To begin this week’s newsletter, we examine the unique risks to the global financial system, as well as how America’s alarming deficit may contribute to them. Then, we look at Russia’s activities in the Balkans, highlighting questions about developments in Bulgaria. We then move to a discussion of government intervention in two currencies, the Japanese yen and the Chinese yuan To end this week, we evaluate South Africa’s progress since the end of Apartheid 30 years ago, touching on the hurdles that the country still has yet to overcome.

The Imperiled Global Financial System

America’s reckless borrowing is a danger to its economy—and the world’s 

The Economist

The End of Magical Debt Thinking 

Kenneth Rogoff, Project Syndicate

The global financial system is in danger of fragmenting 

The Economist

The US federal government has spent $2 trillion more than it has raised in taxes, resulting in a deficit equivalent to 7.2% of GDP. Despite historically low unemployment rates, this deficit persists. Additionally, the national debt is projected to exceed 100% of GDP, a significant increase from a decade ago. The deficit stems from accumulated costs related to wars, financial crises, pandemics, tax cuts, and stimulus programs. Economists are beginning to sound the alarm on the risks associated with high debt levels, which could elevate borrowing costs for the long term, higher economic growths, and limit fiscal flexibility during crises. As usual, low- and middle-income citizens would bear the brunt of the consequences. The current profligacy cannot continue indefinitely due to rising interest costs. While there are potential solutions, such as potential surges in productivity, cutting spending or raising taxes, fiscal irresponsibility could lead to inflation and instability. Given the dollar’s role as the world’s reserve currency, America’s fiscal issues have global repercussions. Without corrective measures, the world may face higher capital costs, an inefficient financial system, and a search for an alternative to the dollar.

Addressing this issue is critical for the US in today’s evolving global financial system. American dominance in the global economy is waning, as financial centers elsewhere (such as Asia) are gaining prominence, reducing reliance on Western economies. Many countries have expanding capabilities to raise capital in their own currencies, enabling a higher degree of financial independence. Proponents of this increasing diversification of the global economy say that it offers more stability, allowing countries around the world to become more resilient in the face of economic volatility. However, some experts point out unique risks that come with a more fragmented world, such as geopolitical tensions leading to increased poverty, volatility, and conflict. Additionally, despite the diversification, the dollar’s dominance remains, creating an uneasy dependence. The evolving shape of the global economy could have unpredictable effects for the world, and it may be time for Western capitals to begin paying more attention to the currents of change already underway. 

Russia’s Influence in the Balkans

Magnitsky-listed Bulgarian mogul Peevski defies the US and becomes strongman of Bulgarian politics

Ilian Vassilev, Analyses & Alternatives

Russia’s Influence in the Balkans

James McBride, Council on Foreign Relations

Why Moldova’s Breakaway Transnistria Region Is Asking Russia for Protection

Irina Vilcu & Aine Quinn, Bloomberg

What is happening in Bulgaria? According to an article by Ilian Vassilev, many questionable things may be underway. The author raises questions related to the confiscation of assets, the lack of transparency, and allegations of corruption in Bulgaria’s judiciary and its government. Was the collapse of Bulgaria’s Cooperative Commercial Bank a Game of Thrones scheme, as Forbes magazine claims, which has been extended for years now into other schemes of corruption, confiscation, and opaque practices? The article questions whether prominent Bulgarian politicians may be involved in deals to extend Russian influence via gas pipelines. According to the author, Moscow has a vast network of large financial, political, diplomatic, and intelligence plays within the country of Bulgaria that focus on energy. How could politicians and others who are on the US Magnitsky list and the Office of Foreign Assets Control’s (OFAC) sanctions list pull the strings and undermine the credibility of such important legislation and institutional acts of the US government? These developments should raise questions for US and EU officials for such a critical and historical juncture for Eastern Europe.

Moscow is not only involved in Bulgaria. Russia, which stands to benefit from fanning tensions in the region (that would serve the purpose of distracting and dividing NATO resources and attention), also likely aims to forestall or end the EU accession process for several Balkan countries, as well as create a need for Russian arms and mediation. In Republika Srpska, one of the two entities of Bosnia and Herzegovina, President Milorad Dodik (who has a close relationship with Putin) works to destabilize the Bosnian state, as well as to discourage the country from joining Western sanctions against Russia. Elections in North Macedonia have been marred by accusations of Russian interreference, where discontent with the slow, bureaucratic EU accession process as well as tensions with its neighbors have grown. Transnistria, a breakaway province in Moldova that represents around 12% of the country’s territory and is home to 400,00 people, supports annexation by Russia. Russian troops have been stationed in the province since the 1990s, and the issue has found new attention given the Ukraine war’s proximity. With these deep political and economic ties to Russia, the Balkans find themselves at a crossroads, and Western officials in the EU and the US must act decisively to counter Russian influence in the region before it’s too late.

