Although the crisis in Ukraine continues to focus attention on Russia’s western border, Moscow is seeking to exploit a more lucrative prize along its vast northern frontage: the Arctic Circle. Melting ice has opened up new transit routes and revealed previously inaccessible oil and mineral deposits. Facing a year of harsh economic constraints, securing exploitable energy reserves remains a top priority for Moscow. The planned militarization of the Arctic is already underway, and funding is secured through 2015 (the Ministry of Defense was the only Kremlin ministry not to be curtailed in the most recent budget.

Although Russia faces a raft of internal and external problems such as a strained economy, matters in Ukraine and pressure from the international community, the Kremlin remains wedded to its pursuit of the Arctic. This has forced Russia’s neighbors to reassess their own military presence in places like the Barents Sea, as well as territorial claims to disputed parts of the Arctic Circle. Norway will press harder for a larger NATO presence in the northern region, but while military conflict remains a threat, Russia will stop short of instigating hostilities. The Kremlin knows that when it comes to acquisitions, actions speak louder than words, and any attempt to grab the rich, unclaimed territory of the Arctic Circle will have to be backed by force.   Russia Wants Artic Oil and Gas

Adair Turner writes:  As 2015 begins, the reality of deficient global demand and deflationary risks in the world’s major economies is starkly apparent. In the eurozone, GDP growth is slowing, and inflation has turned negative. Japan’s progress toward its 2% inflation target has stalled. Even economies experiencing more robust economic growth will miss their targets: inflation in the United States will not reach 1.5% this year, and China’s rate reached a five-year low of 1.4% last November.
In the advanced economies, low inflation reflects not just the temporary impact of falling commodity prices, but also longer-term wage stagnation. In the US, the United Kingdom, Japan, and several eurozone countries, median real (inflation-adjusted) wages remain below their 2007 levels. Indeed, in the US, real wages for the bottom quartile have not risen in three decades. And, though the US created 295,000 new jobs last December, actual cash wages fell.

The developing world is not doing much better. As the International Labor Organization’s latest Global Wage Report shows, wage gains are lagging far behind productivity growth.
Because real income growth is vital to boost consumption and prices, central bankers and politicians are now in the novel business of encouraging wage increases. Last July, Bundesbank President Jens Weidmann welcomed the fact that some German companies had raised wages above inflation. Japanese Prime Minister Shinzo Abe has gone a step further, repeatedly urging companies to increase wages – and encouraging them to do so by reducing corporate tax. So far, however, jawboning has had little effect.
This failure would not have surprised the monetarist economists who observed the high inflation of the 1970s. At the time, many policymakers blamed rapid price increases on “cost push” factors, such as pressure from trade unions for excessive wage hikes. Finance ministers and central banks frequently urged wage moderation, with many countries even introducing formal policies governing wages and prices.  But these policies proved largely ineffective.

The result in many countries has been stagnant real wages, increased inequality, and a potential structural bias toward deficient nominal demand. Given that wealthy people have a higher propensity to save, increased inequality tends to produce sluggish demand growth – unless, that is, the savings of the wealthy are lent to the poor.

The best way to achieve that is not through the current mix of ultra-low interest rates and quantitative easing. After all, though this approach would eventually stimulate demand, it would do so by driving up asset prices – thereby exacerbating wealth inequality – and by re-stimulating the private-credit growth that fueled the financial crisis. Cost of Deflation

Jeffrey Sachs writes:  The good news is that, even near the ZLB, monetary policy works. QE raises equity prices; lowers long-term interest rates; causes currencies to depreciate; and eases credit crunches, even when interest rates are near zero. The ECB and the BOJ did not suffer from a lack of reflationary tools; they suffered from a lack of suitable action.
The efficacy of monetary policy is good news, because fiscal stimulus is a weak instrument for short-term demand management. Ironically, in an influential 1998 paper, Krugman explained why. He argued at that time, and rightly in my view, that short-term tax reductions and transfers would be partly saved, not spent, and that public debt would multiply and create a long-term shadow over the fiscal balance and the economy. Even if interest rates are currently low, he noted, they will rise, thereby increasing the debt-service burden on the newly accumulated debt.

