Fall of the American Empire

By Paul Krugman

CreditDoug Mills/The New York Times














The Social Benefits of Fossil Fuels Far Outweigh the Costs


By Joseph L. Bast and Peter Ferrara






The alternative energy sources environmental activists favor are generally more expensive.












Thinking About the Balkans

By George Friedman


The week’s news from the Balkans has been ominous. Serbia is making demands on Kosovo and its supporter, Albania. Serbia continues to see Kosovo as a threat to its national interest. The Russians have gone out of their way to express their support not only for the Serbs but also for the Serbs living in Bosnia. Last month, Russian President Vladimir Putin hosted Serbia’s president in Moscow. Meanwhile, the U.S. friendship with Albania is deep, making the Serbian claim on Kosovo even more dangerous. Far less ominous but no less important, Turkish President Recep Tayyip Erdogan held a campaign rally last month in Sarajevo, the predominantly Muslim capital of Bosnia and home to a large number of Turkish expat voters, to win their support and to show voters at home that Turkish influence was spreading into the Balkans.

The Balkans are always caught between great powers. It’s also not unusual for the Balkans to seem to be on the edge of war. They usually avoid it. When they fail, the result is catastrophic. Eventually, that catastrophe will come, but rather than hazard a guess as to when that will be, the important thing is to understand the dynamics that led to this uncertainty – beginning with geography.

I think of the Balkans as having two parts, a north and a south. The north is generally a plain divided between Croatia, Serbia and Bosnia. Croatia, a predominantly Catholic country with historical ties to Hungary and current ties to Germany and the European Union, is entirely on this plain. Serbia, an Orthodox Christian country, is mostly on the plain. So is the northern part of Bosnia, an area dominated by Serbs. The southern part of the Balkans – southern Bosnia, Montenegro, southeast Serbia, Macedonia and Albania – is mostly mountainous. Southern Bosnia and Albania are primarily Muslim. Macedonia is a mix of Orthodox Christians and Muslim Albanians.

If this sounds complicated, that’s because it is. Nationalism in the region is so intense because it is so fragile. The nation-states are ethnically heterogeneous and have long-held grievances against each other. The various states fear their neighbors, so they use these ethnic divisions to weaken them, which begets more fear. Apart from this, the Serbians and Croatians speak similar, mutually understandable languages. But one is part of the Catholic world and the other part of the Orthodox world. One is oriented toward Germany, the other toward Russia. And they fought one another savagely during World War II – Croatia alongside Germany, Serbia with the Allies.

This explains how the Balkans is, but it doesn’t explain how it got this way. It must be understood that these countries and ethnic groups are the result of millennia of conflict between Europe and the Middle East, a conflict predating Christianity and Islam but one that continued after their emergence. Alexander forged an empire as far as Afghanistan. The Romans passed through the Balkans on their way to creating a land route to Egypt, the source of grain for Rome. The Christian Crusaders passed through here, as did the Turkish Ottomans when they were going north to take Budapest and nearly Vienna. And the Russians, always seeking to contain the European Peninsula and the Ottomans, were instrumental (along with the Greeks) in spreading Orthodoxy. Catholicism, Orthodoxy and Islam engaged in a three-way struggle after the 15th century, all making alliances with each other to defeat the one left out. Theology did not drive the great powers. It did define the small ones.

The Balkans were a highway to empire and a buffer against rising empires. In themselves they had little of value, but they were indispensable for anyone seeking to dominate the Mediterranean or project force from north or south. The rugged hills and valleys created refuge for different groups that survived invasions from either direction because the effort of rooting them out wasn’t worth it. The result was villages surrounded by mountains that preserved their identity even in the face of great power. But great powers did implant themselves on the plains and on some of the less remote valleys. The Catholic and Orthodox churches and the mosques speak to that.

But even within regions that share a religion, the reality is more complex. Over in the next village, the past perseveres, and the anger with it. In the Balkans, nothing is forgotten, and nothing is forgiven. It is an essential and abysmal reality. Sometimes the fights between the villages draw in other villages, draw in capitals, draw in great powers. Sometimes the great powers competing with each other draw in the Balkan capitals and the villages. Either way, there are countless local feuds and endless powers seeking hegemony over a continent, and together they open the door to all the malice in the region. Today, the Russians whisper to the Serbs, the Americans whisper to the Albanians, the Germans whisper to the Croatians, and each whispers back. The villages hear rumors of great goings-on, and it starts.

The Balkans are not the only place in the world where this goes on, but there is no other place that is so important to so many great powers. Therefore, it is not surprising that there are always rumors and that the rumors are frequently of war. And it is not surprising that the rumors are usually wrong. It just assures that we will be surprised the time they turn out to be right. It’s only a matter of time. And this is a region that expects war, making it all the more likely.

The Other Yield Curve Investors Should Watch as Trouble Mounts

The Treasury yield curve is in focus. Here’s the other curve investors should keep an eye on

By Richard Barley

Gap between spread on short-dated and long-dated U.S. corporate bonds over Treasurys

Note: Based on one-to-three year and 10-year-plus corporate bond indexes

Source: ICE BofAML index via FactSet

Escalating trade tensions have helped push the U.S. Treasury yield curve to its flattest in more than a decade. This flattening is watched closely by investors as an indicator of economic trouble ahead. But another curve deserves attention too—and it is getting steeper.

That is the corporate-bond spread curve, which measures how much extra compensation investors are demanding to take credit risk at different time horizons. The U.S. curve has steepened, as spreads versus Treasurys have widened more on long-maturity bonds than they have on short-maturity bonds. 
Investors now get 1.7 percentage points more yield than Treasurys for corporate debt maturing in 10 years or more, versus 0.68 point for one-to-three-year debt, according to ICE BofAML indexes. Three months ago, the gap was roughly one-fifth tighter.

The message this sends is that while investors have become more uncertain about the longer-term outlook, they are relaxed about the near term. The longer a corporate bond’s maturity, the more credit risk it bears, since the underlying issuer’s business or balance sheet can face more challenges over time. In good times, that risk seems distant; when investors start to focus on it again, it is a sign of a changing environment.

Gap between two- and 10-year U.S. Treasury yields

Source: FactSet

Some think ultraloose global monetary policy has distorted the Treasury curve, potentially generating a false signal. So another indicator for investors to watch is valuable. For now, the credit curve only seems likely to get steeper, in particular because companies have issued a lot of risky long-dated debt. The size of the U.S. triple-B-rated 10-year-plus index has surged to $878 billion, from $235 billion 10 years ago.

Size of U.S. triple-B 10-year-plus corporate bond index

Source: ICE BofAML index via FactSet

The danger point is a combination of wider credit spreads and a flatter credit curve, which would signal deeper concerns about company balance sheets. The good news is this isn’t something corporate-bond investors are betting on—yet.