Archive for November, 2010

Thursday, November 25th, 2010

Euro Collapse?

It is not impossible, though it is unlikely. If the Euro-zone is to survive, however, as a coherent, rather than a troubled, currency it has to meet the criticism of every major commentator. It is impossible to have a currency without a government and all economies in the zone must operate within the same fiscal policy. This requires significant surrender of sovereignty. If the democratic institutions of the zone give the people the right to choose who makes the decisions, then all will, in the end be well.

At present the governance of Europe is among the most peculiar of all the systems currently operating across the world. It is never quite clear who is in charge of what or whether their authority is accepted and understood. The democratic link with much of the structure is stretched, leaving many of the populations of  the nation states in the dark. This provides the illusion of sovereignty to members, but as Ireland has woken up to discover to its dismay, it is an illusion. 

Thus, given that we expect the Euro to survive, we must assume that proper governance will be installed. That may mean that some will want to leave. We cannot yet prophesy how it will all turn out.  We do know what is spooking the markets. Suddenly the size of the sovereign, banking and personal debts of the vulnerable countries is throwing up two questions.

Can such debt mountains ever be paid off? Will the affected populations accept the levels of austerity necessary to make that likely over a long, perhaps very long, term?  Nobody knows the answer to either of these key questions. Markets hate uncertainty. Investors walk away or charge the earth. This is the heart of the current crisis.

Wednesday, November 24th, 2010

North Korea

Once again there is a military flare up, started by the North, often referred to as a hermit state.  The West is really at a loss to understand this isolated country which defies everybody, including its main ally, China. Indeed China is allied to the West in wanting to see North Korea stable without a conflict with South Korea.

Korea is one of a small group of international problems which have not budged towards solution over many decades; Cuba (American policy towards Cuba is absurd), the Middle East and North Korea. Others like Taiwan are likely to edge towards compromise and settlement. Afghanistan and Iraq, though  they will remain unstable for some years yet, are messes of the West’s making.

The Korean peninsular is dangerous because a large scale war is possible with very significant civilian casualties. Seoul would be shattered by a vast artillery barrage on a scale last used by the Soviets against Berlin at the end of WWII. The economic impact would be considerable. Yet the West seems uncertain what to do if China looses control of its errant neighbour.

The first thing the West should do is assure China of its support in her efforts to make Pyongyang behave rationally. The second thing is to recognise that the era of prescriptive diplomacy driven by American sentiment and power is over. A new more engaging style is already emerging which seeks common interest. Arriving with clothes pegs on our noses and a list of changes required ‘to join the family of nations’ is way out of date and will no longer work.

The family of nations now has a lot of new members with more money than the West  has and with a different view of the world. This is a reality upon which we will have to fashion a different attitude of mind. That can be driven by the knowledge that without the cash from these new family members, the old ones are bust. North Korea has to be engaged with, not sanctioned against. They may be communist, they may be a dictatorship, they may be this, that and the other, but they are not going to go away. We need to take a reality check and get down to work. We will find in China a very willing partner.

Tuesday, November 23rd, 2010

Ireland and the U.K. and Debt

So Britain has gone to the aid of a friend in need. Meanwhile the friend’s troubles grow. The government totters. The bail-out is to the tune of 127 billion euros. Even that may not be enough. Worries surface about whether a small economy can ever hope to repay such staggering sums. We should worry too. Our debts are much bigger, but, at the moment anyway, our credit rating is top notch.

It is a moment to reinforce a point of arithmetic principle, even if to do so, is to sound like a shrill, admonishing, maiden aunt. The principle is this. Money is a measurement. It is not an entity on its own. It cannot, literally, be made. When people talk about making money they are using a figure of speech, like the sky falling in. It is not a statement of fact.

We have learned that quantitative easing is when a Central Bank  creates electronic money to buy real assets, usually government bonds. This generates money balances which flow into the financial system, which simply did not exist the day before. This process is used with caution as, because it does not represent a real increase in wealth, it debases the currency and if overdone will cause the currency to collapse.

