Analysis

Global Payments

The last day of June marked the final printing of the London Inter-Bank Offered Rate (LIBOR)—an average of anticipated interest rates among London banks which has thus far served as the benchmark for short term and off-shore lending around the world. LIBOR dictated the rate for all dollar-denominated loans, determining interest rate swaps and consumer loan rates. LIBOR has been replaced by the Secured Overnight Financing Rate (SOFR), a measure based on real transactions in the US Treasury repurchase market. SOFR is thought to be better than LIBOR because it is based on observable rates rather than anticipated ones. 

Solar Ambitions

In Spain’s forthcoming snap elections, the energy transition is high on the agenda, and solar power at the forefront. Prime Minister Pedro Sanchez has often expressed ambitions to make Spain the lead producer of solar electricity on the continent, positioning renewables as a cornerstone of the country’s “transformation in this decade.” By exploiting Spain’s great potential in solar power generation, the Spanish center-left coalition intends to upgrade the Spanish economy and reorient it towards higher value-added activities, in order to create well-paid jobs and appeal to manufacturing firms through low energy prices. 

Parallel Systems

At the start of her three-nation tour of Africa this January,  US Treasury Secretary Janet Yellen spoke to the Associated Press in Senegal, bemoaning the “piling, unsustainable debt” that, she said, “plagued” many African countries. This was a “problem,” she argued, that was “related to Chinese investments in Africa.” Two days later Yellen was in Zambia, a country which,  having defaulted on its external debt in 2020, was still trying to clinch a final deal with creditors more than two years later. In 2021 the G20 had agreed on the Common Framework, a vague set of guidelines meant to smooth such restructuring talks among low-income debtors and a variety of creditors, each with sometimes contradictory demands. If successful, Yellen stressed, such negotiations would unlock much needed disbursements from a $1.3 billion International Monetary Fund (IMF) loan. The problem, according to Yellen, was that China had become a “barrier to concluding the negotiations.” Back in the US, World Bank President David Malpass told Bloomberg that “China is asking lots of questions in the creditors committees, and that causes delays, that strings out the process.” The following day, the Chinese Embassy in Lusaka released a statement defending China’s role in the Zambian talks, chiding Yellen over US debt ceiling uncertainties and advising that “the biggest contribution that the US can make to the debt issues outside the country is to act on responsible monetary policies, cope with its own debt problem, and stop sabotaging other sovereign countries’' active efforts to solve their debt issues.” In this context, it is hardly surprising that ex-Zambian trade minister Dipak Patel has complained of his country becoming a pawn in a “Common Framework Cold War.”

Semi-Politics

Since the late 1970s, cutting edge semiconductors have figured at the heart of the political economy of the United States. Often called the “crude oil of the information age,” they have become increasingly ubiquitous and are now considered the basic building blocks of a broad swath of industry, including telecommunications, automobiles, and military systems. By the 1980s, semiconductors had become so significant to the economy that they came to be seen as symbolic of American power itself, and the essential element in the country’s post-Cold War future. By 2003, a National Academies of Science Report could refer to the pervasiveness of semiconductors as “the premier general-purpose technology of our post-industrial era. In its impact, the semiconductor is in many ways analogous to the steam engine of the first industrial revolution.”

Risk Politics

In 2022, Environmental, Social, and Corporate Governance (ESG) accounted for 65 percent of all new inflows in exchange traded funds in Europe. Investments in the US are also projected to grow—PricewaterhouseCoopers (PwC) observes that more than eight out of ten institutional investors plan to increase their allocations to ESG in coming years. ESG assets under management are expected to reach US$33 trillion by 2026, making up over 20 percent of all assets under management globally. 

Industrial Transformations

The latest US experiment with industrial policy—exemplified by the Inflation Reduction Act, the CHIPS and Science Act, and the Infrastructure Investment and Jobs Act—has sparked outright opposition and pleas for restraint, but also calls for a far more ambitious action.

Pecuniary Salvation

Monetary financing—the issuance of public money to support public expenditure—has in recent times become a policy taboo. The message from economists to politicians, policymakers, and society more broadly is often that any central bank support for public expenditure is likely to destroy an economy.

Reforming the IMF

In March 2023, the US Federal Reserve expanded its balance sheet by $300 billion. Following the run on Silicon Valley Bank, the Fed provided emergency lending through a brand-new bank lending facility that accepted US treasuries at face value (higher than market value) as collateral against dollars, for cash-strapped financial institutions. The US central bank assured that even the uninsured deposits exceeding $250,000 at Silicon Valley Bank would be made whole. As the banking turmoil spread across the North Atlantic, the Fed reactivated its international dollar swap lines. Meanwhile, in Europe, the Swiss National Bank arranged a  public liquidity backstop for UBS Group AG, which had agreed to absorb Credit Suisse. Swiss authorities wrote new amendments into law that enabled them to structure the merger’s terms and conditions.

Two-Price Economy

The crisis affecting US and some European banks shows little sign of abatement. Following the collapse of Silicon Valley Bank earlier in the year, First Republic last week became the latest mid-size US bank to be bought up by a larger lender after investors withdrew more than $100 billion in deposits during the first quarter of the year. The Federal Reserve is now concerned about a “credit crunch” as mid-sized banks restrict their lending in the face of continued pressure on their balance sheets.

Best Execution?

Recent years have seen the rise of the meme stock frenzy—a wave of stock purchases driven by social media trends. This tendency culminated with the Gamestop bubble of 2021, in which the value of the company’s stocks increased more than a hundred times over in just a few months. Beyond demonstrating the added risk introduced by meme stocks, the occasion revealed crucial insights regarding the role of retail day traders in the structure of contemporary equity markets. 

The Revival of Neomercantilism

Amid intensifying geopolitical and economic rivalries, policymakers around the world—including those in the United States and European Union—are increasingly turning to neomercantilist industrial policies to promote the wealth and power of their states. This trend has been reinforced by the pandemic’s disruptions to international supply chains, the growing weaponization of economic interdependence, and the broader backlash against free trade in many countries.  

Testing Loyalties

Pain and resolve: have we reached the beginning of the end of sanctions?

Inside the Black Box

We live in a period of unparalleled financial complexity, and, as the history of recent decades has demonstrated, unparalleled financial risk. The recurring crises which plague the global economy have brought theorists of systemic instability to the fore. Key among them has been Hyman Minsky, whose framework for understanding financial market fragility takes a cyclical form. In his model, an excessive credit expansion (“displacement”) fuels a speculative bubble (“mania” ) and causes “financial distress,” leading to credit contraction and the bursting of the bubble (“panic” ).