Monday, 31 August 2009

The Poodle And The Butcher

Following on from our recent post about relations between Britain and the US (see post), it seems that matters are about to come to a head. It is speculated that a Pentagon report will shortly circulated that suggests that the current US military strategy is ‘not working’ (see report). It is also speculated that the answer, according to the US military, is to send a further 20,000 NATO troops to Afghanistan (see report). This, of course, raises the vexed question of exactly who is to send these additional troops.

America is the first port of call. As the US presence in Iraq is wound down, the Pentagon may have the capacity to increase its presence in Afghanistan. The problem is that the US public is falling out of love with the Afghan adventure. A recent survey in The Economist (see survey) reports that 42% of Americans believe that the US is not winning the war in Afghanistan (as opposed to just 18% who believe that the US is winning the war), 41% oppose increasing the number of troops in Afghanistan (as opposed to 32% who are in favour of doing so), and 65% believe that the US will eventually withdraw from Afghanistan without winning the war (as opposed to 35% who believe that the US will win the war).

This creates a dilemma for President Obama. He is locked into the policy of increasing the number of troops in country because, at present, he cannot contemplate an American withdrawal from Afghanistan. Sadly, he is backing a set of Afghan allies – irrespective of who wins the recent election - who are not currently up to the job of providing their own security. This implies that America will be the first port of call for reinforcements for some time to come. Unless he can engage the rest of the world community in accepting the mission, which is where NATO comes into the picture.

Contrary to popular belief, the current mission in Afghanistan is not an American mission, it is a NATO mission. The US currently supplies 46% of the troops in country (see data). The second largest national contributor is the UK, with 14% of the troops. The total contribution from the EU nations (including the UK) is 43%, marginally less than that of the US. This suggests that the second port of call for reinforcements is Europe. Of the five largest European contributors, Germany (6% of the force total), France (5% of the force total), Italy (4% of the force total), and Poland (3% of the force total) are all likely to cite their own problems in deploying more troops.

Of the top five European contributors, only the UK has the capacity and willingness to increase their deployment. The recent increase in the numbers of British troops in Afghanistan highlighted the tensions over further deployments. The Foreign Office wanted to commit a further 2,000 troops. The Treasury stated that we could only afford 750. The military felt that 750 troops adequately resourced would be better than 2,000 troops inadequately resourced and sided with the Treasury. Against this conversation, the public didn’t really have too much of a view.

And this is the point where the issues of the NHS and the Lockerbie Bomber assume importance. The war in Afghanistan is starting to become unpopular in the UK. For example, in Helmand Province, 10 British soldiers died to allow a population of 80,000 Afghans have the opportunity to vote in the recent election. That only 150 Afghans actually voted is seen in the UK as not good enough (see report). This is not a good time for Gordon Brown to commit more troops to that operation – particularly in the face of an oncoming General Election – to what is seen as an American folly because the US is politically unpopular in the UK at the moment.

If President Obama has any political savvy, he will not ask for more troops from the UK for fear of being rejected. However, that may create problems for him at home. Perhaps our previous Obamascepticism was well placed?

Saturday, 29 August 2009

The Tide Turns

Two recent events have given us an important glimpse of how the future of the global economy may unfold over the next decade or so. First, the Swiss bank UBS has come to an arrangement with the US tax authorities over the disclosure of the account details of US Citizens who, it is alleged by the IRS, are secreting away their assets as part of a move to avoid – or even evade – US tax. The final agreement is something of a compromise, as the US authorities will request the details of the accounts, which will then be subject to review by a Swiss banking panel. Either way, this represents a major step forward in the process of globalisation and the establishment of a transparent banking system that a fully functioning global financial system would require.

The agreement between UBS and the US authorities removed a major source of uncertainty that had previously prevented the Swiss government from disposing its bailout stake within the bank. UBS had been highly exposed to the sub-prime lending crisis, which had led the Swiss government to purchase ChFr 6.1 billion of convertible loan notes. One day after the tax agreement, the Swiss government converted the loan notes and sold the shares into the market immediately for ChFr 5.5 billion. In addition to this, UBS will pay the Swiss government ChFr 1.8 billion to compensate for lost interest on the loan notes, which leaves a surplus of ChFr 1.2 billion for the Swiss taxpayer. This provides an annualised rate of return of 30%.

The long term importance of these events is quite significant. It shows that the public involvement in the banking system need not be permanent. Whilst the press has focussed on the cost of the banking bailout, they have conveniently ignored the nature of the transactions. Although the cost can be stated in billions – or even trillions – of Dollars, Euros, and Pounds, this cost is not an expense – it is an investment.

On the other side of the balance sheet lay the assets that have been purchased. Eventually, these assets will be sold, either through private placement or into the market. As the assets were purchased under distressed circumstances, it is not unreasonable to expect that they will be sold at a surplus (what might otherwise be called a profit). These capital inflows will, undoubtedly, be used to repay the public debt that has been incurred to purchase the banking assets. When we factor this into the equation, then it would seem that the levels of public debt arising across the OECD nations is not as bad as it might first appear.

This is an important point when considering how the rebalancing of the economy might occur. Over the first half of the next decade, there is a real chance that public sector borrowing may crowd out private sector borrowing. The real policy challenge will be to ensure that the effect is felt upon household borrowing for consumer purchases – i.e. credit card debt and household mortgage debt. This seems to be a trend at the moment, as households work to reduce credit card debt and as mortgage lending remains subdued. It is important in this phase to ensure that credit lines to business remain open. If they don’t, then the recovery will take that much longer to achieve.

