Epochal change in our economic situation

What are the epochal economic changes in my lifetime?  I'm no student of macroeconomics, as any reader here will know, so I don't have a ready list.  The rise of China comes first to mind, along with its concomitant, the (relative) de-industrialisation of the West, and its precursor, the collapse of (left-wing / doctrinal) communism.  The oil crises of the 1970s.  Economic migration towards the West and the suppression of labour costs.  And ... economic "neoliberalism"?  The period of the "great moderation"? - maybe.  The banking crisis 2007-09? - not really: what changed?  Any others people care to nominate?  [I'm not looking for lists of new technologies here.] 

Anyhow, now we have a serious new candidate: the Keynsian turn of Germany announced just days ago, which is probably just the cornerstone of the EU letting rip, as many in the EC and several member countries have wanted to for decades now.  So much latent borrowing power!  Assuming it actually happens as presaged, expenditure on weaponry (of course) but also infrastructure, stands to become a truly massive boom, with the added twist that there could be a strong strategic reluctance to outsource all this upsurge in manufacturing and construction to China.

The markets don't think it all looks so obviously great for the USA, either: are we seeing the turning-point in a 25-year bull run on the DJ, and maybe early suggestions of the USD going out of favour?  US recession, even, as the tariffs bite?  Nice one, Donald - though at least there will be plenty of ongoing demand for his natural gas.  

Writing as a non-economist, I'd say that the whole thing also sounds rather inflationary, too - for all of us.   The older I get, the gladder I am for my substantial inflation-hedge. 

What do we all reckon, at this critical juncture? 

ND

PS - did you notice the Irish offered themselves as part of the Macron/Starmer coalition of the willing?!  See, this is real ! 

The Saudis and the 'Petrodollar Deal'

Several days ago, there were stories that a supposed US-Saudi deal had elapsed (at its 50th anniversary) with potentially earth-shattering consequences.  We said we'd take a look.

The 'deal' (as reported) was that the US would guarantee Saudi's security militarily in various ways, in return for the Kingdom only selling its oil in dollars, and reinvesting (most of?) those dollars in US government bonds.  This had the effect of propping up the dollar all these years, as nations globally were forced to buy dollars.  End the deal, end the dollar, was the implication.

Hmm.  Well, firstly I know nothing about macro-economics, so I'm always open to being corrected on some of these things.  (My state of macro ignorance has never held me back, since happily I've always found that micro competence is the way to make money.)

That said, here are a few thoughts.

• several well-informed commentators stated there never was such a deal !
• whether or not the doomsayers knew this (I thought everyone did, but maybe not), the US is about to sign a significant new defence pact with Saudi.**     We probably won't be given the full text ... but I can't imagine the US isn't getting more or less whatever it wants from this
• given that the whole world (not least, China) holds US Treasuries, who wants to crash the dollar anyway?
• the FX markets are just about the most liquid on the planet.  What difference does 'pricing in dollars' make?  (There's my macro ignorance showing - but seriously now, just tell us.  It isn't as if oil is priced in dollars at a fixed price, is it?)
• after many years as a net oil importer (indeed, net energy), since the shale revolution the US has been a net exporter.  That makes the world a rather different place to what it was 50, 30, 20 years ago, in ways that I'm sure the US Treasury is on top of
  

From time to time we hear guff about how China wants the whole world to switch to renminbi, or alternatively some devious crypto-currency of their devising.  Nothing much seems to happen.  Similarly Russia says that, Uncle Sam being a busted flush, it will now export its oil and gas in rubles, thank you very much.  The rest of the world waves them a cheery two fingers.  

The simple fact is that liquidity is liquidity.  Loads of countries announce from time to time that they are going to supplant this or that feature of the established (western-led) global order, but it rarely does them any good.  For many years the Russians have sought to develop a global market in "Urals Blend" crude oil in order to break the tyranny of Brent (i.e. UK / North Sea) pricing, but Brent it remains on the world market.  After Brexit, the EU toyed with the idea of relegating English to "just the language spoken by Malta": and the French fancied their hour had come!  Tough titty, frogs: English it remains, long after the English themselves have departed.  Liquidity is liquidity.

