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Neo-Confucian and Neo-Liberal school of thought: A study of U.S.-China Economic systems

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The academic study of International Relations follows on a detailed analysis on the degree of implementation of a theoretical paradigm on inter-state and intra-state interactions. Theories in themselves provide insight on questions pertaining to the cause and effects of a particular real-life phenomenon. With their general degree of acceptability, they are therefore suitable to be applied in vast real time events. The development of the International System has led to the various changes in theories and has demanded a departure from the traditional conception in International Relations. These have then led to reformed theories aiming to increase our understanding of the change in events shaping our global order. The human history of trade and commerce has been studied and recorded for as long as early Man. Trade was considered as a vital part of sharing resources based on the availability and demand of any specific item. The first recorded trade dates back to almost 3000 BC where early civilizations of the Indus Valley and Mesopotamia conducted their first foreign, long-distance trade (Whipps 2018 ). Major trading routes would soon be formed which would then continue to shape the formation of empires, conflicts and global order.

The onset of Globalization marked a radical change in the international system where in greater economic connectivity was sought in order to attain economic objectives. The first wave of Globalization was marked by the rise of the British empire as a colonial empire. The British Industrial Revolution also led to a increase in trade and commerce of essential items (Vanham 2019). The onset of Globalization also came with the rise of communication technology and various industrial revolution across Europe. It was too however be in 1989, after the fall of the Iron Curtain that Globalization truly became a global phenomenon. The United States role was marked with its efforts to restart International Trade and Commerce through the formation of various economic institutions and Programs. Organizations such as the World Bank, The International Monetary Fund and World Trade Organization all were to influence global trading and the functioning of Global Markets. China was also observing a domestic rise of the need to move away from traditional structures of governance and rule which had led them to be the victim of gross sovereign violations and economic maltreatment. The Opium Wars of the mid-19th century and the Meiji restoration in Japan were to influence Chinese thinking in moving away dynastic mode of governance.  The Republic of China formed in 1912 would try to adopt western economic models in Trade and Commerce (Paine 2010 ).

The Washington Consensus therefore stemmed from the idea first given by Neo-liberal theorists with regards to Free Market economics and liberal principals. Jhon Williamson who first used the term, described the need for free market policies to continue in order to save the Global South. For this the IMF and World Bank were to support and promote stability programs and structural adjustments within developing states in order to lead to “economic growth” (Hurt 2020). The principal targets in this process were cycles of inflation, public finance issues and balance of payment crisis. Over the next decade many developing states were seen to have benefited from the original 10-point mandate in the Washington consensus. India’s growth rate accelerated considerably post 1991 following similar principals. Brazil’s growth rate had succeeded to gain momentum despite destructive hyper-inflation. Vietnam had also observed growth and acceleration as a result of greater connectivity with global financial markets (Spence 2021 ).  However, despite the 10 points highlighting key features needed for boosting economic growth, issues remain pertaining to complex economic interactions with international and domestic market economies.

The Chinese economic and political system has for been an enigma for western academics to decipher. The countries outlook varies largely from what was deemed as an era of Capitalism. The Beijing Consensus follows a departure from traditional understandings of economic theories and policies of the original Washington consensus. Chinese thinkers have moved away from these understandings in part due to the respect for approaching unique problems with tailor made solutions. Based on the 3 fundamentals, overarching principals of Chinese development, the Beijing consensus seeks to adopt a different model for developing states. These include; Innovation, the pursuit of dynamic goals and the importance of self-determination in the making of economic policies (Turin 2010). The Beijing model of economic and social development also follows a different political thought, that of Neo-Confucianism. Neo-Confucius school of thought focuses on the importance of tradition and culture as a means to increase economic growth. This was observed and supported by the Neo-conservatives who argued the East Asian growth stemmed not from traditional Neo-liberal understandings of public welfare, GDP level of a country and foreign assistance rather from ‘traditions and culture’ (Miller 2020 ). The revival of Confucian thinking was done in order to re-vitalize traditional Confucian thinking regarding the development of the inner self and the metaphysical existence. They also sought to include these thinking’s while developing the ascetical dimensions essential to traditional Confucian thought (faculty.washington.edu 2021 ).

