Monday, July 11, 2016

Why Advanced Economies Need To Learn From Developing Nations

By Mohamed A. El-Erian
The Bloomberg View
July 11, 2016

Since the onset of the global financial crisis, I have pointed out that advanced economies should learn policy lessons from the experience of the developing world. This argument has been reinforced by two developments last week: the destabilization of the pound after the Brexit vote in the U.K., and indications that the U.S. now has less influence over the yield curve for its government bonds.

For decades, three key beliefs structured our understanding of the economic and financial underpinnings of most advanced countries: that underlying structural forces had matured into understandable, transparent and very gradual drivers of change; that institutions were stable and well-functioning, and that these two solid foundations could withstand the vagaries of short-term political cycles. This meant that advanced economies were believed to inhabit an analytical “cyclical space,” where secular and structural changes occurred extremely slowly.

This characterization made the job of analysts and policy makers a lot easier, at least on the surface. Rather than having to deal with significantly more complex structural issues, the main task of these experts boiled down to understanding and managing business cycles. With time, even the dynamics of the business cycle were perceived to be conquerable, giving raise to the notion of persistent “goldilocks” (neither too hot, nor too cold) economies and a “great moderation.”

This framework, however, has proved both misleading and dangerous, particularly as it played down or ignored four important underlying developments.

1. The ever-increasing levels of debt and leverage needed to maintain the sense of economic and financial stability, however superficially.

2. Greater and more distorting malinvestment in artificial rather than genuine drivers of growth and prosperity.

3. A worsening trifecta of inequality (income, wealth and opportunity).

4. Growing political polarization that fuels and is fueled by a widening distrust of the political establishment, business elites and expert opinion.

It is clear that over the preceding decade, structural foundations of advanced countries started to revert to features that are more prevalent in emerging economies, particularly those with weak institutions, insufficiently deep economic and financial underpinnings, fluid social fabrics and messy politics. Yet much of the decision-making mindset continued to cling to a cyclical understanding of the economy.

Excessive reliance on a cyclical approach is the main reason that analysis and policy making in advanced economies have disappointingly lagged reality, especially in the aftermath of the global financial crisis. This also explains why most Western governments have been let down repeatedly by economic outcomes, why they frequently have been forced to revise their expectations downward and why outcomes have so often fallen short of even these lowered expectations.

The adverse consequences were not limited to overly unbalanced analysis and partial economic management responses. Consistently disappointing economic conditions also have fueled political polarization, which, in turn, has complicated economic management.

It's no wonder that advanced economies have experienced the kind of events that are unfamiliar (and in some cases, deemed improbable or even unthinkable), but are quite common in the emerging world. The most striking of these include:

-- The stubbornly persistent new normal of unusually sluggish economic growth despite huge monetary policy stimulus.

-- High levels of underemployment and/or unemployment.

-- The risk that an alarming number of young people could go from being unemployed to joining the ranks of the unemployable.

-- The euro zone’s debt crisis.

This is why officials from advanced economies would be well-advised to be more open to the lessons from the developing world. Indeed, last week provided yet more illustrations of the unusually fluid structural conditions in the West and, therefore, the need for greater intellectual and analytical curiosity.

The shock Brexit vote brought volatility to the pound, unanchored by fluidity in both the current and capital account of the U.K.'s balance of payments. It suddenly introduced structural complexity to the U.K.'s commercial relationships with its most important trading partners, which, combined, also constitute the largest economic area in the world. Simultaneously, a central attraction for companies to set up shop in the U.K. -- the ability to serve the whole EU -- also is in play. This raises questions about the future of foreign interests implanted in Britain and, more immediately, will slow inflows of direct investment and portfolio capital.

This kind of uncertainty, which is more common to developing than advanced economies, can severely destabilize the currency. What's more, these developments are taking place as the Bank of England -- unusually -- lacks feasible and effective interest-rate measures to stabilize its foreign exchange markets.

The U.S. also finds itself in an unusual situation, though it is a lot less extreme.

As a large country, the U.S. traditionally has had control over both its economic and financial destinies. Although it still can determine its economic future, it has less control when it comes to the yield curve on its Treasuries, which has been exceptionally subject to influences from abroad.

The consequence is that neither the level of U.S. interest rates nor the relative valuations of various Treasury bond maturities is now closely linked to domestic economic fundamentals. Instead, rates and relative prices are more indicative of the economic and policy prospects in Europe (and, to a lesser extent, Japan). That means the Fed must spend an unusual amount of time assessing external developments and the way they affect domestic variables.

None of these developments is likely to go away soon. In fact, we are likely to see an even longer list of improbables and unthinkables come to pass in the advanced world. And Western policy makers will have an even more urgent need to supplement their conventional economic understanding with insights from the experiences of the developing world.

Article Link to The Bloomberg View:

China’s Strange Trump Love

Trump’s overblown antics have only drawn the Chinese to his brand; nowadays, a trip to New York is not complete without a selfie in front of Trump Tower.

By Brendon Hong
The Daily Beast
July 11, 2016

HONG KONG — Donald Trump is all about branding, and here’s a striking irony: while his political brand is built on Muslim-bashing, Hispanic-bashing, and, not least, China-bashing, his hotel brand appears to be thriving here in Asia.

Last October, well after Trump’s xenophobic and sinophobic presidential campaign got under way, Trump’s man in China, Eric Danziger, told Chinese state-run media that the Trump Hotel Collection is actively seeking expansion opportunities in Asian metropolises, including Chinese cities like Shanghai, Beijing, and Shenzhen.

Trump’s hotels are a hit with Chinese travelers. They appreciate the extra touches put in place with them in mind, like dedicated arrival procedures for Chinese nationals and “red envelope” perks during Chinese New Year.

Trump’s remarks that, say, mock East Asian accents don’t seem to affect their consumption choices. In fact, his overblown antics have only drawn the Chinese to his brand; nowadays, a trip to New York is not complete without a selfie in front of Trump Tower.

Chinese consumers may loathe Trump for using them as theatrical punching bags, but they also love him as a novelty, as entertainment.

More importantly, he is seen by many as an inspiration.

Trump’s self-perpetuated narrative of starting from the bottom with a “small loan” of a million dollars from his father, and turning that into a major company, resonates deeply with those who believe in the Chinese Dream. On identity, his demagogic message of us-versus-them speaks to a society that is largely homogeneous and at times wary of the intentions of foreign powers.

Chinese state media has labeled Trump “unpredictable,” a “celebrity potato,” and “seriously wrong.” They have even imagined a scenario where gunshots ring out on Fifth Avenue, the GOP-hopeful pulling the trigger. Behind the litany of CCP-backed commentary, what truly worries Beijing is the unpredictability of America’s current presidential race. That a businessman with hollow, inflammatory rhetoric is able to stump professional politicians and wrangle popular support is a phenomenon that unnerves the Chinese political establishment. The Chinese Communist Party has mooted concern about how trade policies between the planet's two largest economies may mutate or regress under a Trump presidency.

However, in private, China has proven to be a lifeline for Trump's business dealings. For big chunks of cash, Trump and his associates actively seek Chinese investment for their projects. In March, Bloomberg reported that about a quarter of the funding of a tower bearing Trump’s name in New Jersey was fulfilled by loans from a visa program called EB-5, which offers green cards for cash.

By forking over half a million dollars, Chinese oligarchs, who are repeatedly disparaged by Trump at his rallies, can receive U.S. visas under the controversial EB-5 program that expedites these things for foreign investors in American properties.