I have a very strong suspicion nothing much has changed between the US and Saudi this year.  At any event, the US dollar remains my hedge against a UK meltdown.  It served me very well during the financial crisis 2007-10.

Any views from those with a proper PPE degree?  

ND

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** Incidentally, within the USA itself there is a significant school of criticism of this deal, not least in military circles: "we don't need their oil, so why do we need them any more?"  Not too difficult to come up with answers to that question, though.

Nation-building: Blame The Germans

No apologies for returning to Afghanistan on a day like this.  Over the weekend I was chatting to a diplomat who offered the following suggestion.

After 9/11 the US was all for a crash-bang-wallop intervention in Afghanistan to nail OSB, nothing more.  This is indeed how it started: US + UK special forces, linking up with the Northern Warlords.  The shellshock induced in the whole world by 9/11 (Putin was giving a lot of help, and Pakistan could be leaned upon heavily) meant that a lightning campaign was eminently plausible.

Enter the Germans, with the enticing prospect that it could become a NATO mission ... but their price was the Liberal Meddler Overseas Agenda: schools for girls etc etc  Despite his own Defense establishment's opposition, somehow Bush Jnr swallowed this - and thus it became Policy.

So there's a thought.

There are plenty of liberals / progressives (and Paul Mason) wringing their hands over the thwarting of this agenda as I write, even as they despise the USA and (most of) its works.  Well, maybe in 2001 they all swallowed the End of History yarn, and thought America could impose anything on anyone.

ND

UPDATE: 

' “Saving women” was the reason so many of us backed the invasion'

Polly Toynbee, of course.

[1] it would probably have included Trans Rights today

[2] perhaps dreaming to go one better than his father's epic Coalition during Gulf War One (see this lengthy thread)

Weekend: American Lament - Darwin Awaits ...

If we don't much bang on about the USA so much on this blog, it's not for lack of regard; far from it.  Personally, I have worked for more than one US company and, whilst never resident, I have done a huge amount of business in the States (indeed, made most of my money there).  It's such a big country with so many traditions, and generalisation is often foolish: but in commercial terms most Americans are a delight to do business with: open-minded, and always ready to deal if you show there's something in it for them, without being overly concerned about what's in it for you.  They put most Europeans to shame.  (I exempt the London financial sector which happily shares this same characteristic.)

No: if we don't bang on about the USA so much, it's more out of a sense of not wishing to intrude upon the private grief of friends.  Because they have fallen into the hands of utter lunatics.

1.  There has always been a bonkers strand on the US fundamentalist Right.  I have worked with good professional geologists who claim to believe the Lord made the world in literally seven days some 4,000 years ago - and yet their entire technical discipline is based on, errr, a rather different account  - one that they must also maintain in their heads Monday to Saturday, so to speak.  But in the past it's not generally been too hard to leave them to their Sunday eccentricities**.

2.  The American sense of libertarianism is also somewhat hard to rationalise.  Yes, there are indeed some out-and-out cave dwellers maintaining a genuinely self-sufficient lifestyle in their Montana fastnesses.  (Well, they probably don't manufacture their own automatic firearms ...)  But for so many others, their professed enthusiam for individualism and personal liberty somehow doesn't apply during working hours, because the average American corporate is a tightly-run dictatorship. (Benign? -ish.)  Employee involvement most definitely not wanted: but blind, unquestioning loyalty most categorically required (and forthcoming).

3.  Finally there's the aggressive-woke-snowflake tendency in their universities (and increasingly their corporate HR departments), but we'll let that abomination pass just for now, because ...

It's the fundamentalist/libertarians that are my immediate worry, them and their commander-in-chief.  Their attitude to Covid-19 is likely to see Darwin swinging into action in a big way: a whole year of Darwin awards being issued.  And although we could just about make a pro forma evolutionary argument for how American society is going to emerge all the stronger for a good clean-out of the weak, somehow it doesn't ring very true.  "What doesn't kill me, makes me stronger!"  Yeah, maybe.  But you might want to check on the physical and mental condition of some Covid "survivors".