Unfortunately in the modern world it is possible for everyone, not just governments, to do this by artificially inflating assets such as property and then borrowing real money from abroad against them.  Thus a house is bought for £100,000. A little later the same house is said to be worth £400,000. The excited owners, feeling themselves wealthy, borrow against the inflated value of their asset, under a process misleadingly described as equity release. Let us say they spend this on goods and equipment made in China, which also supplied the cash for the loan. The money from the goods immediately flows back to China, as do all the repayments on the loan.

Here is the nub. That money for those repayments has to be earned, because in the beginning the property owners did not have it. So now they have not only to earn enough to repay what they did not have, but also the charges, called interest, added on. The value in their lovely new goods and stuff has already gone to China in the purchase price. The property owners have neither the money, nor the value. This is why they have to set about earning real money to pay.

Of course they think they have the asset. But the true value of the house remains £100, 000. If they chose to sell now, they may get the £400,000 of its inflated value, but they may not if others need to sell at the same time. If  lots of others need to sell the value of the house will fall back to its true value, which is about 3 times the income of the person  for whom such a property was originally built. This is what has happened in Ireland where property has dropped by 50% and is falling still.

In the U.K. we need to think about the fact that the total indebtedness of our island state and its population is approaching £10 trillion. Most of this is secured against property. The true value of that property is about one third of what we think. About £3 trillion. The other £7 trillion we have, over the coming years, to repay out of real earnings. In other words we have the earn real money to fill the whole left by the evaporation of the money we thought our inflated assets represented, but which, actually never existed.

This is why the Sun and others are unwise to crow about how Ireland is in a mess because it is in the Euro. The Euro is merely the measure. The reality is the total debt, whatever the currency applied. The double reality is the inflation of property assets creating phantom wealth. We are in that position too. Only bigger.

Tuesday, November 23rd, 2010

Sarah Palin

This unconventional politician, initially regarded in Europe as a bad joke, whose ignorance of the world and naivete were literally astonishing, is emerging as a powerful icon on the American political playing field and may run for President. It is therefore time to consider her as a serious contender and assess her potential.

Circumstances and Barak Obama have brought about a profound change in America’s world position. The circumstances are economic. The Western model drove into the ditch and the U.S was in the driving seat. The scale of public and private debt across the western economies may, in some cases, be technically too big ever to be repaid. The money is all in Asia and Russia and Brazil. China is now the second biggest economy but it may already be the most powerful. It, not the U.S., is now calling the tune. This was evident to all those who took off their rose tinted glasses at the G.20.

Meanwhile in foreign policy Obama and Clinton have struggled to repair America’s reputation overseas and salvage  harsh reality out of dogma in the use of its military assets. Afghanistan, as set out in the previous Blog, is unravelling as a winnable project. Iran is emerging as a key player in Iraq and is hovering in the wings as a potential player in the tribal areas of Pakistan and in Afghanistan too. Indeed it may be the key to some acceptable level of stability in these areas. Relations with Russia are on a more productive footing; America needs her help with logistics for the Afghan war and Europe will freeze and the lights go out without Russia’s gas and oil.

All this means that the old values, entrenched since the end of WWII and nurtured since in the Cold War (which the U.S with simplistic boastfulness claimed to have ‘won’ when the reality was much more complex) have been shaken up. In the new values which now ordain the world order and which are, bit by little bit , falling into place, America is no longer the key player. It is a player yes, but there are now many other players. The U.S is one of these, but not the one.

This is not bad news. America is no longer the most reviled nation on earth, as it became after the worldwide sympathy heaped upon it after 9/11, recoiled at the advance of the neo-cons, under one of the worst Presidencies in U.S history. But there is a new problem brewing within its homeland. The economic privations, with their baggage train of unemployment, repossessions and despair, have created a new mood in the country where once again the questions is asked, what is America?  There are two conflicting answers. The United States is and the United States are.

