Perspective

Economists and demographers use life expectancy as a broad measure of human prosperity, over time and across cultures. One such social scientist, Indur Goklany, in his seminal work, The Improving State of the World, assembled actual and estimated relevant data, from which he noted: "For much of human history, average life expectancy used to be 20-30 years. By 1900, it had climbed to about 31 years - by 2003 it was 66.8 years."

This change was not only massive, but from a (very) long-term perspective, sudden as well, as the above chart illustrates. The abrupt shift in the red line, from virtually horizontal to nearly vertical, coincides exactly with that remarkable point in history - beginning in about 1760 in Britain, then spreading over the following century to Western Europe, then to America and Japan - known as the Industrial Revolution. Innovation and technological change, together with a freeing of international trade, the introduction of public education, and the emergence of democracy, produced sustained, unprecedented growth in GDP per capita and human well-being. The scientific method, with its approach to defining, experimenting and resolving, began to supplant fear, superstition and centuries-old beliefs in fate, angels, miracles and holy relics.

Those today who are anti-growth, anti-capitalist, anti-globalization, would do well to recall the extraordinary impact of the industrial revolution - that is, innovation - on human welfare. Just look at the chart. Our era's information-technology revolution - with its associated expansion of trade, capital flows and global supply chains - while at least as disruptive as its 18th-century predecessor, is on track to be even more transformative of the human condition.

A Victory - for the Status Quo

Even by its own political standards, there was a remarkable development in Italy over the weekend.​

In a sixth round of voting over four days, a large majority of Italian parliamentarians from both chambers (738 from a total of 1,007 members) finally agreed on something, voting to re-elect a new President (who, under normal conditions, plays a mostly symbolic role n Italy). But, for the first time in the 65-year history of the Italian republic, the incumbent President is to be the new President. Giorgio Napolitano, 87 years old and set (reports suggest, desperate) to step down from his one-term Presidency on May 15, reluctantly - wearily - agreed to another term - after the leaders of the left-leaning Democratic Party (PD), Luigi Bersani, and the conservative People of Freedom (PdL), Silvio Berlusconi, ran out of options and begged him to stay. Rumors are circulating that in saying yes, Mr. Napolitano has extracted concessions from the principal political party leaders that they agree to form a new coalition government. Sensing this momentum, Giorgio Squinzi, the leader of Italy's business lobby, Confindustria, added his support yesterday, urging the formation of a coalition government, without which the country would be "condemned to prolonged economic recession". Italian financial markets, apparently looking for any news at all that the post-election, 2-month Italian political deadlock could be coming to an end, have rallied, with the 10-year bond yield falling back to just above 4%, and the Italian FTSE MIB stock index up as much as 2% in today's trading.

But such optimism is ill-founded. Forming an Italian government has, if anything, become even more difficult. Mr. Bersani's PD party, the largest group in the Chamber of Deputies, is now fractured, after some members revolted against each of Bersani's original candidates for the Presidency, Franco Marini and former Prime Minister Romano Prodi. Both Mr. Bersani, seen until recently as the most likely prime minister, and the PD's president, Rosy Bindi, were thus forced to resign over the weekend. A break-up of the PD party - an always uneasy coalition of former communists and Christian Democrats - is a possibility. On the right, Mr. Berlusconi, whose future is threatened by four court cases in which he is a defendant, may nonetheless feel emboldened by the rebellion in the PD, thus lessening any pressure to form a grand coalition. And Mr. Monti, who led the previous technocrat government, and who had started down the long road of structural reform of the economy, is deeply unpopular, having garnered barely 10% of the vote in the February elections.

The weary President-elect Napolitano may have no choice other than to call for another national election, and/or to install another caretaker government. Initiating a fix of the Italian economy would thus have to wait.

East Asia

The need for, and apparent efficacy of, American diplomacy was on full display this past week in East Asia, as America's new Secretary of State, John Kerry, dropped in on the new political leaders in Seoul, Beijing and Tokyo. This is to be followed by visits to Beijing this week by General Martin Dempsey , chairman of the joint chiefs of staff, and in May by Thomas Donilon, President Obama's national security adviser.