The study of Neo-liberal policies and the study of various economic development models offers contrasting arguments suggesting a complicated study of the propositions and their results. Many academics have argued that for long the ideas proposed by the Neo-liberal school espouses an ideological construct rather than a sound theoretical approach to the study of the drivers of economic growth. The vague generalizations of ‘Free Markets’ and ‘Economic prosperity’ are not supported by empirical evidence suggesting a general intellectual bankruptcy. The United States embrace of the Neo-liberal ideals came as a result of the De-industrialization phase where in power was taken from the labor movement. It was to be during the time of Reagan that the Neo liberal ideals would gain greater solidification (C.J 2013). With markets being allowed to operate without government intervention, corporate power brokering and market monopolization soon took precedent. These were then leading to a lack of the original conception of a ‘welfare state’ were in the conception of public service was originally created. Neo-liberal ideals were first exposed to the capitalist shocks. The economic shocks of the 1970s suggested how free market economic policies would create unsustainable economic models thus creating a domestic and international crisis. Within the United States, the easy-money policies of the American Central Banks lead to a significant rise in inflation with numbers increasing up to as much as 12 percent. Interest Rates would increase up to as much as 20 percent with famous Professor Jeremy Seagal describing it as the “Worst the greatest failure of American macroeconomic policy in the postwar period.” (Kramer 2021 ).

Neo-liberal policies which were initially idealized and formalized by countries such as the United States and the United Kingdom would soon create economic and political crisis in Europe. While the Neo-liberal argument, argued the cause of the economic crash to be due to rise in oil prices, the fall out had resulted in rise in inflation and interest rates thus damaging the ideological standpoint of Neo-liberalism. The creation of institutions such as the European Union and the International Monetary Fund would also lead to rise in economic crisis in states. The economic crisis in Greece which soon mushroomed into a far greater social and political crisis was influenced by fiscal policies laid by the International Monetary Fund and the European Union. Neo-liberal policy of enforcing austerity measures to a struggling Greek economy by the troika of EU, ECB and the IMF.

The popular narratives surrounding the Greek debt crisis included the inability of the Greek state to comply with the requirements of the European Stability and Growth pact and its reasonability in giving its economic, financial and fiscal situation in order to join the European Union. The loan of over 252 billion Euros by so called troika was done in order for Greece to rescue it from defaults. What the Neo-liberal banking system did not consider was the damage caused by the level of irresponsible lending. This degree of taking risks and dangers would bailout private sector banks which had taken an obscene degree of risk and shifted the pressure onto the Greek people. European markets were able to benefit by taking Greek Bonds at the cost of debt repayment and the social well-being of the local population (Mavelli 2016).

The Global financial crash of 2008-2009 presented arguably the most significant fall out of Neo-liberal globalization which was the influence global economic policies for many years to come. The cause of the financial crisis is generally disputed amongst economists however commonalities drawn suggesting a larger role played by the banking sector. The US banking systems offering to subprime customers with mortgage loans. Knowing that despite the lack of the possibility that owners would be able to repay the loans, banks made significant share profits with shares of subprime loans rising to almost 15 percent in 2004-2007 (Duignan 2019). The effect was to result in a massive fall out in the macro-economic indicators of the economy and with the total GDP of the United States falling by at least 7 percent according to the study made by the Federal Reserve Bank of San Francisco. The financial crisis would also have a deep inter state effect. Many banks across the world experienced shocks and had to readjust with many people losing their jobs and a high rise in unemployment. Its longstanding effects were still to be observed as according to the World Economic Outlook. The study of 24 economies shows a negative deviation in the growth trend suggesting a long standing effect as a result of the financial crash. Neo-Liberal ideals again which had been repeatedly espoused were once again showing a disastrous trend of large-scale unemployment, state bankruptcy and a endless cycle of elitist exploitation.