The same Bloomberg report, which should have gotten more attention, indicated 85 percent of those who received EB-5 visas in 2014 were from China. And those are just the kind of investors the New Jersey project was seeking with, among other things, a Chinese-subtitled video of the building with background music from “The Sopranos.”

The 50-story tower in question, Trump Bay Street, was being built by Jared Kushner, Trump’s son-in-law, campaign booster (and, most recently, defender against charges of anti-Semitism). The company soliciting investors was called, ahem, U.S. Immigration Fund.

A former Chinese public servant who acquired a green card through the EB-5 program told The Daily Beast that he never expected a profitable return on his $500,000 investment. This is common, as many projects funded via EB-5 become inactive or are poorly managed. For Trump, who has had four businesses file for bankruptcy, the program is perfect.

In fact, during the application process, details of the investor's previous employment were never called into question—how did a low-level official accumulate half a million dollars to burn, with plenty to spare? The former public servant never had to provide an answer.

Congressional overseers and the Department of Homeland Security have pointed out the vetting process for EB-5 is lacking, and could be a portal for dirty money and those who possess it to enter America.

So, let’s be clear: Trump-branded projects have ignored concerns raised by government overseers and might be actively creating channels for money laundering. But the Chinese aren’t complaining about the program, they’re enjoying it.

Back in 2011, Trump said, “China is raping this country.” But more recently he was able to claim, when talking about China’s political and business elite, “I like China. I just sold an apartment for $15 million to somebody from China. Am I supposed to dislike them?”

That attitude—dissing foreigners, then cashing in on them, and the law be damned—extends to the presumptive Republican nominee’s political operation. The Trump campaign appears to have solicited financing from foreign nationals, even from foreign politicians.

During Trump’s recent visit to Scotland to promote a new golf resort, Scottish members of parliament received emails that urged them to “make America great again” by giving money to the Trump campaign. That was not an isolated incident. A pattern has emerged of the Trump campaign asking for campaign donations from foreign nationals in Iceland, Australia, and Britain.

Let this be clear: Donald Trump is not only fine with letting foreign money taint the American presidential election, he encourages it. And this despite laws that American political candidates cannot accept donations from individuals who hold neither American citizenship nor permanent U.S. residency.

The Washington-based Campaign Legal Center, which is presided by a former chairman of the Federal Election Commission, has already collaborated with Democracy 21 to file a complaint against Donald Trump with the FEC.

With a representative office in Shanghai, Trump is determined to crack into the Chinese market. Already, The Trump Hotel Collection is developing two resorts in Indonesia, including Bali, a current favorite of Chinese tourists. Chinese travel agencies advertise packages to stay in resorts branded with a potential American president's name, and Trump's resort in Waikiki sees a steady rotation of Chinese visitors.

(That said, it appears the influx of Asian clients has not been able to counterbalance the loss of business in other Trump-branded locations. Hipmunk's hotel booking data from the first quarter of this year tells us that Waikiki is an outlier, not the norm. In the worst case, bookings at Trump Soho New York dropped by 74 percent compared to the same period a year ago.)

At home and abroad, fans of Trump give the same reason for why they love him: He's a businessman, not a politician, not someone beholden to lobbyists and the current establishment. However, a businessman naturally takes care of what concerns him the most—his business. The grassroots supporters of Trump's campaign are neither his clients nor investors, and he owes them nothing. If his business practices are any indication, those who vote for him in November should expect nothing in return.

Trumpeteers may say their “God Emperor,” as some call him, taking the name from a video game, is strong and intelligent, able to deal harshly with the other, and at the same time profit from them. Trump continues to fan xeno-hating flames, rehashing the probably fake story about an American general who executed Muslim insurgents in the Philippines with bullets dipped in pig’s blood, suggesting that China is “raping” America, and hawking bad but rhetorically popular economics by threatening to wage a trade war.

As Trump continues to wax polemical, his supporters fail to realize the issues that have been hijacked to fuel their fervor will not be addressed to their satisfaction, and his promises cannot be kept because they simply make little economic sense. Trump and his business expend far more effort to please Chinese travelers and oligarchs than his grassroots supporters at home. Win or lose, he will walk away a rich man, and perhaps live to file for bankruptcy another day.

Article Link to The Daily Beast:

Who Says We Can’t Protect Both Cops And Civilians

By Nicole Gelinas
The New York Post
July 11, 2016

Philando Castile, Lorne Ahrens, Michael Krol, Michael Smith, Alton Sterling, Brent Thompson, Patrick Zamarripa. All seven men were men with families, friends, and futures. They all died violently last week — with the violence all the worse because it was preventable.

To honor the dead, we shouldn’t succumb to panic and fear, or pit the victims against each other. Instead, we should separate and address two entirely different problems, both magnified in the social-media age: terrorist mass shooters and bad policing.

Ahrens, Krol, Smith, Thompson, Zamarripa — all police officers assassinated Friday night in Dallas. They were killed policing a Black Lives Matter rally.

Shooter Micah Johnson, also now dead, told cops he wanted to murder white people, especially white cops.

But don’t blame Black Lives Matter for Johnson’s five murders — and don’t blame recent cop shootings of civilians, either. To do so is to take responsibility away from the shooter.
Once Johnson started killing, whatever he had to say about anything became irrelevant.

He’s just another mass shooter who proved himself indifferent to all life — joining Omar Mateen, who targeted gay people in Orlando; Adam Lanza, who targeted children in Newtown; Dylann Roof, who targeted black people in Charleston; and Marc Lepine, who, in 1989, targeted women in Montreal.

If Johnson had wanted to improve the world, he would’ve joined the Black Lives Matter protesters, or posted to Facebook. He would’ve exercised his constitutional rights, as New York protesters were doing Thursday night.

On Fifth Avenue, one protester screamed at the police, “you should be ashamed, arresting innocent people” — a perfectly legitimate exercise of speech. Another screamed “f–k the police” — rude and unhelpful, but not mass murder.

How do we stop mass shootings? It sure would be easier if extremists didn’t try to force false choices on us.

It’s OK to worry about ugly ideologies — including white, black or Islamist supremacy — and worry about how easy it is for anyone to get a hold of weaponry that can kill dozens within minutes. We do not have to pick one or the other.

Before yet another mass shooting interrupted the American discourse, the public was shocked by two videos:

-- In Minnesota, Diamond Reynolds’ Facebook stream of Castile, her fiancĂ©, dying from police wounds after complying with police instructions.

-- And in Baton Rouge, Sterling shot by police while already under their control.

A matter that got far less attention, but was no less important: The New York Times’ investigation of extreme neglect of prisoners during transport — neglect that has led to at least a dozen deaths.

With police and justice-system brutality, too, we don’t need to make false choices. We can be for competent policing — including the kind of policing that the NYPD was doing last week. When officers tried to apprehend an 18-year-old turnstile jumper in The Bronx, the suspect fled, leaving his backpack with a loaded gun.

Cops didn’t chase after him or shoot him. They tracked him to his home, where they made a peaceful arrest.

Overall, the NYPD has kept crime down — murders are at record lows — while sharply reducing stops and summonses. That’s in part because of protester pressure — and it’s what should happen.

Dallas police, too, have good relations with the citizenry, The Washington Post reports — and the city has a record-low murder rate.

Indeed, we should always be against incompetent, negligent or willfully malicious policing. And we can also be aware that though social media helps the cause of justice, it makes the present harder to compare to the past.