With all major central banks pursuing expansionary monetary policies, oil prices falling sharply, and the ongoing revolution in information technology spurring investment opportunities, the prospects for economic growth in 2015 and beyond are better than they look to the pessimists. There are rising profits, reasonable investment prospects for businesses, a large backlog on infrastructure spending almost everywhere in Europe and the US, and the opportunity to finance capital-goods exports to low-income regions, such as Sub-Saharan Africa, and to meet the worldwide need for investment in a new, low-carbon energy system.

If there is a shortfall of private investment, the problem is not really a lack of good projects; it is the lack of policy clarity and complementary long-term public investment. European Commission President Jean-Claude Juncker’s plan to finance long-term investments in Europe by leveraging relatively small amounts of public funds to unlock large flows of private capital is therefore an important step in the right direction.  Monetary Policy for Prosperity

Timo Behr writes: For many decades, Germany has been the engine of European integration. Germany’s unquestioning commitment to an ever-closer Union, its willingness to place European interests above its narrow national aims, and its ability to grease the wheels of integration with its ‘checkbook diplomacy’ have been vital for the European project to prosper.

But Berlin’s foot-dragging during the Euro-crisis and Angela Merkel’s heavy-handedness when dictating the conditions of the financial bail-out have been widely interpreted as a sign that Germany might be turning its back on Europe.

Germany’s Interior Minister and a Merkel confidant, sent a blunt message last year: it may be new to Europeans that Germany is defending its interests with vigor, he stated, but others better get used to the idea. And Germany’s tabloid die Bild celebrated Merkel’s bruising victory during the Greek debt crisis with the triumphant headline “Never again Europe’s paymaster!”

Despite everything, German politicians are still unanimous in their backing for the European project and support for Euroskeptic political parties is lower in Germany than elsewhere. Moreover, German reactions to the Euro-crisis have been largely driven by economic anxieties and fear rather than a revival of German nationalism. Reports about Germany’s rediscovered self-confidence and national drive are equally overblown. The truth is that Germany is still unsure about its path and all the talk about German “normality” simply serves to hide its continuing insecurities.

Germany’s political elite is still not accustomed to thinking strategically or taking leadership responsibilities. Neither are other Europeans clear about or comfortable with the idea of more German leadership in the new Europe. They fret about the lack of German initiative, yet they have little taste for German guidance and have been quick to stigmatize German reactions.

Larry Summers says he’s “all in” for bond buying program, but that quantitative easing on its own won’t save Europe’s economy.

The European Central Bank is widely expected to announce that it will begin a bond-buying program similar to the what the U.S. Federal Reserve has done with quantitative easing. Many expect QE will generate a huge boost for the European economy, much like it appears to have done in the U.S..

During a panel discussion at the World Economic Forum in Davos on the eve of the ECB’s QE announcement, Summers threw cold water on what it might do. Summers said that while he was he was “all for” European central bankers buying bonds, he thought we should be less optimistic about what economic benefit it might have.

The main reason that is the case, Summers said, is that longer-term interest rates, which QE is supposed to drive down to spur economic growth, are already low in Europe. Rates were higher in U.S. when the Federal Reserve first started buying bonds.

Instead, Summers says what Europe really needs is direct stimulus spending by governments.

International Monetary Fund managing director Christine Lagarde, who was on the Davos panel with Summers, said the prospect of QE is already having positive effects. She said a lower euro will help exports and create jobs. “QE in Europe has already worked in anticipation,” said Lagarde. “Look at the currency.”

Summers countered that the drop in the currency has yet to produce a real gain. “That’s why I am worried,” said Summers. “We have already had an impact, and the economic forecast for Europe has not improved.”

The weaker euro hasn’t yet, for example, been able to support business in Italy. New orders to industry fell 1.1% in December and were down 4.1% on the year, well below expectations. However, it has helped to turn around business confidence in Germany, which was badly dented last year by the Ukraine crisis.

