Sebastian Mallaby

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British Prime Minister Liz Truss delivers her resignation statement outside 10 Downing St. in London on Thursday. (Bloomberg)

On one level, the resignation of Prime Minister Liz Truss is a peculiar British story, featuring a leader who climbed to power on the votes of just 81,326 party members and then governed with the subtlety of a stoned teenager: a sort of anti-Solomon. Yet on another level, Truss’s implosion after six tumultuous weeks raises an almost universal question. When economics goes badly, how does politics react?

The laboratory of Europe has already suggested some troubling answers. Just as the Greek debt crisis ushered in the left-populist Syriza government in 2015, so the food- and energy-price shocks from Ukraine have generated fresh political upsets.…  Seguir leyendo »

For several days of Britain’s financial meltdown, Prime Minister Liz Truss offered no comment. The Independent newspaper led Thursday with her picture under a snarky headline: “MISSING: HAVE YOU SEEN THIS PM?” Then Truss did comment, choosing local radio stations as an unthreatening venue. Her responses were so wooden the deputy leader of the rival Labour Party declared that “Truss has finally broken her long painful silence with a series of short painful silences”.

Acerbic zingers aside, Truss’s performance is no joke. For 10 days, the British pound has swung dizzyingly from weak to extremely weak to merely weak again. Long-term government bonds, maturing in 50 years, shed one-third of their value at one stage, recovering from that unprecedented plunge only when the Bank of England stepped in.…  Seguir leyendo »

At the start of this month, doom-mongers looking for the next financial crisis in Europe were pointing at Italy. Just as the pessimists predicted, Italians have elected a populist coalition led by the post-fascist Brothers of Italy party. But a funny reversal has occurred. Italy’s economy seems provisionally stable. Britain has emerged as the weak power in Europe.

What gives? Intellectual fashion has been running against globalization for several years, so it’s easy to miss the answer. But the Italy-Britain inversion underlines an old lesson. Sacrificing some sovereignty and submitting to the rules of international organizations are not necessarily bad things.…  Seguir leyendo »

These signs show that China is starting to crack

Is China (a) an economic juggernaut, rapidly overtaking the United States in the technologies of tomorrow? Or is it (b) an ailing giant, doomed by demography, failing real estate developers and counterproductive government diktat?

Trick question: China is both. But the country’s weaknesses increasingly dominate its strengths.

Start with the evidence for juggernaut China. Back in 2000, the country’s spending on research and development, government plus private, was about one-ninth that of the United States, according to Organization for Economic and Cooperation and Development statistics. Fast-forward to 2020 and it was 85 percent. Further, by concentrating its resources, China has achieved global leadership in strategic areas.…  Seguir leyendo »

Liz Truss arrives at the Conservative Party headquarters in London after being announced as Britain's next prime minister on Sept. 5. (Phil Noble/Reuters)

In electing Volodymyr Zelensky as their president, Ukrainians chose a TV comedian and got a charismatic Winston Churchill. In electing Boris Johnson, Britons did the opposite: They chose a Churchill wannabe and got a comedian with a propensity for scandal.

Now that Britain’s ruling Conservative Party is replacing Johnson with Liz Truss, a prime minister who models herself on Margaret Thatcher, it’s anybody’s guess how she’ll turn out. But if we are being charitable, she might combine a bit of Thatcher with some part of that steely German pragmatist, Angela Merkel.

The Thatcher parallel is revealing — though it has its limits.…  Seguir leyendo »

A 'one way' sign is seen as a pilot flame burns atop a flare stack at the refinery of the Shell Energy and Chemicals Park Rheinland in Godorf near Cologne, Germany, August 3, 2022. REUTERS/Wolfgang Rattay (Wolfgang Rattay/Reuters)

American statesmen have long regarded Germany with frustration: They wanted Europe’s economic giant to stop being a political dwarf. Today, there is at least a chance that their wish will be granted. In a world of increasingly assertive autocracies, Germany’s potential transformation is a welcome prospect. There are three elements to watch.

The first sign of the new Germany involves defense. Over the past dozen years, German military spending has averaged around $40 billion annually, or a bit over 1 percent of gross domestic product. To put that in perspective, in 2021 the U.S. defense budget was about 14 times bigger.…  Seguir leyendo »

At the start of the Ukraine war, the West was quick to impose sanctions on Russia. The ruble crashed. Inflation jumped. The financial system teetered. Russia’s government was forced to jack up interest rates, slam on capital controls and slide toward the first default on its foreign debt since the Bolshevik Revolution. Meanwhile, hundreds of Western companies closed their Russian operations and skilled locals emigrated. The International Energy Agency projects that a quarter of Russia’s oil output will be switched off by May, because sanctions impede exports.