Ten years ago, no one outside of Minnesota would’ve heard of a police killing in Minnesota. This change is good — but it also allows us to forget that, over time, we’ve become less violent.

We need better data on police shootings. But overall, the nation’s homicide rate has fallen by half in the past 25 years.

In 1980, black men could expect to live to be 64, falling victim to crime, accidents and disease. Today, they can expect to live to be 73, because of better policing, fewer accidents and better health.

Can we do better? Of course. But not by insisting we have to be for the cops or the criminals.

We must assess the facts, not slot them into partisan talking points — and reduce injury and death to everyone so that more people don’t suffer. Reason matters.

Article Link to The New York Post:

English Are The Exception — Europeans Dig The EU

For most of its citizens, the EU is a welcome force for good — and it’s not going anywhere.

By Miguel Otero-Iglesias
Politico EU
July 11, 2016

In the wake of the Leave campaign’s shocking win in the U.K.’s In/Out referendum, commentators have painstakingly defended Britain’s rampant Euroskepticism as part of a larger trend.

They point to the wave of discontent sweeping through the Union, from Sweden and Denmark in the north, to France, the Netherlands and Austria in the center, and Italy in the south. Influential pro-European pundits have now joined starkly anti-EU politicians such as Nigel Farage in arguing the EU’s disintegration is now irreversible. Today’s dominant view, it seems, is that most Europeans do not want to be ruled by Brussels.

This pessimistic diagnosis is inaccurate. Europeans are angry about how the EU has handled the asymmetric effects of globalization, but the majority do not believe that leaving the Union is the answer. The fact is that Britain — or more concretely, England — is an outlier in the EU in that respect.

The English, especially those forming “Little England,” have always been uncomfortable in the EU. The eurozone crisis only reinforced this feeling. English exceptionalism has many sources: Westminster’s democratic tradition; its imperial past; and its special relationship with the U.S.

English is the world’s lingua franca, and the City of London its most prominent global financial center. Britain is extremely proud of its seat in the U.N. Security Council and its nuclear weapons. All this makes a large majority of English believe they are primus inter pares in the EU club.

This sentiment is exceptional. Of course, other European nations are proud too, and believe they are better than their neighbors to some degree. The Dutch have always punched above their weight in international affairs. The Nordic countries are right to brag about their welfare systems, the Mediterraneans about their lifestyle and their food, and the Central and East Europeans about their work ethic and resistance to Soviet rule. And what can one say about the boundless pride of the French? It certainly shares many of the features of English hubris.

Nonetheless, these countries have neither the capacity nor the desire to go it alone. The era of empires is long forgotten. For continental Europeans, especially those in the South, the EU remains a pillar of democratic stability. One should also not forget that Scandinavian and Central and Eastern European countries are too small, too close to Russia and too keen to be close to Germany to strike out on their own.

The same is true for France. Ever since the German invasion in World War II, the French have understood that tight cooperation with their eastern neighbor — even at the cost of ceding sovereignty — is essential to lasting peace on the Continent. The European Union has based itself on the same logic. Criticizing the Germans might be a national sport to the French, but they value Franco-Germanic cooperation like a national treasure.

The case of the Netherlands offers the closest parallel to Britain’s change of heart when it comes to the EU. Dutch Euroskepticism has grown in tandem with EU enlargement. Previously, this small country was part of the inner circle of EU decision-making. Over the past decade, the Dutch were faced with the fact that their country is just one of many in the EU club. The existential crisis this triggered was further stoked by nationalism and xenophobia.

England came to a similar conclusion. The global financial crisis and the consequent bankruptcy of Lloyds Bank and the Royal Bank of Scotland was the first blow to English pride. The second — and far more potent — blow came in the aftermath of the eurozone crisis.

This might sound counterintuitive. The English have felt considerable schadenfreude over eurozone members’ suffering. Many in England, especially in the City, felt pride in the U.K.’s sovereign decision not to join the single currency. The response from London was: “We told you this was a bad idea, now deal with it.”

But the fact is that the eurozone crisis, and the way it was managed, displaced the U.K. to the margins of the Union. And this did not go unnoticed. The evidence of German control over the Union dealt a huge blow to the English psyche. In part, this explains why the Leave campaign’s slogan, “Take back control,” had such a powerful effect. England should not be made to suffer from German Chancellor Angela Merkel’s poor decisions on refugee policy, they argued. The solution was simple: Let’s get out.

If they don’t openly reject German dominance in the EU, the English still have serious reservations about it. Their belief that the rest of Europe feels the same way is a serious miscalculation.

Despite Anglo-Saxon commentators insisting the euro is a disaster and should be dismantled, an overwhelming majority, both in northern and southern parts of the eurozone, wants to keep the single currency. Why? Some say fear of the unknown has kept countries like Greece, Italy or Spain from quitting the euro. In reality, the situation is complex, and has more to do with the benefits of belonging to a stable, democratic and wealthy club whose bureaucrats are less corrupt than local politicians.

Those who think Brexit is the start of the EU’s unraveling should think twice. Why is it that despite the euro’s apparent failure, the eurozone has added three new members and not lost a single one over the past five years ? If the EU is such a disaster, why is it that Scotland is so keen to stay in? What does it say that England’s younger and best-educated generation want to stay in the EU?

Claims the EU is on the verge of disintegrating are overblown. Brexit, if it happens at all, is an exception to the rule. Yes, the EU needs to be reformed. But it is here to stay.

Article Link to Politico EU:

English Are The Exception — Europeans Dig The EU

How We Got To The Brink Of Civil War, And How To Stop It

By Joel B. Pollak
July 11, 2016

My wife related a disturbing story to me about a ride with an Uber driver late last week. The gentleman behind the wheel was black, and a Navy veteran, so he and my wife had at least two things in common.

They discussed current events, and as he drove the late-model luxury sedan to my wife’s office he told her that he shared the anger of young black men in the streets, because the white Republicans, driven by the racist Tea Party, had never given our black president the chance to govern.

What my wife found disturbing is that this man, whose circumstances were so different from some of the people rioting in the streets, and who had lived through the integrating, uplifting experience of service in the armed forces, could believe that his countrymen were racist.

It compounded the frustration she feels when she opens Facebook and sees the chest-beatings of her fellow Harvard alumni, pouring out white guilt or fulminating against The Man. As if they had any real reason to believe it.

I’ve learned to ignore a lot of that, because I’m used to the idea that people often arrive at their deeply held political beliefs for purely psychological reasons.

It is very unlikely that an educated black person, for example, will encounter the virulent racism many believe, or assume, happens all the time. Ta-Nehisi Coates, who writes about the persistence of racism in America, admitted in an interview with Playboy that he personally has never been called the N-word — by a white person — in his life.

But as the late Benedict Anderson explained, national identity is often forged by shared imagination and shared media, and what is being imagined today, in common, can have very real consequences.

The people facing off against police on highways in Atlanta and Oakland may never have had any kind of negative experience with police — indeed, they share an implicit trust that the police will let them protest, even illegally — and yet they are forging a new political identity that can create its own reality.

How did we get here?

Conservative radio host Joe Walsh earned national notoriety by blaming Obama for the police murders. There are other conservatives who feel the same way — and they are largely wrong.

Literally hours before the Dallas murders, Obama gave an unusually — for him — heartfelt speech in defense of law enforcement. That received precious little attention, though, because Obama prefaced those words with unfortunate comments about “a broader set of racial disparities.”