There are of course those on the Left who'd say Boris Johnson's Britain bears more than a passing resemblance to Trump's America.  It's not a wholly empty comparison.  But it's not a quarter as much perturbing (not to me, anyway, even if it's clear Boris has made a very bad fist of being king-of-the-world).  

Yes, the USA has colossal strength in depth, as the Japanese learned to their surprise and detriment.  And mighty empires don't crumble overnight.  But what Americans face today, on several fronts (Covid, China, identity politics ...), and the shape in which they face it, is frightening.  There's a long LRB piece here that addresses primarily the China apsect of this, concluding:

The US is currently preoccupied by the legacy of racial hierarchy and the last half-century of widening inequality.  But as it attends to the challenge of domestic reconstruction, its political class faces another question.  Can it fashion a domestic political bargain to enable the US to become what it currently is not: a competent and co-operative partner in the management of the collective risks of the Anthropocene?  After the shock of Covid-19 it is more urgent than ever.  

Sorry, my Trans-Atlantic friends, but under any probable political leadership over the next four years, I don't quite see how you come out of this, except materially diminished - relative to China at the very least.  Which is depressing indeed.

ND

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** I realise of course that many would attribute much worse things to some fundamentalists than just quirky ideas on evolution etc  

How Long the Dollar as World Currency?

BTL in a recent post, Anon asked for views on how much of the present ME unpleasantness is explained by US desire to maintain the dollar as the currency in which the world buys oil?   Anon went on to mention that Gaddafi head been mooting a barter scheme to circumvent dealing in dollars before his demise.

This is quite a long post so I'll summarise here: not really plausible, IMHO. 

It's not an academic response, nor does it contain any quantified macro-economics (my being in neither profession): but after a career in pragmatic multinational micro-economics - the energy business - I do have a number of practical observations.

*   *   *   *   *   *

1.  Liquidity / critical mass is vital in every sector.  Nothing stymies business worse than non-fungibility and non-convertability.   Needless to say, if anything that has "currency" today is doing a halfway satisfactory job in the market, that militates strongly against the adoption of anything else.  The intertia / barriers to entry & exit are great.

2.  There have long been plenty of national-pride-based attempts to drag the commercial world away from Anglo-US dominance of the instruments of liquidity.  In my own sphere: many countries hate having their oil priced against Brent (which almost all crude oil is, except US production), let alone in dollars; and there have been attempts to establish marker-prices for other blends, and to have them traded in other financial centres.  Kuwait Blend; Urals Blend, Dubai ... they come along, they get reduced to a basis-differential against Brent, and the world carries on.  And this despite apparently formidable technical difficulties in maintaining "Brent" as a marker (due to terminally declining North Sea production).  But the clever chaps in London cunningly keep extending the definition of the blend and - thus far - they've had total success.

Likewise, and to Anon's question, lots of folks have dreamed of having oil - even just their own local production grades - priced in their own currencies.  You might justly argue that provided there is full FX convertability between those currencies and USD, what's to stop them?  Answer: nothing - except it would be entirely empty.  The whole business world speaks English (and reads the FT), not Russian or Mandarin.  Arbitrage ensures "their" price would always be (Brent USD +/- basis)*FX.

As regards barter schemes ... well, money was invented, partly because there are distinct, nay fatal limitations as to what barter can achieve.  So I don't think Gaddafi represented any kind of threat to dollar oil trade.   BTW, the Russians have tried to sell gas to China in complex packages with industrial equipment - but the Chinese are having none of it!  Cash on the nail, so far as they are concerned.

3.  Some things do change & evolve: but typically only for very good reasons (which do not include national pride).  Example: the first natural gas trading hub in Europe was the UK's "NBP", and European gas prices for many years were given as NBP (+/- basis).  How logical was this, when the UK isn't remotely the centre of gravity of European gas movements, and the Eu deals mostly in EUR?  Very logical indeed - when only the UK's gas market was truly liquid.  However, over time, unsurprisingly several other hubs emerged as the rest of the EU belatedly caught up on gas trading (well, sort-of), one of which - the Dutch TTF -  was very much closer to the continental centre of gravity than our peripheral island market.  A German hub would have been just as likely a candidate: but the Germans genuinely don't understand how markets work, and screwed up their market design.  The Dutch are much better at it: and so today the TTF is more usually given as reference point for "the gas price in Europe".  (By the way, NBP and TTF trade at incredibly high correlations and the basis differential is always easily rationalised - as you'd expect, because they are both liquid, and generally inter-connected physically.)