Anyone who thinks these blows are insignificant should listen to the Russian government. Its officials expect the economy to shrink by 10 to 15 percent this year, a stunning downgrade from the 3 percent growth expected before the invasion.…  Seguir leyendo »

The headquarters of Bank Rossiya, Russia's central bank, in Moscow on Feb. 28. (Andrey Rudakov/Bloomberg News)

As the Ukraine war grinds on, the West continues to prevail on the economic battlefield. Its sanctions are punishing Russia’s economy. Russian attempts to counterattack appear likely to backfire. And the result is a psychological blow to China, whose state-capitalist system was already looking vulnerable.

Start with the sanctions. By freezing the bulk of Russia’s foreign-exchange reserves, the West disabled Moscow’s main tool for defending its currency. In the first two weeks of the war, the ruble lost nearly half its value against the dollar. Soaring import prices, panic-buying by Russians and shortages induced by other sanctions combined to drive inflation up to 2 percent per week.…  Seguir leyendo »

Russian President Vladimir Putin attends a wreath-laying ceremony at the Tomb of the Unknown Soldier, near the Kremlin Wall, in Moscow on Feb. 23, which Russia celebrates as Defenders of the Fatherland Day. (Alexei Nikolsky/AP)

Now that Vladimir Putin is invading Ukraine, the West faces a test of a comfortable idea: that it can exercise power while making minimal sacrifices.

Three things have encouraged this appealing delusion. The West won the Cold War without having to fight the Soviet Union directly; the carnage was confined to proxy wars in poorer countries. The West has managed non-military challenges with relatively little sacrifice; the flu pandemic that began in 1918 killed 1 in every 150 U.S. citizens, many of them of prime age, whereas the coronavirus pandemic has killed around 1 in 500. On the flip side, where the West has accepted sacrifice, the payoff has been dismal.…  Seguir leyendo »

Behind the ‘power law’: How a forgotten venture capitalist kick-started Silicon Valley

Success has many fathers, and Silicon Valley is no exception. Searching for the origins of this miraculously innovative region, some fasten on 1951, when Fred Terman, the engineering dean at Stanford, created the university’s famous Research Park. Others begin the story in 1956, when William Shockley, the father of the semiconductor, abandoned the East Coast to launch a company on Terman’s campus and actually brought silicon to the Valley. But the most compelling origin story — the one that aims the spotlight squarely at the force that makes the Valley so distinctive — begins in the summer of 1957, when eight of Shockley’s young researchers rose up in revolt against their imperious employer and went out on their own.…  Seguir leyendo »

The big day was March 29. Then it was April 12. And now Europe’s powers have decreed that Britain has until Oct. 31 to decide how — or indeed whether — it would like to leave the European Union. At this rate, you may be thinking, Britain is never really going to quit. Unfortunately, the odds of a hard-line Brexit are probably increasing.

The immediate consequence of the E.U.’s announcement is that Britain’s Parliament gets more time to decide what sort of Brexit it favors. But the logic that has blocked a deal so far has not been magically altered. On one side, the supposedly governing Conservative Party cannot unite behind an exit formula that would satisfy Europe’s determination to safeguard peace in Ireland.…  Seguir leyendo »

Two and a half years ago, when Britain voted to leave the European Union, my instant reaction was apocalyptic. I predicted a recession that has not materialized, thanks mostly to a central bank stimulus and a strong world economy. I predicted the destabilization of the Western alliance, but with President Trump as destabilizer in chief, Britain is a rounding error. Yet in some respects my pessimism was, if anything, too mild. As of Thursday afternoon in London, two cabinet members, two junior ministers and four other aides had resigned their government positions. The obstacles to a reasonable exit deal have proved as bad as anything I imagined, and the resulting political chaos is dizzying.…  Seguir leyendo »

How should pragmatic centrists respond to populism? One answer, delivered with a wringing of the hands and a grimace of contrition, is to acknowledge the rage that populism expresses, even to the point of co-opting its playbook. Open immigration rules, for example, improve the lives of migrants and boost growth; but electorates have sent a clear message that they resent foreigners, so perhaps their democratic wish must be respected. Open trade boosts prosperity, but perhaps protectionism is a small price to pay for signaling to regular voters that the globalist elite has heard them.