Hillary Clinton followed suit after the Dallas murders — by blaming “systemic racism” and declaring: “White Americans need to do a better job of listening.” (Only white Americans?) That kind of rhetoric might impress a panel of CNN political commentators, but it is exactly the wrong message. It frames racism as the fundamental problem in American society, and encourages people to interpret events through that lens. It sows seeds of mistrust, when racism had largely been overcome.

In his Sabbath sermon, my rabbi — who works closely with police here in Santa Monica, where the chief is a black woman — lamented the sudden decline of race relations as a throwback to the past. We all went through a common experience, when things improved — why are we being dragged backwards?

And the answer is that our leaders made a deliberate choice to radicalize our politics, unnecessarily. The racism and mistrust followed, because they are necessary to sustain that radicalism.

The Tea Party arose not because of racism, but because President Barack Obama made clear he was going to push through his agenda regardless of the wishes of the opposition or the constraints of the Constitution, and because voters realized that the Republicans, left to their own devices, were not going to stop him.

That’s all. That had nothing whatsoever to do with racism, but Obama and his party found it convenient to invent it — like the lies about the N-word being shouted at black legislators in 2010.

The reason Donald Trump exists as a political phenomenon is that there is a sizable constituency of conservatives who are tired of losing to that. They were tired of losing in 2000, too, but Republicans worried at the time about the moderate middle, and so a “compassionate conservative” like George W. Bush was their response.

The left demonized Bush anyway — partly because the 2000 recount convinced them they could, because he was “illegitimate” — and Obama rode that wave to office.

Trump fights back (though his statement about Dallas was remarkably measured, even presidential). The problem is that there is only so much more fighting the country can take. We abuse social media to fantasize about a dystopian America, and in the process we are bringing it about.

There is only one way to stop this: to find racial harmony where it exists, and to show it to each other, in every medium — to make Dr. Martin Luther King’s vision competitive again in the free marketplace of ideas.

Article Link to Breitbart:

The U.S.-China 'Thucydides Trap': A View From Beijing

The “Thucycides trap” isn’t a death sentence.

The National Interest
July 11, 2016

“It was the rise of Athens, and the fear that this inspired in Sparta, that made war inevitable.”

China’s rising comes as the most pronounced but complicated feature of the twenty-first century. In the past few years, people over the world, especially in the Asia-Pacific region, have witnessed increasing tensions in U.S.-Chinese relations, from all levels and in a wide range of areas. Graham Allison, a world-famous expert on international security and also the founding dean of the Kennedy School of Government at Harvard University, was the first person to combine the concept of the “Thucydides Trap” with the analysis of China’s ongoing rise, with recent commentaries published in global influential newspapers and websites such as the Financial Times, the New York Times and the Atlantic. In those articles, he warned that over the past five hundred years of human history, twelve of all sixteen cases of global tensions resulted in shooting wars. What’s more, he argued that a Thucydides trap has arisen between the United States and China in the western Pacific in recent years. Thereafter, some world-class masters, including Zheng Yongnian, Robert Zoellick, Zbigniew Brzezinski, Patrick Porter and T. J. Pempel, followed in using this popular term when talking about U.S.-Chinese relations today or in the years ahead, regardless of their personal attitudes toward such a pessimistic term.

Its impact was so great that China’s President, Xi Jinping, had to respond to it publicly once again during his state visit to the United States, when he delivered an address to local governments and friendly groups in Seattle. He presented himself as a constructivist IR scholar, in the eyes of skeptical American realists, by emphasizing the importance of mutual intentions and interactions while rejecting the pessimistic prospect of bilateral relations projected by the widespread identification of a so-called “Thucydides Trap” between the two countries.

Unfortunately, it is the constructivists that always remind us that either discourse or prediction might be a self-fulfilling prophecy. Most scholars in China reject the so-called metaphor from history and regard this simplistic historical analogy as the newest vision of the longstanding “China Threat Theory.” However, from an academic point of view, theoretical and empirical analysis is still necessary. Objectively speaking, the widespread use of the term “Thucydides Trap” just indicates a period when a rapidly rising power has obviously narrowed the gap between itself and the system’s dominant power, simultaneously stirring up fears and anxieties in other countries that are satisfied with the existing distribution of power. As Allison himself puts it, the two crucial variables are rise and fear.

The real risk associated with the “Thucydides Trap” is that business as usual—not just an unexpected, extraordinary event—can trigger large-scale conflict. War is not destined, though risks undoubtedly become very high compared with other periods in the bilateral relationship. Similarly, it implies a period in which all countries, especially emerging and ruling powers, should be very cautious in dealing with their relationships and divergences if neither has any intentions to embark upon a devastating war. We will now illustrate the concrete scenarios of the gathering “Thucydides Trap” between the two giants.

On the Systemic Level: A Battle over Rules?

Some observers of U.S.-China relations describe the most prominent features of bilateral relations in 2015 as a battle over rules. The most important element of an international system is defined by its key norms and rules. As Allison has pointed out, the defining question of global order in the decades ahead will be whether China and the United States can escape the Thucydides trap. In the eyes of sensitive Americans, China’s ambitious “Belt and Road” strategy was nothing more than a parody of the Marshall Plan. Additionally, China’s global efforts to set up the Asian Infrastructure Investment Bank encountered resistance from an implicit U.S.-Japanese joint-led coalition. Generally speaking, a battle over rules is visible from both the security and economic dimensions.

In the dimension of security, the most eye-catching problem is the still escalating dispute over the freedom of navigation (FON) and overflight in the South China Sea. It has been a longstanding dispute between the two countries, and has already caused severe crises in 1994, 2001 and 2009. This time it was reinvigorated by China’s unparalleled artificial island construction in the South China Sea, in response to the deliberate provocations of the Philippines and Vietnam. For China’s part, its actions are justifiable to defend its territorial integrity without any room for retreat, when considering surging public opinion and the very high political audience cost that the Chinese government has suffered.

However, on the side of the United States, as the asymmetric theory of IR has suggested and Assistant Secretary of State for East Asian Affairs Daniel Russell has repeated on several occasions, it is not a matter of rocks but rules. U.S. officials believe that its position on FON is universal rather than directed against a specific country, and the United States has been conducting FON operations in many regions, and against many countries of concern, since the 1980s. If it does not react to China’s island construction in the South China Sea with enough toughness, it will consequently send signals to its allies and the world at large that the United States admits its decline and is appeasing China, which will seriously erode the international order built by its overwhelming hegemonic power after World War II and damage its reputation as the leading power of East Asia, not to mention that the Philippines is its formal military ally with clear military obligations. It seems unlikely that either China or the United States will compromise. Given that the United States has promised to continue its cruises and overflight operations within the twelve nautical miles of China’s islands, and that senior military officials have intermittently delivered harsh speeches, the accidental risk of military conflict persists.

In the economic dimension, the Trans-Pacific Partnership is a perfect example. Benefiting from its entrance into the WTO, China’s economy has doubled several times since then, while the U.S. economy was exhausted by its two global wars on terrorism. After the 2008 financial crisis, there emerged a widespread perception (perhaps just a misperception) that in East Asia, a dual-center structure was emerging, in which the United States remained the traditional security center while leaving its place to China as the new economic center. Ever since the financial crisis, Americans have been in a state of unconfident anxiety, watching China’s diplomacy turn from keeping a low profile to striving for achievement. To secure its leading position in the region, the Obama administration is eagerly promoting a new free-trade agreement with high standards in the Asia-Pacific, closed to China in the negotiation stage, as an important component of its “Rebalance Strategy.” Therefore, there are two approaches to regional trade and investment liberation, that is, the coexistence of the negotiation processes of both TPP and RCEP, which are strongly backed by the United States and China respectively. The true story of the struggle between TPP and RCEP can be interpreted as a strategic rivalry on economic rules between the two countries. In other words, the two FTAs’ explicit frameworks reflect the implicit dual centers of the power structure in the region. As President Obama expressed publicly in his 2016 State of the Union speech, with TPP, China doesn’t set the rules in the region—the United States does. Of course, the complex effects on U.S. domestic politics make the prospects of this battle much fuzzier than those in the security dimension mentioned above.