The Chinese model of Trade and commerce has shown a departure from its Western version of market capitalism. Its political system combined with its economic policies are as stated before a enigma for academics and western policy makers. Chinese opening after being diplomatically quarantined for a large part of the late 1970s saw a vast scale study conducted in order to ascertain the means to its success. Despite being a politically authoritarian state, its does not fall neatly into western assertions of liberal democracies and totalitarian regimes. Chinese economic policy follows much of the liberalized version of market practices. The application of “Chinese characteristics” to every foreign political/social ideology has led to an adaptation to financial and political challenges. Chinese economic outlook focuses primarily on development by the state in order to push for growth and to remove the inconsistences in financial gain posed by market system (Li 2015 ).  The Chinese model continues to gain traction amongst Western scholars and policy makers as it seeks to establish stable growth and ensure mass social uplifting of the common working class. Chinese economic policies combined with good governance models and a desire for growth have resulted in the uplifting of over 800 million people out of poverty according the World Bank (World Bank 2021 ).

In attempting to ascertain its capability in becoming the next greater global marketing and economic system certain merits and de-merits need to be studied. The Chinese economic has shown result with the steady rise of its GDP growth averaging at an almost 9.23 percent from 1989 to 2021. It however is not without its share of criticism which comes in large parts due to its authoritarian structure. As studied previously, the Chinese model for governance is based on a political structure which is a single party rule and is largely authoritarian. Western democracies have championed the conception of liberal democracies criticizes Chinese political structure on the basis of its lack of representation. However, while this may suggest a repressive regime structure, the economic progress that China has made shows a different perspective.   

Chinse trading policy has come after Chinese trade flows have excessed beyond the expectations of economists. These trading policies are a product of a China’s major shift towards market orientation policy and has led a to greater economic success. The level of global trade integration based on the statistics argue that China has succeeded in raising the levels of trade intensity. A recent study studying the Chinas rise as a trading giant used the gravity model to quantify China’s trading prowess. The gravity model aimed at setting new indicators for studying trade integration. Based on these factors and radical policy and governance reforms, China was able to increase its share in the world GDP from 9.5% to 15.4% between the years of 1995 and 2005. At the same time period, Chinese openness ratio, which studied the levels of imports and exports doubled from 33% to 62% (Schnatz 2006 ). The Chinese understanding therefore suggested a robust economic and trade model for developing nations through which stable growth rates and greater world integration could be achieved. The Chinese study on its economic integration was made after extensive research studying more than 3500 bi-lateral trade relationships. Other factors such as trade volumes have grown in the last 21 years from 18.1% of exports to 17.7% of imports.   

In studying and analyzing the debate between the economic propositions of the Chinese model and the neo-liberal assumptions regarding trade certain factors come into light. In the formulation of assumptions, the Chinese model offers a different view than the Washington consensus on trade policy. The degree of rigidity enshrined in the model is countered through a flexible approach of the Chinese economic model. The Chinese models follows a more pragmatic approach based on existing economic and social integrators. These have shown to be extremely useful leading to the rise of the Chinese economy in the past three decades. From trade to poverty indicators the China model has resulted in a remarkable growth and recovery (Huang 2010). The Chinese understanding of a flexible approach and state monitored economic policies offers a interesting departure from fundamental neo-liberal conceptions. The Neo-liberal perspective of a free market and a initialization of economic governance follows a ideological construct which has shown little empirical evidence. The academic grounds for the study of free market economies are based on the principals of providing greater freedom, access and ensuring minimal intervention. These are based on the motivations suggesting creator creativity and driving profits and economic growth.  

Another understanding on the debate on how the Chinese model provides a sound policy alternative as an economic model is to study Chinese ideological beliefs. The neo-liberal contestation of the protection of private property was rejected by a Chinese conception of rational socialism. Chinese adaptation of Maoism and the study of Marxist philosophy underlined the importance of challenging capitalist ideals throughout. Mao’s identification of class struggle and events such as the Great Leap Forward and Cultural Revolution were done in order to promote a cultured socialism under the Chinese banner. Deng Xiaoping ascension to the leadership throne saw a rejection of previous ideals and a greater focus on promoting economic welfare. For this, unlike Mao a greater departure was reacquired were in markets and economic policies would be liberalized. The principal driver under the new rule would not be ‘class struggle’ but would ensure that the nation strived towards a collective effort to increase productivity in order to ‘catch up’ with western economies. Unlike the neo-liberal approach, economic polices under Deng ensured that “The core issue is to improve efficiency in production, construction, distribution, and other aspects of the economy in every possible way.” (Weber 2020 ). These conceptions therefore were to create a stable economic growth chart with the Chinese economy experiencing significant economic growth while at the same time maintaining its authoritarian political regime. On a theoretical basis the Chinese model does provide a alternative to tradition neo-liberal school and promotes a collective effort under the management of the state in order to drive economies towards collective growth. With greater focus on productivity and ensuring maximum utilization of labor China has been able to create sustained economic growth rates and has integrated itself well in to the global economy.