It is to the latter that the bugle of Sarah Palin’s disparate band of hockey moms and neighborhood communities sounds and her banner flutters. Small government, a less powerful presidency, lower taxes, localising the power of government (for which the U.S. under its Constitution has the most advanced and sophisticated democratic system in the world). If these are to be the alternative goods offered on the Republican stall to challenge Obama’s Big State in November 2012, Sarah Palin might be the best choice. The fact that she may not know where London is exactly would not matter, because Americans are now more interested in what goes on at home and are fed up with wars overseas which never end. London would not mind either, because its focus is now to the east. The rest of the world is already focussed there.

Monday, November 22nd, 2010

NATO Summit

This was a success on two fronts. The first and by far the most important was the new accord with Russia following the announcement of the new style sea based missile shield for Europe, with which a relieved Russia has agreed to cooperate. Both Cameron and Obama see eye to eye with the need to end historic enmity with Russia, which is not only a natural ally of Europe, but has come to its aid three times in modern history to help defeat Napoleon, the Kaiser and Hitler. Fear of the old repressive Soviet Union creates natural suspicion among the old Eastern bloc states, but this is historic rather than real. Equally fear of NATO encirclement is the traditional fear and doctrine of the Russian military.

Moving from these out of date positions to a modern relationship will benefit everyone and gradually trust will return. Russia is also willing to assist with the NATO effort in Afghanistan, though not with troops on the ground. This brings us to the second piece of good news. Reading between and beneath the lines of the official communique and the political rhetoric, NATO now accepts that its mission is going to peter out without any decisive conclusion and, significantly, President Karzai is losing confidence in the military project. He is beginning to look to a deal with the Taliban as a way forward. Whether he will get it and whether such a corrupt and ineffective government can possibly survive with or without a deal is open to question.

The key point is that it no longer matters. From now on we have to build a strategy of containment so that whatever goes on in that tribal country and its surrounds, stays there and does not pose a threat around the world. There are many ways of doing that and none that have a chance of working involve combat troops from Nato.

Gradually events will move in that direction. The star of General Petraeus is falling. That is why he was sent there. President Obama is a much sharper cookie than the Pentagon thought.

Monday, November 22nd, 2010

George Osborne and Dangerous Times

The news from Ireland is two edged. The good part is that it is going to be rescued. The bad part is that although Ireland made huge sacrifices to get its economy in order, it still needed rescuing. The bad part, like an iceberg, goes very deep.

The first element is the lack of an executive government for the euro area, managing the euro economy as a whole and setting out the limits of what members of the currency can do. All the chickens flying about connected to that fundamental issue, are now coming home to roost. The Euro is in trouble. Whether it is the kind of trouble which will strengthen it in the end or bring it down, nobody yet can tell. Any who says they can are guessing or thinking wishfully.

We now find ourselves part of the rescue. As shareholders in the IMF that is very proper. To make a separate loan, described as a good neighbourly act, is not proper at all. This is because Ireland is in the Euroand it is Euroland’s  job to sort this out. Also, and more important, we do not have the money to lend. We have to borrow it first. That is utterly indefensible. We need to remind ourselves that our true national debt is £4.8 trillion and our total debt as a country including private, public and business, is approaching £10 trillion (according to PWC). When interest rates rise, as they will, this will suck out a good deal of GDP. Another £7 billion is a drop in the ocean, yes, but we cannot afford it and the last straw….etc.

Behind the Treasury thinking is the spectre that we have learned that RBS, that profligate bank, has a total exposure in Northern Ireland, which is heavily intertwined with Irish banks, of an eye popping £53 billion. If anything goes bang in the Irish Republic, the shock waves will decimate the Ulster economy and spread back to RBS with further massive losses to the U.K taxpayers who own nearly half its shares. To cover those losses more money will have to be borrowed. Suddenly things would get very difficult because when it comes to a real crunch, Britain is technically bust.