On the Regional Level: Third Parties and Indirect Structural Conflicts

The United States and China are not connected by land, and the Pacific between them is large enough to create a safe distance. But as the sole superpower, the United States is the military ally of many regional countries and has a treaty obligation to defend them when attacked, while many of those countries have disputes with China over maritime territories. In the cases of the China-Japan dispute over the Diaoyu Islands, and the overlapping territorial claims among five parties over the South China Sea islands and their surrounding waters, the United States became involved because of its alliances with Japan and the Philippines. After the United States announced its rebalance strategy, local countries also quickly launched their own visions of rebalance, in order to pursue their own interests. Through escalating the territorial disputes and getting the United States involved, Japan, under the lead of the Liberal Democratic Party, especially since Prime Minister Abe returned to power in 2012, is heading firmly towards its ambitious national goal to regain a normal state status by profiting from the strained atmosphere of U.S.-China relations. To prevent China’s return to the central position of the Asian power structure, Japan is much more active in containing China and interrupting its resurgence.

Similarly, Aquino in the Philippines did the same, out of fear that a much more stronger China would be less willing to compromise in the South China Sea. Under the endorsement and support of the United States, the legally controversial South China Sea arbitration initiated by the Philippines aims at pressing China to soften its policy through seriously damaging its national image before the global audience and deteriorating its neighboring diplomatic atmosphere with ASEAN countries, conversely arousing stronger nationalistic public opinion among the masses in China, and leading the Chinese government to be less compromising.

Another case is North Korea’s wild ambition to be a nuclear country, and its endless military provocations in order to catch enough attention in exchange for economic aid from the international community, and the United States’ security reassurance in particular. The United States is the formal protector of the Republic of Korea, while China’s defense commitment to North Korea, enshrined in a 1961 treaty, is still valid from the perspective of international law. Although the bilateral relations have been seriously harmed by DPRK’s uncompromising stance in obtaining its own nuclear weapons and ballistic missiles, considering China’s important geopolitical interests in the Korean Peninsula and its record in the Korean War in 1950, no one should doubt China’s willingness to defend its national interests in this regard. Despite the inescapable responsibility of the United States, an unpredictable DPRK has already became a disguised troublemaker, not only for China-U.S. relations and China-ROK relations but also for regional stability and security, as we can see from the ongoing endless quarrel over the deployment of the Terminal High Altitude Area Defense (THAAD) system in South Korea.

The most dangerous situation is that the United States has become deeply embedded in cross–Taiwan Strait relations through its contradictory commitments to treaties on both sides. The separation between Taiwan and mainland China is the result of China’s civil war, nearly seventy years ago. Most Chinese see the final unification of Taiwan as an indispensable symbol of its great rejuvenation and the last page of the painful memories of China’s century of humiliation. The increasingly strong pro-independence forces in Taiwan since the 1990s have brought U.S.-China relations to the brink of war several times.

Now, as the pro-independence Democratic Progressive Party (DPP) under the lead of Tsai Ing-wen returned to power on May 20, 2016, and in light of her ambiguous inaugural address on Taiwan’s relations with the mainland, cooling relations across the strait have once again become a potential flashpoint. Beijing has expressed its position again and again: that the DPP government in Taipei must clearly affirm that both sides of the straits belong to one China if it wants to maintain all the achievements reached during Ma Ying-jeou’s Kuomintang government. It seems now unlikely to expect Tsai’s government to make such a commitment, as some influential U.S. experts and officials on the Taiwan issue continue sending misleading if not wrong signals to Taipei. They seem to have been quite satisfied with what Tsai said and done so far, and have turned to urging and pressing Beijing to show a degree of flexibility. Some mad politicians and scholars have even begun to image giving Taiwan a more prominent role in the United States’ rebalance strategy, in order to contain China’s growing strategic advantages within the first island chain.

Furthermore, Japan is also strengthening its support for the DPP, which makes things much more complex. Abe’s August 15 speech paralleling Taiwan with China and other regional states, and his meeting with Tsai, reflect Japan’s attempt to reap profit from deteriorating cross-strait relations. Considering the emerging clash of public opinion across the strait, people on the Chinese mainland have shown their disappointment and impatience for the existing official policy of unification through economic and cultural exchanges without a deadline, which seems to not have been so successful, as the recent situation has indicated. Now, if provoked, appealing for a decisive military campaign will prove overwhelmingly popular, which will undoubtedly force Chinese political leaders to move ahead. After all, the Taiwan issue does not only concern China’s core national interest of territorial integrity, but it is also a major pillar of legitimacy for anyone who wants to rule China. So if the United States fails to constrain itself from an illusory impulse on Taiwan, or Tsai suddenly finds herself losing control of the green forces on the island in the years ahead, a great confrontation may be sparked.

Could This Time Be Different? Ways to Manage the Trap

States go to war for many fixed reasons, sometimes unintentionally, and domestic factors matter in almost every case. However, the “Thucydides trap” has existed for thousands of years, while the basic unit of the world system has evolved from city-states in Thucydides’ era to the present day’s nation-states, which shows that the emergence of the “Thucydides trap” has no necessary connection with the attributes of the unit. Although the characteristics of certain kinds of units do precipitate conflict more than others, it is the focus on the interaction between emerging powers and ruling ones, rather than purely domestic-oriented analysis, that really features in the so-called “Thucydides Trap”.

This finding also applies to the observation of China-U.S. relations today. It is obvious that the recent round of tensions also comes from the despair of America elites, who are suddenly waking up to the fact that Chinese reform and the United States’ engagement strategy may not be able to turn China into another America, as they previously envisioned. But we should still keep in mind where the analytical boundary lies when using the term “Thucydides Trap.” As U.S. policies towards Taiwan and Tibet remind us again and again, more and more Chinese are reaching the consensus that whether China is ruled by the Communist Party or not, hostility from the United States is unavoidable if the Chinese nation, descended from the traditional Chinese Empire, wants to stay on its path to great rejuvenation as a whole, because the roots of the tension are in structural factors. So we will not discuss the ideological and institutional disputes between the two states in this limited commentary. After all, all those barriers have accompanied them since the founding of the PRC, long before the “Thucydides Trap” emerged in recent years, even though they do sometimes exacerbate mutual distrust and tensions.

Though China and the United States are more highly interwoven in the economic, social and political dimensions than any other case in history, and Professor Tang Shiping has made a convincingly theoretical proof that the world has already evolved from the offensive world of Mearsheimer to a defensive world of Robert Jervis, in which a defensive security strategy is the best and prevalent rational choice for all countries, the prospect of conflict implied by the “Thucydides Trap” remains. Optimistic thinkers before World War I, such as Sir Norman Angell, as described in his masterwork The Great Illusion, also yearned for high interdependence among industrial countries as a way to eliminate war as a rational choice from the policy menu of all rational states, but reality was so cruel that closely following the outbreak of war, no space remained for their naivetĂ©.