The debate around economic policies has maintained center stage amongst academicians. The study of policy making and interactions at the economic level continue to define state interactions and define future relationships. In the contestation between the two primary economic models, the China model has shown considerable resilience despite being a capitalist economic system. The Chinese economic model has begun to gain traction amongst European policy makers as a viable alternative in response to increasing challenges faced by states. Global trading patterns have also seen significant alterations with growth rates being affected due to flawed neo-liberal economic policies. The recessions and major economic crisis have had a lasting impact on trade relationships. For the Chinese model to be seen as a viable alternative as new model being adopted at a larger scale, it would have to rise to the theoretical and policy challenges posed by a pre-dominant Western audience. To the neo-liberal free market and trading principals, liberal democracies are an essential element in ensuring freedom for actions, the right to own private property and to trade at an individual and institutional capacity. Neo-liberal economic models also rely on lesser intervention from governments in the form of its authoritarian and interventionist policies and monitoring and regulating trading interactions. The government is largely seen as a ‘meddler’ in issues which fall under the realm of markets. The promotion and establishment of institutions are also another vital aspect ensuring greater rules and regulations surrounding trade and greater global and regional connectivity.

The EU has continued to allow for greater trade relationships by enforcing a centralized trading charter wherein trading rights are provided to countries wishing to utilize another’s resources. The Chinese model therefore is presented with its first challenge. While economic liberalization has followed greater trade and global connectivity, western approach has shown little effect on the Chinese political system. Despite the great opening under Deng Xiaoping Chinese political system to this day continues to remain that of a pre-dominant authorization structure. The states monitoring and intervention has created a greater environment for directed economic goals amid at increasing labor potential, skill and productivity at a national level. Western economies have while supporting Chinese economic model, have criticized its authoritarian structure which runs in tangent to the ideals of liberal democracy. The issues with regards to trade policy remains suggestive of the concept that China’s rigid control over its society has been able to stop bad policies and to award successful policies. Another issue highlighted by policy makers and academics is the consistent is that the Chinese model have followed considerable changes over the rise and rule under Mao, Deng and Xi Jingping. These policies have differed on the ideological context with the current premier seeking a return of older policies (Dissanayake 2021 ).

The rise of globalization as has been promoted by the increase in levels of communication and by a greater integration economics. Globalization was promoted by the US through the formation and institutions and supporting weak economies of Europe through programs such as the Marshall plan. Another important event in the history of globalization comes after the acceptance of Dollar as a central reserve currency of the world in 1944. This marked the monopolization of US economic policies through the acceptance of a standard currency system. The dollars would then become the central currency on the basis of which GDP would be measured and financial interactions would take place. Western academics have largely considered this to be the primary reason for American monopolization of the financial markets. The Chinese economy despite coming out of its cocoon and participating in global financial trade was unable to match the dollar and produce a currency as a parallel for the dollar. The Chinese model therefore continues to face a sustained and complicated challenge with regards to introducing its system as a viable alternative system. Developing countries adaptation of the model have been showing a mixed result. This in large part is due to a weak political structure combined with poor governance leading to lack of control of policy and implementation. While Chinese economic trading programs continue to make inroads in many developing countries, its policies face a myriad of social, political and economic challenges.