Asian Currencies in Flux: Yen Rollercoaster and Yuan Debate

Yen’s Wild Swings Are Just a Taste of What’s to Come

Ruth Carson, Toru Fujioka, and Daisuke Sakai, Bloomberg

Yuan Devaluation Debate Surfaces as Traders Weigh Next FX Shock 

Tania Chen, Bloomberg

The Election-Devaluation Cycle 

Tania Chen, Bloomberg

In the realm of global currency markets, recent events surrounding the Japanese yen’s fluctuation have increased interest in the currency among traders and analysts alike. The yen’s abrupt slide, followed by a dramatic rebound, has become a focal point of discussion, sparking debates on the underlying drivers and potential ramifications. According to Bloomberg’s report, government intervention is yet to be confirmed, but Bank of Japan accounts suggests that the central bank might have spent $35.1 billion to support the yen. As traders dissect the complexities of Japan’s monetary policy, geopolitical tensions, and economic indicators, they are reminded of the volatility inherent in FX markets. This rollercoaster journey of the yen serves as a litmus test for market sentiment, reflecting uncertainties surrounding inflation, interest rates, and central bank interventions. Furthermore, Japan’s economy is unlikely to catch up to its counterparts like the US, as the US continues to maintain a robust economy and high interest rates. Meanwhile, Japan’s currency situation and debt, which equates to 250% of the total Japanese GDP, remain a drag on the economy.

There is also a domestic debate emerging in China as to whether to devalue the Chinese yuan or not. Supporters of devaluing the currency argue that it will allow China to boost exports and allow the central bank to cut interest rates. However, this is a minority view and has not happened since 2015’s shock devaluation. The People’s Bank of China’s overall goals, though conflicting, are to facilitate an economic recovery by lowering costs while also increasing the appeal of the yuan to the dollar. However, the rising power of the dollar, capital outflows, and concerns about a potential resumption of the trade war if Trump is elected, complicate the bank’s abilities to achieve its goals. Traders are mulling over the possibility of the next FX shock, with the yuan’s value becoming a point of contention. Against the backdrop of escalating trade tensions and geopolitical maneuvering, discussions intensify around China’s exchange rate policies and their potential impact on global trade dynamics. Wall Street banks are forming a consensus that the yuan will devalue even if devaluation is not the chosen policy by the Chinese central bank. As market participants scrutinize past patterns and anticipate future shocks, the intertwined narratives of the yen’s turbulence and the yuan devaluation debate underscore the intricate dance of economic forces shaping currency markets worldwide.

South Africa: Struggling 30 Years After Apartheid

How South Africa has changed 30 years after apartheid

The Economist

Why South Africans are fed up after 30 years of democracy 

The Economist

Thirty years since Apartheid ended in 1994, with the successful election of Nelson Mandela and his African National Congress (ANC) party, South Africa finds itself at a crossroads, grappling with the complexities of its transformation over the past three decades. As the nation as evolved beyond minority rule, it has experienced profound shocks within its socio-political landscape. From the dismantling of institutionalized racism to the challenges of socioeconomic inequality, the journey of post-apartheid South Africa is a story of progress tempered by persistent disparities. Those persistent disparities have led to 71% of South Africans believing that their lives will not improve over the next two decades, while 79% of South Africans believe that their democratically elected leaders cannot be trusted, highlighting a global south trend of a lack of faith in democracy to improve lives. Unemployment hovers around 32% of the population, a 12% increase from 2008. The murder rate is at its highest in 20 years. With such a poor-performing economy and high rates of insecurity, some 72% of South Africans would sacrifice personal freedoms to increase economic prospects and security.

Simultaneously, despite 30 years of freedom, issues such as government corruption, economic stagnation, and social unrest have eroded public trust in democratic institutions, fueling calls for accountability and reform. These calls have been primarily aimed at the ANC, the dominant political party for the last 30 years. However, there have also been critiques of Nelson Mandela’s legacy by academics, commentators, and left-wing politicians, that the deal he struck to end apartheid was a sell-out that allowed for political rights for blacks but not economic freedom. There is a fear that politics in South Africa, as a result of this increasing distrust between the public and government officials, could delve into populism, allowing firebrand politicians to exploit identity and economic issues to gain power at the expense of a healthy democratic system.