Consequently, if both China and the United States do not anticipate an unintended war occurring between them, they should take the “Thucydides Trap” seriously and collaborate with each other to manage their bilateral relations. As mentioned above, on the systemic level, due to asymmetric attention to the same issue caused by their different statuses in the international system, both countries need to put themselves in the other’s shoes and avoid circumstance leading the other to lose face, whether before the international audience or their domestic audience. On the regional level, because most structural conflicts are caused and exaggerated by third parties, both need to cooperate with each other, as the United States needs to take good control of its allies to prevent itself from being entrapped in a conflict it may not want to see, and China should continue to show its wisdom in defending its rights. For instance, its coast guard rather than its navy plays an active role on the front line in defending its claims over disputed islands and their surrounding waters, referred to as a pattern of “white hulls.” The United States should learn to tolerate such a resolution that leaves both sides a gray space from confronting directly.

All in all, what really matters is to restrict their adventurous ambitions to gain at the other’s expense. But as history has presented again and again, that is always hard to maintain. Finally, it comes back to the domestic dimension as Allison concluded; historical cases of peace have required huge adjustments in the attitudes and actions of the governments and societies of both countries involved. For China and the United States, perhaps the construction of a new model of major-country relations jointly is the only right choice.

Article Link to The National Interest:

The Ultimate Nightmare: U.S. Withdrawal From South Korea

U.S. troops make all the difference in the Korean peninsula.

The National Interest
July 11, 2016

In a piece for the National Interest, Doug Bandow has argued that the United States should withdraw its troops from South Korea in order to save American lives and resources from being wasted on foreign soil as well as create incentives for Pyongyang to give up its nuclear weapons. Overall, Bandow’s argument is worth paying close attention to; however, I strongly oppose his views on the role of the U.S. troop presence in maintaining peace on the Korean Peninsula as well as his proposal for dealing with the nuclear issue with Pyongyang. Leaving Korea at this moment is not a wise decision to make regarding recent developments in North Korea’s nuclear capability.

Bandow’s argument rests on two major assumptions. First, he believes that Washington should not play the major role in the defense of prosperous and military advanced South Korea for doing so will exhaust America’s already stretched military budget; in addition, keeping American troops as a tripwire in South Korea will potentially draw Washington into conflicts with nuclear-armed North Korea. Second, withdrawing American troops will break the current deadlock in negotiations with North Korea over the nuclear issues since Pyongyang will no longer face direct threats from the South, and as a result, it may give up its nuclear weapons. At a glance, Bandow’s points may sound convincing; however, following his proposal would do more harm than good for the United States’ interests.

Since the end of the Korean War, American troops in Korea have been used for two major purposes: first to deter North Korean attacks and second to constrain South Korean unilateralism. This security structure has successfully prevented a few crises from erupting into full-scale wars, namely the North Korean attacks on Cheong Wa Dae in 1968, the assassination of the South Korean first lady in 1974 and the presidential assassination attempt made by North Korean agents in 1983 in Rangoon. In all cases, Washington succeeded in preventing Seoul from launching a counterattack thanks to the U.S. influence on South Korea’s military decision-making process.

A U.S. withdrawal would beyond all doubt create a vacuum of power on the Korean Peninsula, prompting North Korea to take on more provocative actions such as testing more missile and nuclear tests, attacking South Korean troops near the DMZ more often or shelling on the South’s ships and islands near the Northern Limit Line. In return, South Korea may respond militarily to avoid losing face, and if initial deterrence fails, the two Koreas will be drawn into another Korean War, an adverse prospect for future U.S. administrations. The U.S. should not worry about being drawn into a conflict with North Korea because the presence of American troops has effectively thwarted North Korean attacks in the first place. In addition, keeping American troops on Korean soil is cheaper than sustaining the same number of troops in America, which helps shoulder some of the budget burden from American taxpayers. Maintaining the presence of American military in Korea is undeniably beneficial to both America and South Korea.

Second, withdrawing U.S. troops will not result in any breakthroughs in negotiations with North Korea. Pyongyang’s nuclear bid does not originate from its fear of Washington’s threat; instead, it is the imbalance of power on the Korean Peninsula in Seoul’s favor that pushes Pyongyang to resort to nuclear capability. Even if Washington were to withdraw all its troops from South Korea immediately, the South Korean military would still be able to defeat Northern aggression (though a Pyrrhic victory). Moreover, with the absence of American military, miscalculations between North and South Korea will increase, which poses more threats to Pyongyang after than before U.S. troops’ withdrawal.

Pyongyang clearly understands these facts; thus, it finds no incentive to give up its nuclear program and confronts Seoul in the realm of conventional warfare. Moreover, American withdrawal does not guarantee that North Korea will not carry on with its nuclear programs. The collapse of the Agreed Framework, the Six-Party Talks and the Leap-Day Agreement should serve as a reminder of North Korea’s untrustworthiness; therefore, Washington must not make the same mistakes in future engagements with Pyongyang. In the meantime, the best way for the United States to curb North Korea’s nuclear program should be to enforce UN sanctions and persuade China to join forces, and this approach only works as long as the United States sustains its influence in the region. It is better to deal with the devil we know than the devil we do not know.

With the presidential election coming up, there have been many attempts to revise the current foreign policy. Taking into considerations Americans’ concern for their country being too overstretched amid domestic economic hardship, a strategy of offshore balancing should be suitable for dealing with North Korea. Offshore balancing advocates American desire to build up its military presence in Asia and encourages troop reduction in the European theater. This strategy will help save American resources from being spent in places where threats are not imminent while allows Washington to defend its security structure in East Asia and balance a rising China. With that being said, American security commitment to South Korea must remain strong and firm under any circumstances.

Article Link to the National Interest:

Obama's Double Standard On Race

Obama was quick to racialize the deaths of Philando Castile and Alton Sterling, but reticent on Dallas.

The National Interest
July 11, 2016

America has just experienced one of the saddest weeks anyone can remember, certainly since the 9/11 Al Qaeda attacks. Two young black men shot to death by policemen, one white, the other Asian, in episodes that seem, in early perceptions, to have been senseless. Then eleven Dallas police officers shot from ambush—at least five fatally—in a racially charged spree of savagery. Such events, and certainly such events in confluence, defy efforts to give expression to the human emotions they unleash. We try, of course, reaching for the most powerful and outrage-charged words we can muster, but everything seems to fall short. It’s too sad, too numbing, too disheartening.

Such events also are too easily exploited for political advantage or philosophical leverage. Whenever a black is killed in confrontation with a white policeman (or, it seems now, an Asian American), the cry goes up that racism must have been at the heart of it.

Consider the immediate reaction of Minnesota governor Mark Dayton following the death of Philando Castile in the course of a routine traffic stop for a broken taillight. We don’t know yet precisely what happened before the fatal shots were fired from the gun of officer Jeronimo Yanez, and yet that didn’t stop the governor from proclaiming publicly what was at the foundation of the tragedy. “Would this have happened,” he asked, “if those passengers and the driver were white?” He answered: “I don’t think it would’ve.” Even while acknowledging that the facts weren’t yet known, he said, “I’m forced to confront—and I think all Minnesotans are forced to confront—that this kind of racism exists?”

What kind of racism was he talking about? And how can he know that racism was at the core of this heart-rending episode absent the facts?

