Iran Podcast & China's New Long March - May 26 2019 EconVue Spotlight

As some of my more patient friends know, I have been toiling away at a book on Chinese monetary history during the Interwar period off and on for some years.  Immersing myself in the public and private words of the historic figures of the 1930’s has perhaps sensitized me to the propensity of even well-intentioned leaders to glide into chaos.  That which is unthinkable inexorably becomes inevitable.

While everyone has been focused on the impasse in US-China trade negotiations, the specter of war with Iran has resurfaced--if not directly with us, via proxy. US sanctions are biting;  I’m told by recent returnees that economic conditions in Iran are worse than during the Iran-Iraq War.  Narimon Safavi, EconVue Iran expert who is also a commentator for Worldview on NPR, is this month’s Hale Report guest.  At the conclusion of our podcast, we agreed that neither the US nor Iran wants a war. Narimon believes that the chances of one happening this year are less than 10%. Japanese media is reporting today that Prime Minister Shinzo Abe might visit Iran to mediate after his discussions with President Trump as early as next month. 

To many, recent events look and feel like the US buildup to the Iraq War with a twist: the involvement of both Russia and China, which have vital interests in the Middle East.  China, Iran’s largest trading partner and importer of crude oil, was unhappy about the loss of its oil waivers at the beginning of May. Things became bellicose, with very senior Chinese officials suddenly  claiming they were able to take over Taiwan.  North Korea’s missile program was reactivated. Each of these events, including the breakdown in recent US-China trade negotiations, affect each other.  In fact as our interview was taking place, Iranian Foreign Minister Mohammad Javad Zarif had just met with Chinese Foreign Minister Wang Yi in Beijing. Iran is actively enlisting the support of its other trading partners.

Although talk of war is simmering on low, there are limitless possibilities for each player to underestimate the other side. Any conflict that affects the Strait of Hormuz will create an oil price shock that could finally untether inflation and also deal a blow to China’s slowing economy. In the buildup to World War II, a separate train of events in both Europe and Asia suddenly converged into global conflict.  At the very least, momentum for the US-China trade talks has all but stopped, and Xi Jinping has told the Chinese people to be ready for another Long March. Iranians are already living that reality.

HALE REPORT PODCAST

Guest: Narimon Safavi Iran’s Political Economy and Prospects for War

In spite of talk about war between the US and Iran, EconVue Expert Narimon Safavi says that neither side really wants a conflict, even in the face of fierce internal debates in both countries. Iran’s economy is suffering, but Iran’s trade with other large nations---China, India, and Japan, as well as the EU matter and in fact might create a pathway to peace. 

STORIES IN OUR SPOTLIGHT

Trade War

Nobody seems attuned to the fact that we are competing in a global economy where all factors of production are more mobile and fungible than they’ve ever been before
Patrick Chovanec 5/11/2019 Twitter 

An antidote to current thinking that the bilateral relationship between the US and China is driving everything in the global economy.

China Loses More From This Trade War
Tyler Cowen 5/13/2019 Bloomberg

China’s supply chain competitors are the winners in this fracas.

Will the Fed Help Trump Fight His Trade War?
Benn Steil and Benjamin Della Rocca 5/14/2019 Council on Foreign Relations

Will the Fed Help Trump Fight His Trade War? The authors say no because of expected wage inflation. Would the Fed response be the same if we get a sudden hike in oil prices due to growing Middle East tensions?

The Theory That (Might) Explain Trump’s Trade War
Karl W. Smith 5/6/2019 Bloomberg

Surprisingly, the number of Americans who support free trade has nearly doubled over the last ten years.

Why the United States and China See Negotiations Differently
Shang-Jin Wei 5/14/2019 Columbia Business School

In China, there’s a saying: “Nothing is agreed until everything is agreed.”