As it turned out, the timing of Mr. Kerry's visit, planned months ago, was auspicious, coming just as North Korea's 29-year-old leader, Kim Jong Un, was once again ratcheting up the essence of North Korea's own brand of diplomacy - belligerence and bluster. This latest round of threats, including war and nuclear annihilation, has been especially shrill, beginning last December, when the regime launched a rocket, then continuing, first in February when it conducted its third test of a nuclear device, and subsequently in March, when it declared the 1953 armistice that ended the Korean war nullified. ​

China's new leaders, who will no doubt continue to regard the North Korean state as an essential buffer, have nonetheless responded this time somewhat differently. Thus, China supported UN Security Council resolutions in January and February tightening sanctions against North Korea, and in March reaffirmed its commitment to the Korean armistice - to which it was an original signatory. But the compelling evidence that China's interest lies in preventing armed conflict in the Korean peninsula comes not just from its political and diplomatic initiatives, but how it continues to invest its international reserves (quick primer: at nearly $3.5 trillion, China's international reserves are easily the largest in the world. Reserves, held as assets by a country's central bank, are regarded as savings to be invested, but kept readily available in the event of a balance of payments crisis, which in turn often precipitates a run on a country's currency). Thus, China has been increasing its investments of reserves in South Korean financial markets: as, already, the third-largest holder of South Korean bonds (after the U.S. and Luxembourg), it increased these holdings by 6.5% between the end of 2012 and the end of March (the same period that Mr. Kim was becoming especially unhinged). Similarly, Chinese investments in South Korean stocks jumped 30%.

Such activity amounts to a substantial vested interest by the Chinese in South Korean and regional stability.​ Couple this with President Obama's "pivot" of America's military focus to Asia, together with its treaty obligations to defend South Korea and Japan, and it becomes difficult to imagine China allowing Mr. Kim - whose behavior is now likely well beyond what China wished for - to do much more than bluster. A shame, though, that, while the geopolitics play out, ordinary North Koreans are forced to continue their miserable - even desperate - existence. Only de-nuclearization, and re-unification, of the Korean peninsula can change this.

Mr. Lew Goes to Europe

America's new Treasury Secretary, Jack Lew, flew to Brussels Sunday night, his first trip to Europe as Secretary (though not his first official trip abroad, which was to China). He is meeting today with EU officials, including European Council President Herman Van Rompuy, Olli Rehn and Jose Manuel Barroso from the European Commission, then on to Frankfurt to meet with Mario Draghi, President of the European Central Bank, and finally to Berlin to see Wolfgang Schaeuble, the German finance minister, and to Paris for discussions with Pierre Moscovici, the French finance minister.

One wonders how Mr. Lew plans to cover - in the 48 hours allotted for the tour - even a few of the most pressing European issues. Consider:  ​

-​ Last month's EU/IMF 17 billion euro bail-out of the Cyprus government and its commercial banks, under which a portion of uninsured deposits are to form part of the funding for the rescue package, suggests depositors in other over-leveraged Euro Zone banks could also lose out. Confidence in the safety of deposits, a fundamental in any developed economy, has thus been eroded significantly. Contagion from Cyprus may be felt first in Slovenia, whose mostly state-owned banks are holding assets severely impaired by a property crash similar to what occurred in Spain.

- Italy, where fiscal re-balancing and economic re-structuring are urgently required, is still without an elected government following February's national election. Political deadlock appears intractable, and even new elections, at this point the only apparent way out, but possibly months away, may not help, especially if Mr. Grillo's anti-establishment 5-Star Movement were to gain more seats in Parliament; ​

- Portugal and Greece continue to struggle with implementing the austerity measures imposed under their EU/IMF financial bail-outs.​ Portugal's Constitutional Court dealt a blow to the process, ruling on Friday that wage and pension cuts to public sector workers were unlawful. This undermines the credibility of the the country's efforts to ultimately regain full access to the bond markets. Prime Minister Coelho responded to the ruling saying it presented "serious obstacles and risks" to the 2013 and 2014 budgets and had "very serious consequences". Such consequences are not likely to be confined to Portugal.