One is forced to ponder why government officials feel compelled to reach for the hoary accusation of racism whenever such terrible events occur. There is no issue in American politics more sensitive than race. There is no issue more likely to stir incendiary emotions or to bring people into the streets in protest, most often peacefully but sometimes descending into flights of violence and destruction. One might think, therefore, that public officials would shy away from premature pronouncements of racism before we know all that needs to be known in order to form such a judgment.

But, just as evidence of racism or even hints of it in law enforcement inevitably generate powerful emotions among blacks, so too can they alter the balance of political power in any community and in the relationship of those communities with the federal government. Consider the Black Lives Matter movement, which emerged in response to the shooting of young Michael Brown in Ferguson, Missouri, by police officer Darren Wilson. Protests in Ferguson turned into riots that lasted more than a week. The governor ordered local officials to relinquish command of the situation to the state highway patrol. But eventually he had to call out the National Guard to help restore order. It was a delicate and potentially dangerous time.

In the midst of it, President Obama weighed in with ill-considered remarks that positioned himself as the arbiter of just where the proper balance should be struck in the fast-moving and perilous standoff between thousands of protesters, with significant looting and rock-throwing going on, and the authorities charged with ensuring that this highly charged situation didn’t flip out of control and lead to serious bloodshed. His admonitory words, directed at both protesters and local government officials, implied a moral equivalence of the two sides, which served to undermine the standing of local officials.

The Black Lives Matter movement that emerged out of all this proved so potent among Democrats that one presidential candidate, former Maryland governor Martin O’Malley, actually apologized for the inexcusable faux pas of suggesting that “all lives matter.” At one candidate debate, when the contenders were pressed to endorse the “all lives matter” concept in conjunction with a commitment to black lives, none demonstrated the temerity to take such an inclusive stand.

But it turned out that there was actually no evidence of racism in the tragic Ferguson event. A St. Louis County grand jury declined to indict Wilson, and the U.S. Department of Justice subsequently cleared the policeman of civil-rights violations in the shooting. The department based its conclusion on forensic evidence as well as the credibility of witnesses who corroborated Wilson’s account. It questioned the credibility of those who incriminated the officer. Thus, based on the evidence, the shooting was a matter of self-defense.

Yet when the episode is mentioned on NPR and other liberal media outlets, the final law-enforcement conclusions are finessed so as to burnish the significance of events that catalyzed the Black Lives Matter movement.

Which brings us back to the depressing events of the week just past. Dayton’s pronouncements following the Castile shooting, and before any facts of motivation were in, constituted probably the most blatant political exploitation of a tragic incident. But President Obama couldn’t resist the temptation either.

In Thursday remarks from Warsaw, Poland (before the Dallas police shootings), the president spoke in eloquent and very human terms about the death of Castile and the previous police killing of Alton Sterling in Baton Rouge, Louisiana. But he couldn’t resist attributing the episodes to racial attitudes. “When incidents like this occur,” he said, “there’s a big chunk of our citizenry that feels as if, because of the color of their skin, they are not being treated the same, and that hurts, and that should trouble all of us.” He said the incidents were “symptomatic of a broader set of racial disparities that exist in our criminal-justice system.”

But the incidents could be symptomatic of broader racial disparities only if they reflected actual racialist or racist attitudes on the part of the officers involved. Not every tragic incident involving white police officers interacting with blacks in the course of their duties can be symptomatic of what the president calls a problem “that we all should care about.” Some may; perhaps many are. But each incident must be assessed on its own facts and merits, and that’s what the president declined to do. In his effort to combat the stereotyping of blacks who encounter police officers, he ended up stereotyping white police officers by suggesting that these incidents, ipso facto, represent a systemic problem.

It’s interesting to note that, the next day, following the brutal sniper attack on white police officers, Obama omitted any reference to race in issuing the usual expressions of outrage and heartsickness at “a vicious, calculated and despicable attack on law enforcement.” Here was an instance of actual and clearly established black racism on the part of a man who said he wanted specifically to kill white people, preferably white policemen. Yet the president refrained from the kind of admonitory and patronizing expressions he directed toward the nation’s whites in the wake of Ferguson or the Trayvon Martin tragedy or the arrest of Harvard professor Henry Louis Gates outside his own home in Cambridge, Massachusetts. Apparently no broader lessons are to be found here of the kind he likes to trot out when a black is killed by a white cop, even before he knows the facts of the case.

Some have sought to draw a connection between the president’s lopsided approach and the kind of hate-filled actions witnessed in Dallas. No such connection is suggested here. The president’s good faith is not in question. Neither is the appropriateness of calling attention to racial disparities that can be identified through serious information gathering and dispassionate analysis. Seldom can an act of evil be attributed to ordinary political discourse.

But it seems fair to question the president’s judgment when he steps forward with broad lessons for Americans drawn from episodes that he can’t possibly fully understand because the facts aren’t yet in hand. And it seems fair to wonder why the lessons always seem to go in one direction. For presidents, as for the rest of us, a good admonition is to wait until the facts are in before specifying their meaning.

Article Link to The National Interest:

Monday, July 11, Morning Global Market Roundup: Asia Stocks Hit Four-Week High, Look Forward To Stimulus

By Wayne Cole
July 11, 2016

Asian shares enjoyed a relief rally on Monday as upbeat U.S. jobs data soothed immediate concerns about the health of the world's largest economy, while the prospect of more policy stimulus helped keep sovereign yields near record lows.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS jumped 1.9 percent to a one-month top. Australia added 1.8 percent and Shanghai .SSEC 1.1 percent.

Stocks in Germany .GDAXI were seen starting 0.9 percent higher, with the CAC .FCHI up 0.7 pct and the FTSE .FTSE 0.5 percent. EMINI futures for the S&P 500 ESc1 came within a point of their all-time top.

Japan's Nikkei .N225 climbed 4.5 percent, its biggest daily gain in three months, as Prime Minister Shinzo Abe flagged a fresh fiscal stimulus package after the ruling coalition won a landslide victory in the upper house.

"Abe's victory boosted confidence in investor sentiment, and winning a two-thirds majority sends foreign investors a message that Abe's policies will see a progress," said Hikaru Sato, a senior technical analyst at Daiwa Securities.

The Asian rebound came after news the U.S. economy added 287,000 jobs last month, well above median forecasts and recovering from a very weak May report.

In the end, investors concluded the data was not strong enough to revive the prospect of a rate hike from the Federal Reserve for the next few months, benefiting bonds and stocks.

The Dow .DJI gained 1.4 percent, while the S&P 500 .SPX firmed 1.53 percent and the Nasdaq .IXIC 1.64 percent. The rise set the seal on an eight-session run that has seen U.S. equities add $1.4 trillion to market capitalization.

Several Fed officials are scheduled to speak this week, offering plenty of opportunities for the market to glean clues about policy.

The Bank of England meets on Thursday and might well cut its 0.5 percent interest rate to offset the economic drag from Britain's vote to leave the European Union.

Governor Mark Carney has already opened the door to easing, including the expansion of its 375 billion-pound bond-buying program.

No End To EU Uncertainty

The only question was timing, with analysts in a Reuters poll divided on whether a cut would come this week or in August.

Various reports out Monday argued for urgent action, with consumer spending falling last month, the business outlook darkening by the most in four years and economic activity in London slowing sharply.

"The outcome of the UK referendum has dealt a significant shock to the outlook for the global economy," warned Christian Keller, an economist at Barclays.

"It introduced a higher uncertainty about Europe's future, and raised questions about globalization more generally," he added. "Confidence and financial channels could potentially propagate the effects to the U.S., China and beyond."

