By Aadhavaarasan Raviarasan
In September of 2018 President Donald Trump nominated Nellie Liang - a Senior Fellow at the Brookings Institute, longtime Federal Reserve staff member who is an expert on financial regulation, and holder of a Phd in economics from the University of Maryland - to the Federal Reserve Board. To grasp the impact of this nomination, one must first understand primary function of the Federal Reserve: the raising or lower of interest rates.
Every quarter (three months), the Federal Reserve (the Fed) decides whether to raise or lower interest rates. When the Fed raises interest rates, it decreases the amount of money in the economy, making each dollar more valuable, which increases the prices of goods across the economy. The Fed employs this strategy during times of prosperity to prevent runaway inflation, which occurs when there is an abundance of supply (too many investments are being made) that diminishes the worth of each dollar, generating massive price increases across the market. Runaway inflation is especially harmful when price growth outpaces wage growth. When the Fed decreases interest rates, it increases the amount of money in the economy, making each dollar less valuable, generally increasing prices in the economy. This is done in times of economic downturn in order to revive the economy, since this provides extra monetary resources to invest and jump start the economy out of rock bottom.
The nomination of Ms. Liang into the board grants her the power to decide the direction of monetary policy - determining if interest rates are raised or lowered and by how much - giving her plenty of power on the direction of our economy.
Insofar as she about to gain a massive amount of power, it is probably important to identify exactly who Ms. Liang is and what she specifically intends to do with her power. Liang’s first position of prominence was as the premiere head of a new division created after the 2008 financial crisis research financial stability issues. Ms. Liang’s position on monetary policy is one geared towards harsh restriction. Indeed, she advocates against the dropping of interest rates in order to recover the economy - believing that the markets ought to recover themselves with no help - and the raising of interest rates in order to curb excesses in the market. Indeed, her ideology on the economy has 2 key central tenants, (1) the establishment of a strong regulatory framework, and (2) early and decisive action to any market shifts.
Moreover, she also believes that, based on our current track, a “recession which will be severe” is bound to occur. In order to deal with this, Liang has supported raising interest rates in order to act as more ammo to drop interest rates by massive amounts upon the onset of the crisis. However, while these may be her set positions towards monetary policy as of right now, Liang is known for having a strong appetite towards risky policies, willing to deal with uncertainty when new problems pop up.
Her position is consistent with the current track of the Federal Reserve, which has been dramatically surging interest rates in this current time of economic prosperity. Her reinforcement of this policy has two possible implications. The first possible implication hinges on the Federal Reserve’s predictions being correct; if it is right that the economy is seeing strong growth and and unemployment reduction, it will continue taking the appropriate stance of raising rates, keeping the economy stable. In this scenario, the nomination of Ms. Liang proves beneficial in that it maintains current policy.
The second possible implication will occur if the Fed’s predictions are inaccurate. If the economy is not as strong as they think it is, then the raising of interest rates will only reduce the necessary supply of money to maintain job growth. The logic is simple: if a business is not doing super well, then reducing the amount of money it has decreases its resources to hire or invest. This can send a struggling or even stagnating business past the brink of survival, causing a chain reaction of bankruptcy and corporate collapse that could potentially end in recession. In this scenario, the nomination of Nellie Liang proves to be a disastrous choice, locking in a policy that will only end with the collapse of the American economy.
Which scenario is correct? Well, no one knows. The Fed itself struggles with uncertainty in determining the optimal time to raise interest rates and how far the economy can go without devastating inflation. It can only estimate, predict, and hope, which is why raising interest rates always hurts someone. All things considered, including her experience and credentials, Ms. Liang is a good pick for the reserve: if we have to choose someone to make predictions, we should choose an expert.