In studying economies and global trade, it is important to study the geo-political context alongside the stringent economic principals. The Cold War between the US and the Soviet Union saw a ideological contestation of principals and altering visions of a global order. The communist understanding was based on its fundamental premise of ending the class struggle which had been a product of exploitative capitalist economics. The US led camp promoted a western ideal of free market economy with the assurance of the right to control and own private property. Apart from this, geo-political tensions would also be played out over different countries adopting the others ideological model. The war in Vietnam was an example on how two great powers eyed for their adaptation of the ideological, political and economic models. Europe was at the heart of the expansive campaign through which both states sought to cement their ideological legacy. The Truman Doctrine envisaged the importance of supporting weaker European states at the cusp of ideological takeover. Countries such as Greece during the time of the Truman administration was seen as a threat which would soon be taken over by the Communist Soviet Union. Great power competition was also promoted due to control of future economic and trading systems. The free-market trading system of the United States would ensure greater monopoly and control by the US. The fall of the Soviet Union was to result in the famous ‘Unipolar’ moment where in the United States freely adapted its neo-liberal policy at a global scale.

The current contestation between the United States and China revolves around similar patterns observed during the Cold War. Despite a radical change in the global system and political dynamics, rising China continues to pose a threat to the United States hegemony with many academics fearing a ‘Thucydides trap’. Deeply integrated economies of China and the United States pose the principal barrier to any future military conflict which would prove a disaster to the world economy. However, the newer policy of sanction committed by global institutions poses a newer form of Cold War between the two nations. The Trade Wars during the time of the Trump administration showed how economic sanctions were the mainstay of US foreign policy in challenging its vision and economic model. While Great Power competition continues to pose a threat to financial order of the World, the Chinese model also continues to gain traction and inroad into major policy making circles of the World. Recent projects such as the Belt and Road Initiative and its flagship projects in many developing countries have introduced a lucrative model for trade and commerce ensuring greater social welfare. The Chinese model also focuses on building sperate trading blocs reducing the dependency and hegemony of the United States. The Shanghai Cooperation Organization illustrates Chinese ambitions to de-link US’s Asian influence to become a regional hegemon. By become a central power in Asia, policy adaptation would become more prudent for developing states. Capitalist influence in Europe became more pronounced after the unipolar moment. For the Chinese, its hegemony would mark a departure from traditional economic ideals of neo-liberalism and a adaptation of the Chinese working model of governance, trade and commerce.

The role of economic models has shown a pronounced role in defining a countries political outlook and foreign relations. Defining a ideological stance is based on it theoretical paradigm influence policy making. Both the models studied above show a parallel degree of strengths and opportunities. However the Chinese has continued to show an increasing acceptance a comprehensive model tackling major issues concerning states and ensuring economic growth. It remains to be seen how the Chinese model adapts to the rising challenges of international and domestic nature and its degree of acceptance as the new model for the economic and political world order.

The Author is pursuing a degree in International Relations from National Defense University Islamabad and is a associate at Institute of Strategic Studies Islamabad. He can be reached at abdulwasayajmal10[at]gmail.com

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Rebalancing Act: China’s 2022 Outlook

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Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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The US Economic Uncertainty: Bitcoin Faces a Test of Resilience?

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Is inflation harmful? Is inflation here to stay? And are people really at a loss? These and countless other questions along the same lines dominated the first half of 2021. Many looked for alternative investments in the national bourse, while others adopted unorthodox streams. Yes, I’m talking about bitcoin. The crypto giant hit records after records since the pandemic made us question the fundamentals of our conventional economic policies. And while inflation was never far behind in registering its own mark in history, the volatility in the crypto stream was hard to deny: swiping billions of dollars in mere days in April 2021. The surge came again, however. And it will keep on coming; I have no doubt. But whether it is the end of the pandemic or the early hues of a new shade, the tumultuous relationship between traditional economic metrics and the championed cryptocurrency is about to get more interesting.

The job market is at the most confusing crossroads in recent times. The hiring rate in the US has slowed down in the past two months, with employers adding only 199,000 jobs in December. The numbers reveal that this is the second month of depressing job additions compared to an average of more than 500,000 jobs added each month throughout 2021. More concerning is that economists had predicted an estimated 400,000 jobs additions last month. Nonetheless, according to the US Bureau of Labour Statistics, the unemployment rate has ticked down to 3.9% – the first time since the pre-pandemic level of 3.5% reported in February 2020. Analytically speaking, US employment has returned to pre-pandemic levels, yet businesses are still looking for more employees. The leverage, therefore, lies with the labor: reportedly (on average) every two employees have three positions available.