That was one factor behind the relentless demand for sovereign debt that has driven down yields, which move inversely to prices, and kept the pound at its weakest since 1985.

Benchmark U.S. 10-year paper US10YT=RR was paying 1.37 percent, with Japan at -0.28 percent and Germany -0.20 percent.

Sterling was stuck at $1.2963 GBP=D4 on Monday, having failed utterly to rebound from the 13 percent loss suffered in the immediate wake of Brexit.

The Japanese yen eased as the Nikkei rose to reach 101.35 per dollar JPY=, while the euro stayed on the defensive at $1.1049 EUR= having touched a low of $1.1003 on Friday.

In commodity markets, spot gold XAU= was steady around $1,364.80 per ounce.

Crude prices edged down to near two-month lows on seasonally weak consumption, despite comments from Saudi Arabia's oil minister that the oil market was becoming more balanced.

Brent crude LCOc1 was down 16 cents at $46.60 a barrel, while NYMEX crude CLc1 fell 23 cents to $45.18.

Article Link to Reuters:

Oil Falls On Economic Woes; Drillers Adjust To Lower Prices

By Henning Gloystein
July 11, 2016

Oil fell on Monday over signs that U.S. shale drillers have adapted to lower prices and on renewed indications of economic weakness in Asia.

Brent crude was trading at $46.38 per barrel at 0653 GMT (02:53 a.m. EDT), down 38 cents from its last settlement. U.S. West Texas Intermediate (WTI) crude was down 46 cents at $44.95 a barrel.

Physical markets were also under pressure. Rising Canadian oil flows are having difficulty finding space in pipelines, weighing on Canadian prices, now at a $15 discount to WTI.

Iran set the official selling price of its light grade for Asia at $0.45 above the Oman/Dubai average for August, down 40 cents on the month.

Traders said the lower prices were a result of Asian refiners beginning to cut crude orders, and also to the region's economic slowdown.

"Crude imports to Asia over the last few months are falling ... (but) volumes were so high over the last year thanks to the rush to take advantage of the low oil prices, that it was rather natural that we would see a slowdown sooner than later," said Ralph Leszczynski, head of research at ship broker Banchero Costa.

"As we look at 321 cracks around the world, most are now trending near or below 5-year seasonal lows. Economic run cuts are finally starting in a few markets, but more may be needed ... The implied, but delayed, ripple effect into crude demand is not helpful for oil balances and prices," Morgan Stanley said.

Goldman Sachs said that it expected "WTI oil to remain in a range of $45-50 per barrel over the next 12 months".

Meanwhile, there is evidence that U.S. producers can live with crude of $45 or higher, as drillers added rigs for the fifth week in six, U.S. oil bankruptcies became sparse in June, and bullish U.S. oil bets dropped to near four-month lows.

Saudi Arabia's energy minister Khalid al-Falih said on Sunday that oil markets were becoming balanced and, as a result, prices were stabilizing.

However, signs of economic slowdown weighed. In Japan, core machinery orders unexpectedly fell 1.4 percent in May from the previous month, down for a second straight month, government data showed on Monday.

Elsewhere, China's economic growth likely cooled to a fresh seven-year low of 6.6 percent in the second quarter, according to a Reuters poll of 61 economists, its weakest in seven years.

Despite this, vehicle sales climbed 14.6 percent to 2.1 million units in June compared with last year, according to the China Association of Automobile Manufacturers.

Article Link to Reuters:

North Korea Threatens 'Physical Response' Against U.S. THAAD System Deployment

By Jack Kim and Ju-Min Park
July 11, 2016

North Korea's military said on Monday it will make a "physical response" to moves by the United States and South Korea to deploy the advanced THAAD missile defense system on the Korean peninsula.

The United States and South Korea said on Friday that the Terminal High Altitude Area Defense (THAAD) anti-missile system will be used to counter North Korea's growing nuclear and ballistic missile capabilities.

The announcement was the latest move by the allies against the North, which conducted its fourth nuclear test this year and launched a long-range rocket, resulting in tough new U.N. sanctions.

"There will be physical response measures from us as soon as the location and time that the invasionary tool for U.S. world supremacy, THAAD, will be brought into South Korea are confirmed," the North's military said in a statement.

"It is the unwavering will of our army to deal a ruthless retaliatory strike and turn (the South) into a sea of fire and a pile of ashes the moment we have an order to carry it out," the statement carried by the official KCNA news agency said.

The North frequently threatens to attack the South and U.S. interests in Asia and the Pacific.

The move to deploy the THAAD system, which drew a swift and sharp protest from China, came a day after the U.S. Treasury Department blacklisted leader North Korean leader Kim Jong Un for human rights abuses.

North Korea called the blacklisting "a declaration of war" and vowed a tough response.

South Korean President Park Geun-hye said on Monday the THAAD system was not intended to target any third country but was purely aimed at countering the threat from the North, in an apparent message to Beijing.

"I'm certain the international community knows full well that we have no intention whatsoever to target any other country or threaten them," Park said at a meeting with her senior advisers, according to the Blue House.

Chinese Foreign Minister Wang Yi said on Saturday that THAAD exceeded the security needs of the Korean peninsula, and suggested there was a "conspiracy behind this move."

South Korean Finance Minister Yoo Il-ho downplayed the possibility that China, Seoul's biggest trading partner, would retaliate economically over the THAAD decision.

"(China) is expected to separate politics and economics," he told lawmakers on Monday in response to a question during a parliamentary session.

A South Korean Defence Ministry official said selection of a site for THAAD could come "within weeks," and the allies were working to have it operational by the end of 2017.

It will be used by U.S. Forces Korea "to protect alliance military forces," the South and the United States said on Friday. The United States maintains 28,500 troops in South Korea, a legacy of the 1950-53 Korean war.

The system will be focused solely on North Korean nuclear and missile threats and would not be directed towards any other nation, the two countries said last week.

Article Link to Reuters:

Musk Hints At Top Secret Tesla Masterplan

By Lauren Hirsch
July 11, 2016

Tesla Motors Inc (TSLA.O) CEO Elon Musk on Sunday tweeted his intention to soon publish part two of his "top secret Tesla masterplan" following an embattled several weeks for the Silicon Valley heavyweight.

The tweet, which read "Working on Top Secret Tesla Masterplan, Part 2. Hoping to publish later this week" comes amid inquiries into two crashes of Tesla cars, as well as ongoing questions regarding Musk's plans to combine his electronic vehicle company, Tesla, with his solar panel maker company SolarCity Corp (SCTY.O).

On July 1, a driver of a Tesla Model X in Pennsylvania crashed into a turnpike guard rail. The National Highway Traffic Safety Administration (NHTSA) announced last week it is investigating the crash "to determine whether automated functions were in use at the time of the crash."

Tesla has said, "Based on the information we have now, we have no reason to believe that Autopilot had anything to do with this accident."

The crash came on the heels of NHTSA's disclosure it was investigating a May 7 crash in Florida that killed the driver of a Tesla Model S that was operating in Autopilot mode.

The Tesla Autopilot system allows the car to keep itself in a lane, maintain speed and operate for a limited time without a driver doing the steering.

Last month, Tesla proposed to buy SolarCity over which Musk serves as chairman and principal shareholder.. Musk expects the deal will help Tesla get into the market for sustainable energy for homes and businesses.

Jim Chanos of Kynikos Associates has called the proposed acquisition "shameful example of corporate governance at its worst."

Article Link to Reuters:

Musk Hints At Top Secret Tesla Masterplan