China

Two-Way Street: 2019 Update US-China Investment Trends
National Committee on US-China Relations

Chinese direct investment in the United States fell by a startling 90 percent in 2018, and with divestures dropped to a net negative, reversing a trend that has provided some 200,000 American jobs, according to a May 8 report by the National Committee on U.S.-China Relations and Rhodium Group.

‘Tariff War’ Flares Up, But Deal Still Likely Later this Year
Michael Lewis 5/10/2019 FMI

China, we believe, is gambling that Trump needs to make a deal as he heads into a re-election campaign. They are making the same mistake that North Korea did last year in de-nuclearization talks. In both cases, Trump walked away from the table rather than take a “bad” deal. It’s almost like he has written books on the subject…

Trump is mostly right about China, but here’s where he’s wrong
Kenneth Rogoff 5/7/2019 Market Watch

Is a flexible exchange rate the key to China’s long-term success?

Structural Change in the Chinese Economy and Changing Trade Relations with the World
Koopman, Robert and Bekkers, Eddy and Lemos Rego, Carolina, SSRN Discussion Paper May 2019.  

The long run: Increases in productivity and domestic consumption and a decrease in the savings rate mean that China's current trade surplus will become a deficit. The US-China trade imbalance will disappear because of structural changes within China.

China’s Pyramids Promise Riches but Deliver Curse as Economy Slows
Dinny McMahon 8/31/2017 Macro Polo

China’s financial pyramid schemes are akin to business cults, outside the realm of shadow banking, enabled by the Internet. Tens of millions of people stand to lose their investments as China’s economy slows. Protests are spreading.

More and more of China's Migrant Workers are Staying Home 
Cissy Zhou 5/1/2019 Inkstone News

Unemployment is becoming a significant issue in China. Older migrant workers staying home, 10 million younger cadres sent to the countryside. China has discovered the limits of cities and the process of deurbanization

U.S.

Surveillance: Inflation Isn’t Dead, Hatzius Says (Podcast) 
Bloomberg 4/23/2019 Higher energy prices could finally bring inflation.

Manufacturing Can’t Create Enough Jobs. Infrastructure Can.
Louis Uchitelle 5/2/2019 the New York Times

There is almost limitless work to be done to upgrade US infrastructure, a sector particularly dependent on labor which is arguably in short supply. However infrastructure investment returns are not quick or simple to achieve, even for public-private partnerships.

My Best Growth Forecast Ever
Robert J. Barro 4/29/2019 Project Syndicate

"Yet today, the antipathy toward the Trump administration is so intense that many people, including some of my economist colleagues, are rooting for lower economic growth just to deny him a political win."

Iowa missed a chance to free workers of costly, unnecessary work licenses
Matthew Mitchell and Anne Philpot, 5/2/2019 Des Moines Register

“Should an Iowa massage therapist spend 4.5 times as many hours training to obtain a license as an EMT?” One out of every three workers in Iowa is licensed- limiting job mobility.

$9 million donation earmarked for cannabis research
4/30/2019 the Harvard Gazette

A major industry investor is sponsoring marijuana research at Harvard and MIT. Is this analogous to tobacco companies sponsoring similar medical research? What if new deleterious effects are discovered?

‘Getting Worse, Not Better’: Illegal Pot Market Booming in California Despite Legalization
Thomas Fuller 4/27/2019 the New York Times

So marijuana legalization with licensed production created more, not less illegal production in California. Law of unintended consequences, and price competition for an expanded market.

Crypto Assets

Fidelity’s Bitcoin Trading Is Only Weeks Away
Jimmy Aki 5/6/2019 Bitcoin Magazine

A significant milestone for cryptocurrencies. Is this the reason that Bitcoin has outperformed most other asset classes in 2019?

The Time Value of Bitcoin and LNR
Nik Bhatia 4/18/2019 Medium

Bitcoin already is an asset class. It is not yet a currency.

HTC Plans to Launch Another Blockchain Phone This Year, Exec Says
Yogita Khatri 4/30/2019 Coindesk

The ultimate fintech accessory—should I replace my aging Ifone with a blockchain phone?