The ‘Great Resignation,’ a coinage for the new phenomenon, underscores this unique leverage of job selection. Sectors with low-wage positions like retail and hospitality face a labor shortage as people are better-positioned to bargain for higher wages. Thus, while wages are rising, quitting rates are record high simultaneously. According to recent job reports, an estimated 4.5 million workers quit their jobs in November alone. Given that this data got collected before the surge of the Omicron variant, the picture is about to worsen.

While wages are rising, employment is no longer in the dumps. People are quitting but not to invest stimulus cheques. Instead, they are resigning to negotiate better-paying jobs: forcing the businesses to hike prices and fueling inflation. Thus, despite high earnings, the budget for consumption [represented by the Consumer Price Index (CPI)] is rising at a rate of 6.8% (reported in November 2021). Naturally, bitcoin investment is not likely to bloom at levels rivaling the last two years. However, a downfall is imminent if inflation persists.

The US Federal Reserve sweats caution about searing gains in prices and soaring wage figures. And it appears that the fed is weighing its options to wind up its asset purchase program and hike interest rates. In March 2020, the fed started buying $40 billion worth of Mortgage-backed securities and $80 billion worth of government bonds (T-bills). However, a 19% increase in average house prices and a four-decade-high level of inflation is more than they bargained. Thus, the fed officials have been rooting for an expedited normalization of the monetary policy: further bolstered by the job reports indicating falling unemployment and rising wages. In recent months, the fed purview has dramatically shifted from its dovish sentiments: expecting no rate hike till 2023 to taper talks alongside three rate hikes in 2022.

Bitcoin now faces a volatile passage in the forthcoming months. While the disappointing job data and Omicron concerns could nudge the ball in its favor, the chances are that a depressive phase is yet to ensue. According to crypto-analysts, the bitcoin is technically oversold i.e. mostly devoid of impulsive investors and dominated by long-term holders. Since November, the bitcoin has dropped from the record high of $69,000 by almost 40%: moving in the $40,000-$41,000 range. Analysts believe that since bitcoin acts as a proxy for liquidity, any liquidity shortage could push the market into a mass sellout. Mr. Alex Krüger, the founder of Aike Capital, a New York-based asset management firm, stated: “Crypto assets are at the furthest end of the risk curve.” He further added: “[Therefore] since they had benefited from the Fed’s “extraordinarily lax monetary policy,” it should suffice to say that they would [also] suffer as an “unexpectedly tighter” policy shifts money into safer asset classes.” In simpler terms, a loose monetary policy and a deluge of stimulus payments cushioned the meteoric rise in bitcoin valuation as a hedge against inflation. That mechanism would also plummet the market with a sudden hawkish shift.

The situation is dire for most industries. Job participation levels are still low as workers are on the sidelines either because of the Omicron concern or lack of child support. In case of a rate hike, businesses would be forced to push against the wages to accommodate affordability in consumer prices. For bitcoin, the investment would stay dormant. However, any inflationary surprises could bring about an early tightening of the policy: spelling doom for the crypto market. The market now expects the job data to worsen while inflation to rise at 7.1% through December in the US inflation data (to be reported on Wednesday). Any higher than the forecasted figure alongside uncertainty imbued by the new variant could spark a downward spiral in bitcoin – probably pushing the asset below the $25000 mark.

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Platform Modernisation: What the US Treasury Sanctions Review Is All About

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Image source: home.treasury.gov

The US Treasury has released an overview of its sanctions policy. It outlines key principles for making the restrictive US measures more effective. The revision of the sanctions policy was announced at the beginning of Joe Biden’s presidential term. The new review can be considered one of the results of this work. At the same time, it is difficult to find signs of qualitative changes in the US administration’s approach to sanctions in the document. Rather, it is about upgrading an existing platform.

Sanctions are understood as economic and financial restrictions that make it possible to harm the enemies of the United States, prevent or hinder their actions, and send them a clear political signal. The text reproduces the usual “behavioural” understanding of sanctions. They are viewed as a means of influencing the behaviour of foreign players whose actions threaten the security or contradict the national interests of the United States. The review also defines the institutional structure of the sanctions policy. According to the document, it includes the Treasury, the State Department, and the National Security Council. The Treasury plays the role of the leading executor of the sanctions policy, and the State Department and the NSS determine the political direction of their application, despite the fact that the State Department itself is also responsible for the implementation of a number of sanctions programmes. This line also includes the Department of Justice, which uses coercive measures against violators of the US sanctions regime.