4.  So: given that things can change over time and with good fundamental reasons, who's to rule out everything coming under Chinese hegemony in the long run, when their economy becomes dominant?  Well, in the very long run, maybe.  But right now they don't really understand markets either, nor indeed quite How The World Works.  Case in point: they'd spent years cultivating Gaddafi (for his oil), and were gobsmacked when "the West" just did away with him one day.   WTF?, you could hear them saying.   And, to their disgust, right now large & mainstream Chinese firms are obliged to, errrr, kowtow to US sanctions on Iran, much as they'd like to exploit the situation commercially. 

Of course, they hate this stuff and have every intention of supplanting it.  One day.  And who knows, maybe Trump will so overplay his hand, he'll help them accelerate the process.

Then again, the French have long hated the use of the English language everywhere - and most specifically in the organs and councils of the EU.  Tough titty, mes braves; not even Brexit is going to change that. 

No lengthy post is complete without an army anecdote.  All army vehicles come with a comprehensive toolkit.  But as I quickly discovered when becoming responsible for a troop of 30 vehicles, there's only one item out of a dozen or so that's ever taken out of the box, and which is permanently going missing - the Spanner Adjustable.  

Yes: some things turn out to be Really Useful.  The English language, the Brent oil contract, and the Almighty USD are excellent examples.  The clever Chinese will need to come up with something even better if they want any of them to be superceded.

ND

Facebook on trial...perhaps

Sadly our American cousins are afflicted with sae jumped-up hysterical political generation that we have here in the UK.


A classic example of this will be seen today when two congressional hearings will get to grill Mark Zuckerberg of Facebook.


Facebook has apparently a lot to answer for. Sharing cat videos and one-year old's birthday party pics has proven to be a dark road for the world indeed, soon, it started trying to sell you a sofa that you had purchased last year and from then on it was not long before the only thing appearing on Facebook was doing it yourself Sarin kits and guides from Moscow.


Anyway, that is how the congressmen will put it. Asking over the top questions to try and get onto the news and twitter by going gung ho on Zuckerberg. I am a total bystander having never signed up to this over-sharing fantasy world that people enjoy so much. Good luck to them, the idea that you share all your most personal data freely then get annoyed when the company you gave this all to sold the data to make money.


Umm, that is the business model of social media, after all, it is free at the point of use so how are the companies going to make money?


Yet the Congressmen, exactly like our pathetic Select Committees, will grandstand instead of questioning the underlying nature of the business model and how this works. Indeed, Zuckerberg can probably win just by reminding everyone of quite how desperate politicians are to throw money at his company - money raised from their own brand of suckers, and how he will promote some sort of restriction on political advertising. Boy will they not like that.

It is not just Russia...

So say the highly intelligent, err, US intelligence agencies.


The USA is in a real bind with China.


On the one hand, China creates the mass market products that keep the American consumer market on the road, including the all-American Apple Iphone X - 100% China made of course by Foxconn.
The Chinese also finance this trade by being the willing buyer of trillions of dollars worth of US T-bills. So much so, that it has become a truly symbiotic relationship wherein unpicking it would really hurt both parties.


But China has also made many of its gains through stealth, subterfuge and outright theft. It's brand new FC-31 fighter is a copy of the US F-35 - America's own newest jet fighter. China stole the plans via industrial espionage. In the corporate world, most manufacturing companies from the West managed to destroy themselves in China, where with no intellectual property protection, their products were copied and delivered more cheaply with no recourse. Far fewer Western companies go to China now, the flow has turned the other way (which kind of works too, those expensive flats in Mayfair needed cocky buyers too....).


Moreover, just today the US is calling out China to be on a par with Russia in terms of a state threat. Not because it is as aggressive, but because it is so much richer and has its vast human intelligence network that Russia lacks.