- ​France - where a political scandal is deepening as its budget minister, caught in a "series of lies" regarding an undeclared personal bank account in Switzerland, was forced to resign - has slipped into recession. Unemployment, above 10%, keeps rising. Socialist President Hollande is attempting to reign in public spending (which is the equivalent of 57% of GDP, the highest ratio in the Euro Zone), but has given up on his promise to get the deficit below 3% of GDP in 2013. He faces a deeply skeptical electorate and a plummeting approval rating, to a record low of 22% in the latest opinion poll. 

- Germany, whose electorate is also highly skeptical, and weary - of providing further bail-out funds to stagnant periphery countries - is not yet in recession, but is likely to achieve only marginal GDP growth in 2013. Chancellor Merkel faces re-election this fall, so further, fundamental policy initiatives from Brussels and the ECB - such as a banking union, and at least partial mutualization of sovereign debt - cannot be expected until the election outcome is clear. 

In such an economic environment, Mr. Lew, apparently increasingly concerned about the impact of Europe's recession, and growing social unrest, on the United States and the rest of the world, will reportedly be advising his European hosts to back away from draconian austerity and  opt for policies to promote growth.​ "We have an immense stake in Europe's health and stability," Mr. Lew said. "I was particularly interested in our European partners' plans to strengthen sources of demand at a time of rising unemployment." The Germans (and other creditor nations in the North, such as the Finns and the Dutch) aren't likely to listen until budget and debt positions in their southern neighbors have improved substantially.

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Augmenting and Tapering in a World of Cheap Money

Central banks in America and Japan may be about to move in opposite directions.​

In Asia, while North Korea ratchets up belligerence (it has declared that the armistice ending the Korean War in 1953 is void, threatened to launch nuclear and rocket strikes on the United States and, most recently, declared at a high-level government assembly that making nuclear arms and a stronger economy are the nation's top priorities), Japan's new Prime Minister, Shinzo Abe, is waging war of a different kind - on the deflation, and in-and-out recession, characterizing the economy for the past 20 years. Following the introduction in January of massive new public spending on infrastructure (despite the highest debt-to-GDP ratio in the world, exceeding 200%), his government announced today an unprecedented - some are saying experimental - expansion of monetary stimulus as well. Having installed a new Governor (Haruhiko Kuroda) and Deputy-Governors, Mr. Abe has directed the Bank of Japan to do whatever it takes to achieve 2 per cent inflation (latest data indicate that consumer prices fell 0.3 per cent in February year-over-year). In the context of its program of quantitative easing, the Bank will double its holdings of government bonds - across the entire maturity spectrum - over the next two years. To gauge the magnitude of this expansion, consider that under the new program the Bank will buy the equivalent of $78 billion of government bonds every month - compared to $85 billion currently being purchased by the Federal Reserve - in an economy that is just over one-third the size of America's. Markets have responded dramatically - Japanese shares closed Thursday 2 per cent higher on the day, the 10-year Japanese government bond yield dropped 20 per cent, to 0.45%, and the yen fell a further 2 per cent against the US dollar (Japanese policy-makers want a weaker yen, to spur exports).

In America, statements yesterday and today from Federal Reserve officials suggest quite a different path for US monetary policy. San Francisco Federal Reserve Bank President John Williams said, "I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases by then", and, "If all goes as hoped, we could end the purchase program sometime late this year".​ This is certainly a change in, at least, tone from the Fed. Then today, there was this somewhat less provocative statement, from Atlanta Federal Reserve President Dennis Lockhart: "We need evidence that the recovery is moving ahead", and, referring to Mr. Williams earlier statement, "I wouldn't totally rule it (tapering) out". Mr. Lockhart is concerned about the unintended consequences of the Fed's massive bond-buying program, such as inflation. He also repeated an oft-heard call, in the face of reckless fiscal policy, for a credible long-term deficit-reduction plan.

We live in a era of extraordinarily cheap money. That is not about to change very soon, notwithstanding the views of Mr. Williams and Mr, Lockhart, given tepid growth (or none at all) everywhere in the developed world. Indeed, it may not be too late to play the market strategy of shorting the yen/dollar and going long the Nikkei 225.