Interestingly, the Department of Commerce is not mentioned among the institutions. The review focuses only on a specific segment of the sanctions policy that is implemented by the Treasury. However, it is the Treasury that is currently at the forefront of the application of restrictive measures. A significant part of the executive orders of the President of the United States and sanctions laws imply blocking financial sanctions in the form of an asset freeze and a ban on transactions with individuals and organisations. Decrees and laws assign the application of such measures to the Treasury in cooperation with the Department of State and the Attorney General. Therefore, the institutional link mentioned in the review reflects the spirit and letter of a significant array of US regulations concerning sanctions. The Department of Commerce and its Bureau of Industry and Security are responsible for a different segment of the sanctions policy, which does not diminish its importance. Export controls can cause a lot of trouble for individual countries and companies.

Another notable part of the review concerns possible obstacles to the effective implementation of US sanctions. These include, among other things, the efforts of the opponents of the United States to change the global financial architecture, reducing the share of the dollar in the national settlements of both opponents and some allies of the United States.

Indeed, such major powers as Russia and China have seriously considered the risks of being involved in a global American-centric financial system.

The course towards the sovereignty of national financial systems and settlements with foreign countries is largely justified by the risk of sanctions.

Russia, for example, is vigorously pursuing the development of a National Payment System, as well as a Financial Messaging System. There has been a cautious but consistent policy of reducing the share of the dollar in external settlements. China, which has much greater economic potential, is building systems of “internal and external circulation”. Even the European Union has embarked on an increase in the role of the euro, taking into account the risk of secondary sanctions from “third countries”, which are often understood between the lines as the United States.

Digital currencies and new payment technologies also pose a threat to the effectiveness of sanctions. Moreover, here the players can be both large powers and many other states and non-state structures. It is interesting that digital currencies at a certain stage may present a common challenge to the United States, Russia, China, the EU and a number of other countries. After all, they can be used not only to circumvent sanctions, but also, for example, to finance terrorism or in money laundering. However, the review does not mention such common interests.

The text does propose measures to modernise the sanctions policy. The first one is to build sanctions into the broader context of US foreign policy. Sanctions are not important in and of themselves, but as part of a broader palette of policy instruments. The second measure is to strengthen interdepartmental coordination in the application of sanctions in parallel with increased coordination of US sanctions with the actions of American allies. The third measure is a more accurate calibration of sanctions in order to avoid humanitarian damage, as well as damage to American business. The fourth measure is to improve the enforceability and clarity of the sanctions policy. Here we can talk about both the legal uncertainty of some decrees and laws, and about an adequate understanding of the sanctions programmes on the part of business. Finally, fifth is the improvement and development of the Treasury-based sanctions apparatus, including investments in technology, staff training and infrastructure.

All these measures can hardly be called new. Experts have long recommended the use of sanctions in combination with other instruments, as well as improved inter-agency coordination. The coordination of sanctions with allies has escalated due to a number of unilateral steps taken by the Trump Administration, including withdrawal from the Iranian nuclear deal or sanctions against Nord Stream 2. However, the very importance of such coordination has not been questioned in the past and has even been reflected in American legislation (Iran). The need for a clearer understanding of sanctions policy has also been long overdue. Its relevance is illustrated, among other things, by the large number of unintentional violations of the US sanctions regime by American and foreign businesses. The problem of overcompliance is also relevant, when companies refuse transactions even when they are allowed. The reason is the fear of possible coercive measures by the US authorities. Finally, improving the sanctioning apparatus is also a long-standing topic. In particular, expanding the resources of the Administration in the application of sanctions was recommended by the US Audit Office in a 2019 report.

The US Treasury review suggests that no signs of an easing are foreseen for the key targets of US sanctions. At the same time, American business and its many foreign counterparties can benefit from the modernisation of the US sanctions policy. Legal certainty can reduce excess compliance as well as help avoid associated losses.

From our partner RIAC

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