By: Aadhavaarasan Raviarasan
In the past 2 years, tensions with North Korea have only escalated. North Korea has blamed these tensions on military drills, whereas the US has blamed these tensions on missile tests. However, in the past months, something has changed. North Korean Leader Kim Jong Un has met with South Korean President Moon Jae - in, and a summit is being planned for a similar meeting between US president Trump and Kim. The problem is that, ever since 1985, the US and North Korea have followed a cycle of failed diplomacy and hostility. For example, talks about denuclearization in 1994 failed after the US increased military drills, and the Sunshine policy (a policy guideline between the Koreas on openness and integration) failed due to US deployment of missile defense. However, there are 2 key steps the United States must take to avoid complications and make sure that this time will be the time that succeeds.
Historically, at every single North Korea - US period of diplomacy, the US has always demanded denuclearization. Indeed, ever since North Korea tested its first nuclear weapon, US policy has always been that nuclear North Korea is unacceptable. However, this is unacceptable to North Korea. This is because North Korea’s highest priority has always been survival, and in Kim Jong Un's eyes, the only way to ensure that survival is to have a credible nuclear force that would deter the US and South Korea from ever striking them.
Kim Jong-un sees this as the non-negotiable safeguard against suffering the same fate as Muammar Gaddafi in Libya, who gave up his nukes only to be toppled by the US afterwards. As a result, when Trump demanded that North Korea denuclearize, the regime refused, almost leading to the cancellation of the summit. Thus, in order to avoid complications in negotiations with North Korea, it would be beneficial for the US to be pragmatic and stop demanding denuclearization.
Every year now, the US and South Korea have been conducting live fire military drills, which North Korea is extremely against. The problem with this is that live-fire military drills near the border could convince Kim that such a strike is coming and trigger a North Korean response.
Kim’s reasoning is simple, he sees military drills as the US planning a strike, so if a strike is coming, he might as well become more aggressive or even attack first. Consequently, when the US began military drills this year, North Korea suspended talks with South Korea, and threatened to cancel the meeting between Trump and Kim. Furthermore, last year, in order to protest US - ROK military drills, North Korea launched a barrage of missile tests. If the US wants diplomacy to be successful, it is in our best possible interest to suspend threatening activities like military drills.
Missile defense is seen by North Korea as the ultimate act of US hostility because it undermines its aforementioned nuclear deterrent. Indeed, North Korea sees the deployment of missile defense as the US positioning itself to protect its strategic assets, and in North Korea’s mind the only reason the US would need to do that is if it were preparing to attack.
This is viewed as a real threat as North Korean government newspapers said specifically in 2006 “What the U.S. is after is to freely carry into action its preemptive strike strategy after setting up a colossal missile defense system at every strategic vantage and binding other countries hand and foot to neutralize North Korea’s means of retaliation.” Furthermore, an overwhelming trust in the effectiveness of missile defense allows the US to be more militaristic and aggressive and less diplomatic. All in all, the best path forward to ensure that diplomacy does not fail is by withdrawing our missile defense systems from the area.
The Summit between Trump and Kim must go well as Nyshka Chandran from CNBC notes that “If the North Korea-U.S. summit fails to conclude in an agreement, war risks will increase, exceeding previous levels, because of another failure of diplomacy.” The reasoning is simple: peace processes are generally seen as a test for diplomacy, so when they fail, it is not just the specific peace process that has failed, it represents diplomacy as a strategy that has failed.
Furthermore, diplomacy must be successful for South Korea to establish a hotline for direct communication which would open the door for a reduction in the chance of miscalculation and finally bring stability to the region.
This is possible, as under the sunshine policy, which was the last period of friendliness in the region, Presidents from both countries met during this time and North Korea agreed to the removal of its nuclear arsenal, which genuinely gave the first shot at true peace.
Ultimately, a more pragmatic and diplomatic US will enhance the probability of diplomacy with North Korea being successful. If the US decides to pursue the path of militarism and maintains a hardline stance, it risks war on the peninsula, and will most certainly result in a diplomatic failure, only continuing the 7 decades of tension.