Militarily too, there is no doubt China could defend its Eastern Hemisphere now from an US attack. It is 10 years since the Chinese sub famously emerged in the middle of the US 5th Fleet off Taiwan, since then they have been busy building even quitter nuclear and diesel subs and better missiles (recently tested in Syria by the Iranians, natch).


So what can the US do, one thing in their favour is that as much as the Chinese detest the West and still harbour deep hatred for the colonial period, they don't much care for the rest of the world beyond it being a source of raw materials. Not for China a global peacekeeper role. For all the talk of the Belt and Road, it is an aggressive economic strategy with little military input. Compare and contrast to the USA post 1945 with bases left and indeed, expanded, around the world.


China has problems at home too in the medium term as it tries to adapt its one-party rule state to the internet age and an impossibly large population to control. But time is on China's side.


How Trump and the US deal with China, always a canny negotiator (see since this month how European oil prices have increased after China/Russia agreed to reduce supplies going West and send them East instead), will be interesting to watch. No President yet has got it right, Trump at least tried with his Syria strike whilst dining with President Li.


What would you do?

Dancin' to the Jailhouse Rock

Prosecutors@Work:  those Americans know how to write an indictment.   Take a look at the Manafort / Gates document, as they throw the book at these two gentlemen in no uncertain fashion.

Central to the case is that "in furtherance of the scheme [i.e. disbursing the millions he is supposed to have made working for pro-Russian Ukrainian players] Manafort used his hidden overseas wealth to enjoy a lavish lifestyle in the United States without paying taxes".  Oh yes, this being America naturally the bulk of the material relates to alleged tax offences, always a nice place to start.  (Often, "wire fraud" is thrown into the pot because almost everyone has made an interstate telephone call at some stage in the proceedings - but I didn't notice it this time.)   In another standard American ploy, they are also accused of misleading the people who prepared their tax returns for them, doubtless so as to render their professional advisers guiltless  -  and, errr, co-operative?   Same thing happened in a lot of the Enron indictments. 

We should of course note that Messrs M and G deny everything.  That said, check out the details given of Mr M's "lavish lifestyle".  Quite a bit is alleged to have been spent on houses, home improvements and the like (oh, and four Range Rovers - three in 2012 alone - how many do you need?).  But the real winner is $934,350 paid to "Vendor C - Antique Rugstore in Alexandria, Virginia".  As a nice detail, that can surely be bettered only by the famous list of Tuco's crimes, read out before one of his many hangings, in The Good The Bad & The Ugly.  Amongst all the rape, pillage and murder, Tuco is accused of impersonating a Mexican general ...    

Anyhow, in America they do actually sometimes lock people up, often for many years.  A propos of which, who's this shuffling into view with a new book to promote?  It's Gordon Brown!   And what does he wish to tell us?  He thinks some of the wicked bankers should have been locked up after 2008!!   And who was PM 2007-2010 ..?   FFS.  

I recall we aired similar views ourselves - but that was actually at the time.  What a plonker.  Altogether now:

 

The warden threw a party in the county jail ...

ND

Nuclear War - the world should make this avoidable

It is really quite worrying that this is being discussed.


What lesson should we really learn, to me the obvious one is that we desperately need the UN Security Council to have more muscle.


North Korea should have been stopped from getting hold of Nuclear Weapons, history has shown us that they are very safe in a MAD environment when controlled by sane Governments. North Korea is not sane, never has been - not an adult country that can be trusted with Nukes.


The list of countries like this is quite long, but not overly so. Few societies manage to fail so spectacularly over such a long-period of time, although being communist tends to be a strong marker for this.


The next on my list is Pakistan, utterly corrupt country and culture with religious extremism thrown in too and an existential fear of India. Only then would we get to the likes of Iran.


However, surely North Korea shows that the sanctions process is very key over the longer term - Iraq, with hindsight, even proves that.