Yet there are times when such concessions backfire.…  Seguir leyendo »

The bitcoin hype is weird. But investors might be right

In the long history of money, there have been essentially two kinds. The first is a tangible commodity — usually, gold. The second is a “fiat currency,” created by a ruler with the power to compel use. The proposition underlying this year’s extraordinary bitcoin surge is that we are about to have a third type of money. It is abstract, not tangible; it is the brainchild of a computer scientist with no power to compel anything. Today’s leading creators of money — the Federal Reserve, the European Central Bank — are at pains to appear transparent and accountable. In contrast, bitcoin’s creator is silent and anonymous.…  Seguir leyendo »

With extraordinary speed, China has morphed from a diffident player in international finance into an impatient table-banger. Six months ago, one could muse about whether the Chinese were interested in a larger role within the International Monetary Fund or in helping to rebuild the crisis-battered global system. Now, the Chinese are pumping almost $40 billion into a new East Asian version of the IMF, browbeating trading partners into using the yuan, and floating fantastical ideas about a new international reserve currency. Visiting Beijing last week, Brazilian President Luiz Inácio Lula da Silva picked up on his hosts' changed mood. Calling for a "new economic order," he suggested that it was time to stop denominating trade in dollars.…  Seguir leyendo »

Capitalism has triumphed everywhere, but it's time to dust off an old socialist slogan. When it comes to housing finance, the commanding heights of the economy must be nationalized. Last night's statement from Treasury Secretary Hank Paulson was designed to look statesmanlike and measured, but it misses an opportunity.

You can understand why nationalization is not Paulson's first choice. Fannie Mae and Freddie Mac, the two monster housing-finance companies, between them owe trillions to their bondholders. Nationalizing that exposure would appear to inflate the federal debt, and there's been talk of damage to the nation's credit rating. Moreover, Fannie and Freddie have made or guaranteed almost half of all loans to American homeowners.…  Seguir leyendo »

We are now several months into the global food crisis, which is a much bigger deal than the subprime meltdown for most people in the world. Food prices have almost doubled in three years, threatening to push 100 million people into absolute poverty, undoing much of the development progress of the past few years. The new hunger has triggered riots from Haiti to Egypt to Ethiopia, threatening political stability; it has conjured up a raft of protectionist policies, threatening globalization. And yet the response to this crisis from governments the world over has been lackadaisical or worse.

Start with the lunatic story of rice stockpiles in Japan.…  Seguir leyendo »

The good news on climate change is that the world wants to do something. It's no longer just the Europeans and a few fellow travelers; a recent survey suggested that 96 percent of South Koreans and 66 percent of Ukrainians regard global warming as an important threat. The latest report from the Nobel-anointed Intergovernmental Panel on Climate Change got the blanket media coverage it warranted. In the United States, business and congressional leaders have decided action is inevitable.

Then there is the bad news: None of these fine sentiments will matter unless a critical mass of countries unites around a real policy.…  Seguir leyendo »

The presidential corner office at World Bank headquarters has undergone serial changes. Under the master networker, James Wolfensohn, it was a gallery of faces: Yard upon yard of windowsill was forested with trophy photographs. Under the ex-Pentagon man, Paul Wolfowitz, the photos gave way to an ornamental Indonesian dagger. Now comes the workaholic Robert Zoellick. Forget photographs and ornaments; the windowsill is covered with meticulously stacked files.

After the failed presidency of his predecessor, Zoellick is off to a good start. His wonkish style goes over wonderfully: In my straw poll of World Bank insiders, the new boss gets a rapturous thumbs up.…  Seguir leyendo »

A decade ago, financial globalization seemed terrifying. Crises swept from East Asia to Russia and Brazil; the implosion of a globe-spanning hedge fund, Long-Term Capital Management, forced the Fed to orchestrate a bailout. But this decade may be remembered for the opposite lesson.

If the world comes through the current market turmoil relatively unscathed, it will be thanks to the globalization of finance. The demon will have turned into a hero.

Since 2001, pessimists have predicted that the United States would drown in financial self-indulgence. The Bush administration inherited a federal budget that virtuously saved money every year; it cut taxes recklessly and spent like a drunken sailor.…  Seguir leyendo »