The vultures in the market may sense this and start to circle. It is to ward them off the Osborne has acted. It may work. It may not. On the face of it the Euro rescue will either work or not. £7 billion from us will make no difference one way or another. But with the gesture we earn the right to be rescued ourselves. Maybe that was the motivation in the Treasury.

Because everyone is now in grave danger. All our plans and forecasts do not take account of a further major financial implosion in the banking system and the sovereign debt sector, because we have no margin left. This is were one of the most critical figures of all looms into view. At the start of the global financial crisis the combined foreign exchange reserves of the Eurozone, America and Britain together added up came to no more that 8% of the total in the world. It has got worse since. When it comes to the ultimate crunch the West has run out of money.

No wonder George Osborne is anxious.

Saturday, November 20th, 2010

Queen Camilla?

Prince Charles is evidently not sure. He and the Duchess expressed their expectations at the time of their marriage. Has anything changed? Not really. The key point, however, is this. In order for Camilla not to become Queen, which is automatic  for the wife of the King, Parliament would have to pass a special Bill. It is unlikely that it would do this.

Saturday, November 20th, 2010

NATO Conference

This has made a good start. The shift to a more realistic and potentially more effective missile shield for Europe and a proper invitation to Russia to become more engaged, is at last beginning to recognise the realities of the post cold war world. This Blog has long argued for closer ties with Russia and the end of mutual suspicion. It is certainly in Britain’s long term strategic and economic interests to mend fences with Russia.

(This wekend the blog is busy with another project so posts will be short)

 

Friday, November 19th, 2010

Lord Young

Lord Young, appointed by the Prime minister as his ‘Enterprise Adviser’ quite recently has now resigned, following publication of remarks which offended almost everyone. This Blog is more interested in his appointment than in his resignation.

Worthy though he may be, we must get away from this coterie of whisperers in the ears of our leaders as some kind of official appointment. Prime Ministers should not need such people. They have all their own ministers and the civil service. If it is believed that the likes of Lord Young have special pearls of wisdom, David Cameron can always pick up the phone. There is no need of any official appointment. The public are fed up with this. Coming on top of the photographer saga and with Coulson still hanging about, Number Ten is beginning to suffer damage. Time to get a grip.

Friday, November 19th, 2010

Corporation Tax in Ireland

A few days ago Ireland said it did not need money and would not take a loan. Now it is saying it will not give up its very low rate of Corporation Tax. It will be interesting to see how long it can resist the pressure, especially from Germany and France. In the end it will be a stand-off between Ireland digging in and the Eurozone pressing hard. Both have a lot to lose. If Ireland concedes, its main weapon for getting back on its feet and paying back what it owes will be surrendered. If it refuses  and the Euro money is held back, it is likely that the Irish economy will implode. That would be a disaster for the Eurozone. This Blog’s advice is to let the Irish have the money and keep their low tax rate until they are back on their feet.

By then the Eurozone has absolutely got to get in place an effective structure of economic governance, binding upon its members. Clearly it would have to be democratically accountable, because of its impact on the lives of Europeans. To give it teeth referenda will be required in the Eurozone countries. The chances of a unanimous yes vote are not good, but without a government in charge the Euro cannot survive. In the end it may come to a battle between sovereignty and solvency.

Ireland needs to have a plan B. When the economy has stopped collapsing, if it wishes to restore its treasured sovereignty, it should quit the Euro, introduce an Irish Dollar on the lines of Canada, Australia, Singapore etc, cut its corpoation tax rate to 10%, its income tax rate to 15% and cut regulation to the bare minimum to protect,  health, safety and the environment. Then the Irish will find their economy will really take off. They have already shown what they can do. They need to have the confidence to do it alone.

But first they have to get out of the hole and it is a very deep hole too.  Above all they must not again think that money can be made by simply inflating property assets. If they keep heart and learn from the errors of the past, the Celtic Tiger will wake up with a roar.