I do wonder now that the hell China is going to do in the current circumstances - after all without Chinese help North Korea would still be a peasant state instead of nuclear armed terror threat. It is hard to know as I guess there is potential for China to like the idea of the North eliminating its rivals in South Korea and Japan - equally though, in statecraft the Chinese operate effectively over decades and are useless when things have to be done over days or weeks. A tricky situation indeed, the US is out of the game now, as any sate is when threatened with MAD.

US uses muscle to shakedown the world

The US has fined Credit Suisse for helping clients to avoid US taxes. I find the US approach to tax raising very scary and I am very glad I am not a US citizen.

The new(ish) FATCA regulations make all US citizens pay US taxes anywhere in the world, regardless of whether or not money is earned in the US. As a result, thousands of US citizens are giving up their citizenship per year, as compared to a trickle of a few just before the new rules came out.

What is bad is where the US go, others will follow with extra-territoriality rules - chasing you wherever you go. Sadly, a downside to the rise of technology is the increasing capability of Governments to monitor every move of its populace.

The US Government under Obama has gone to a whole new level though, Credit Suisse is not the first bank to be shaken down, HSBC and JP Morgan have been here before as have many others. There was no legal backing for the demands of $20 billion from BP - except threats of losing all US licences to operate. The same threat made to Credit Suisse (which we should not forget, is really 50% a US bank, First Boston). BNP Pariabs is under threat for breaking sanctions by lending to Iran even though there are no France/Iran financial sanctions in place.

Basically, the US Government feels able to threaten any MNC it likes with threats of closing the US market and increasingly is targeting its own citizens via this route and its own empowered IRS.

It is a sad state of affairs that the Country has fallen into, reduced to bullying and stick-up's to find money for the Government.

Don't forget, this is the real story behind Pfizer and others looking to leave US domicile when they can - the laws of America mean little to its President or Executive.

China/Japan - of more import than US-Iran?

This is quite a hard one to ponder. The dispute between China and Japan has been building all year long. In truth, it is for decades. China has never forgiven Japan for its occupation in the 1930's and 1940's; and it was a barbaric occupation by any standards.

Chinese schools teach their students of the horrors, whilst Japanese schools tend to ignore the nasty buts because after all, it was 2 generations ago.

So does this explain the rather weird stand off over some fairly tiny islands in the East China Sea. It seems to in part. There are oil fields and gas fields of some significance, but nothing compared to say the North Sea which several countries were bounded too and happily drew up an agreement to share.

In the South China Sea, things are a bit more obvious. The Spratly's and Colonia Islands are chock full of oil and gas reserves, in the main untapped. Here one can see much more clearly the realpolitik of the Countries and states with competing claims.

The worrying part is the escalation of claims against one another. It could well be that China decides in the near future to use hard power. Its use of soft power in North Africa and the Middle East has produced underwhelming results. And in reality, who is going to challenge China's military a few miles of its coast?

Whereas in Iran, the Country itself is a tinderbox with a move to becoming slightly more moderate and the West is impotent enough to sign a deal that gives them little except a fig leaf to pretend that Iran will comply with reducing its Nuclear ambitions. But its seems neither side are keen for a war, whereas the tension in the East China Sea goes the other way.

Who is more evil - USA or Germany?

A nice little interlude today with he USA saying that Germany's drive to exports and to keep home consumption low is hurting the eurozone and is a terrible economic model. Much better to be like the USA and splurge your way to victory by printing limitless amounts of the world's reserve currency so pushing up inflation for everyone else across the globe. Hmmm...this is a hard one:

USA:
Source of Global financial crisis
Source of rapacious investment banks, namely the vampire squid of Goldman Sachs
Home of money-printing
Not averse to using its military to achieving economic ends
Huge long term debt crisis
Divided Government regularly frightens world markets
Did handily step in to lend $3 trillion to stop the world ending in 2008

Germany:
Land of Tight money and the bundesbank
Happy to allow a weak euro to subsidise its exports at the expense of other countries import costs
No longer prone to using its military to achieve economic ends
Preaches consumption restraint and practises it too
Prone to lecturing other on their failings
Lacks empathy to support Countries in Eurozone affected by its policies

It's a close call to decide who is worst, both Countries are very keen on mercantilist policies and self-interest. The comments below will decide it....