The real problem Summers said is that all of Europe seems set on austerity and cutting back government spending at the same time. Summers said that collective belt tightening is going to lead to lower economic growth in Europe.

Michael Spence writes: At a time of lackluster economic growth, countries around the world are attempting to devise and implement strategies to spur and sustain recovery. The key word is strategy: to succeed, policymakers must ensure that measures to open the economy, boost public investment, enhance macroeconomic stability, and increase reliance on markets and incentives for resource allocation are implemented in reasonably complete packages. Pursuing only some of these objectives produces distinctly inferior results.

China provides a telling example. Before Deng Xiaoping launched the policy of “reform and opening up” in 1978, the country had relatively high levels of public-sector investment. But the centrally planned economy lacked market incentives and was largely closed to the global economy’s major markets for goods, investment, and technology. As a result, returns on public investment were modest, and China’s economic performance was mediocre.

China’s economic transformation began with the introduction in the 1980s of market incentives in the agricultural sector. These reforms were followed by a gradual opening to the global economy, a process that accelerated in the early 1990s. Economic growth surged ahead, and returns on public investment soared, reaching an annual growth rate above 9% of GDP, shortly after the reforms were implemented.

The key to a successful growth strategy is to ensure that policies reinforce and enhance one another. For example, boosting returns on public investment – critical to any growth plan – demands complementary policies and conditions, in areas ranging from resource allocation to the institutional environment. In terms of effectiveness, the policy package is more than the sum of its parts.

Barry Eichengreen writes: Economic pundits, almost without exception, are predicting a stronger dollar in 2015 – an expectation that is leading investors to place some very large bets.  The consensus reflects the fact that the United States is currently the only major economy where growth prospects are improving.

The revision was based mainly on personal consumption and business investment – the most stable and persistent components of GDP.

All of this not only enhances confidence that strong US growth will persist; it also reinforces the belief that the US Federal Reserve will begin raising interest rates, conceivably as early as April. For investors, this makes buying dollars even more attractive.

The other major economies, by contrast, are stagnant, slowing, or both. Europe’s economy is dead in the water, and the dreaded specter of deflation is looming ever larger. Because policymakers are out of options, there remains little doubt that the European Central Bank will pursue quantitative easing.

Meanwhile, in Asia, the Japanese economy’s sputtering indicators have spurred the Bank of Japan to increase its securities purchases, which likewise point to the prospect of a weaker yen. And unmistakable signs of slowing growth in China are leading investors to ask, for the first time in years, whether China’s government will seek to engineer a weakening of the renminbi’s dollar exchange rate.

Other emerging markets’ growth prospects are even worse – not least because of low commodity prices.

Where is the strength of the dollar threatened?  Because the strength of the dollar is already reflected in the markets, we have to look at fundamentals: the US economy outperforms the consensus forecast and the Fed initiates monetary tightening earlier than anticipated, or other economies’ performance is even worse than expected.

The second risk is that, even based on current growth expectations, investors may have gotten ahead of themselves in anticipating monetary-policy tightening. The Fed will raise interest rates when it senses that the economy is nearing full capacity and that inflation – wage inflation, in particular – is accelerating.

Labor-force participation will be key to shaping this environment. As it stands, the low official unemployment rate can be explained partly by declining participation rates, especially among workers aged 25-54.

But there are now signs that the participation rate of these workers is stabilizing, and may even be set to rise. If it does, the unemployment rate may stop falling, and upward pressure on wages would be limited. The Fed would then delay tightening for longer than anticipated.

Last but not least, unexpected financial problems – which lower oil prices could catalyze – would interrupt US growth and discourage the Fed from tightening.

Such developments would cause US debt yields to spike, disrupting growth. The dollar would become weaker, leaving investors wrong-footed. The dislocations could be severe.

Exchange-rate movements over horizons as long as a year do not function according to theoretical models. The behavior of currency markets has repeatedly confounded and even bankrupted sophisticated investors. With so much currently staked on the market moving in one direction, it is worth contemplating the consequences if this happens again in 2015.