Blog Post

During most of this year, the VIX — the Volatility Index on The Chicago Board Options Exchange — has been at the lowest levels of the last ten years.  It recentlydipped below 9, even lower than March 2007, just before the sub-prime mortgage crisis. It looks as though, once again, investors do not sufficiently appreciate how risky the world is today.

Known colloquially as the “fear index,” the VIX measures financial markets’ sensitivity to uncertainty, in the form of the perceived probability of large changes in the stock market.  It is inferred from the prices of option on the stock exchange (which pay off only when stock prices rise or fall a lot).   The low VIX in 2017 signals that we are in another “risk on” environment, when investors move out of treasury bills and other safe haven assets and instead “reach for yield” by moving into riskier assets like stocks, corporate bonds, real estate, and carry-tradecurrencies.

New sanctions imposed by the United Nations Security Council on September 11 in response to North Korea’s latest nuclear test are “not significant enough,” according to R. Nicholas Burns, an Atlantic Council board member who served as undersecretary of state for political affairs in the George W. Bush administration.

Sanctions must be part of a “patient long-term strategy” that includes deterrence, working closely with allies, and negotiations, said Burns, laying out the United States’ options for dealing with the North Korean crisis.  

Americans have under-estimated the nuclear threat from North Korea and misunderstood what policies would reduce it.  At the same time they have over-estimated the importance of bilateral trade deficits with China and misunderstood what policies would reduce them.  Now these two different issues intersect.

My preceding post discussed the Chinese trade aspect of the problem.  Here I review the geo-politics and history of the North Korea nuclear problem.

Trump has threatened new trade barriers against China while simultaneously depending on Beijing’s help to rein in North Korea’s alarming nuclear weapons program. These two aspects of US policy toward China are at odds.

It feels inappropriate to write a column that treats the two issues on a par. To state the obvious, the stakes are vastly higher in a potential US-North Korean military conflict, especially when it comes to the real danger that nuclear weapons will be used, but even if they are not. But we need to consider the Chinese trade issues together with the Korean nuclear issues because the Trump White House does. (Chief strategist Steve Bannon, for example, had the priorities reversed. Just before he was fired he said that the Korea issue was a “side show” compared with the all-important “economic war with China.”)

In its attempts to deter North Korea from developing the capability to credibly threaten the continental United States with a nuclear weapon, Washington now finds itself in a crueler version of the strategic dilemma Israel faced in 2011 amid what it saw—or at least presented—as a closing operational window of opportunity to deal with Iran’s nuclear program. In his piece for Iran Matters, Daniel Sobelman argues that the basic structure of the crisis between the United States and North Korea is analogous to the challenge Israel faced when trying to dissuade or stop Iran from developing nuclear weapons.

Why do Republican politicians seem unable to come together on a bill to “repeal and replace” the 2010 Affordable Care Act, also known as Obamacare? After all, they have spent 7 years with that as their single-minded goal, they campaigned on it in the 2016 presidential election, and they now control all branches of government.It is tempting to blame lack of experience and competence on the part of the president. But that doesn’t explain why the Republican congress can’t do it without him.

As the United States, Mexico, and Canada prepare to renegotiate the North American Free Trade Agreement, as US President Donald Trump’s administration has demanded, much attention is being devoted to one item in particular: sugar. The negotiations will probably produce a sweet deal for the US sugar industry, highlighting the emptiness of Trump’s promises to “drain the swamp” of special-interest influence over policymaking.
Sugar producers’ political clout is nothing new, in the US or other industrialized countries. They have often received trade protection, in the form of import tariffs and quotas, to ensure that domestic sugar prices far exceed those in supplier countries like Australia, Brazil, the Dominican Republic, the Philippines, and Mexico.

What can we expect from Rouhani’s second term? The large majority with which he won does not change the basic fact that the number one decision-maker in Iran remains Supreme Leader Khamenei. Ephraim Kam writes to Iran Matters that it is doubtful that Rouhani’s large majority will translate into greater power vis-à-vis Khamenei and the regime’s radical wing, as the president will likely continue to depend on them.