There will come a point, however, where recovery reaches a point where the restoration of tax revenues and the decline in social assistance allow for public borrowing to become public repayment of debt. Once this point has been reached, private sector borrowing can be safely allowed to crowd out public sector borrowing. The proceeds of public sector asset sales will hasten this process. This effect will also be greater and faster in those economies - such as France and Germany – that rely more upon ‘automatic stabilisers’ than those economies – such as the US – which rely more upon ‘discretionary stimuli’. Our calculations suggest that, for the UK, the turning point is likely to be somewhere around 2017 or 2018.

Of course, such suggestions are subject to all sorts of unpredictable factors (e.g. exactly how generous are the pensions that will be paid to the Boomers who are now entering retirement in mass). And yet, the case of UBS does establish two things. First, the public involvement in the banking sector need not be permanent. And second, the withdrawal of the public sector from the banking sector could actually yield a surplus to public funds. In this respect, the tide has turned.

Thursday, 20 August 2009

Poodle Snaps At Owner

In a recent post we wrote about how the British poodle was starting to bite at it’s American owner (see post). In the post, we touched upon the case of Mr Megrahi – the Lockerbie bomber and his imminent release from prison on compassionate grounds. It was announced today that Mr Megrahi would be released and allowed to return to Libya to die with his family (see story). There is so much in here that it is worth unbundling the story in order to take stock.

In recent days, there has been a great deal of diplomatic pressure from the US not to take this decision. The White House had called for Mr Megrahi to serve his sentence, until death, in a Scottish prison. The statement was reinforced by a personal appeal from Hillary Clinton for Mr Megrahi to stay in Scotland. That the Scottish Justice Secretary decided to pay no regard to these appeals suggest that – whilst there may be no intention of a snub to the US – the Scottish politicians are not perturbed by the discomfort of the American politicians. As such, it signifies a major change of attitude towards the US.

It will be interesting to see how the US government responds to this decision. Regret has already been expressed, but will it go beyond that? It would not be in the interest of America to take matters too much further for two reasons. First, things are not going well for the US military in Iraq and Afghanistan. There has been an uptick in violence in Iraq, which always has the attendant risk of spiralling out of control. Will the US troops have to come out of their barracks again? Will the withdrawal from Iraq have to be delayed? These are two issues on President Obama’s agenda at present.

In Afghanistan things are not going well. Turnout for the elections is reported as being low (see report), which suggests that the Taliban might say that they have won the election. The mission could well take far longer than expected, which puts President Obama in a position where he needs to ask for greater support from the European allies. The question that he currently faces is whether or not he would want to jeopardise this support by taking up the case of the families of the victims of the Lockerbie bomber.

The second reason why President Obama might be a bit loathe to race to action is money. Not only is he short of manpower, he is also short of cash. The Federal deficit is at record levels and rising. Interestingly enough, the UK is the third largest purchaser of US Federal Debt - behind China and Japan - with all of the economic vulnerabilities that implies. It is difficult to believe that President Obama would be prepared to risk a run on the dollar for a relatively minor incident.

In an exchange of private correspondence after my last post on this issue, one of my correspondents stated that ‘the UK needs the US more than the US needs the UK’. I wonder if that is really the case. Under the Bush administration, France suffered no great disadvantages from being hostile to the US and Britain enjoyed few favours from being America’s friend in Europe. This may not have changed in the new administration. If so, then we may be witnessing a realignment of the UK away from the US and towards the EU.

Only time will tell.

Wednesday, 19 August 2009

China And The WTO

In an interesting ruling last week, the WTO upheld a claim by the US that China was unfairly restricting imports of books, songs, and movies (see report). This is of interest from a number of perspectives, and how China reacts will help to shape the path of globalisation in the immediate future. For years, the EU and the US have maintained that China has been operating a globalist policy on its exports (free access to overseas markets), whilst operating a nationalist policy for its imports (protecting the home market). For example, China only allows the import of 20 foreign movies each year. The recent ruling will have an impact on that duality and gives the Chinese Government something of a dilemma.

The WTO rules have, essentially, a liberal agenda written into their DNA. Part of this agenda is the free flow of goods and ideas. Encapsulated in the books, songs, and movies that have been restricted in China is the cultural meme of the society which produced them. For example, it would be very uncommon for a movie made in the US to question the primacy of the market, respect for the individual, and the rule of law. In promoting these values, the central tenets under which the Communist Party of China rules the nation would be called into question. Which is precisely why their official distribution is limited. The influx of predominantly western culture into China might be an act that is corrosive to the rule of the Communist Party.

And yet, if China continues to block the importation of books, movies, and songs, it lends itself open to retaliatory sanctions within the WTO framework. This may be something of a boon to western – particularly European – negotiators at the IPCC in December. There is a feeling at the moment that those countries which do not sign up to the international carbon reduction agreement are effectively giving their economies a hidden carbon subsidy. China would fall into this category. One way to address this carbon subsidy would be the imposition of a carbon tariff at the point of entry into Europe. If this were to occur within the framework of the WTO, then it would provide a very attractive solution to something of a political problem within Europe.

All of this suggests that China has arrived at something of a crossroads. For the past decade it has been able to operate a globalist approach overseas whilst maintaining a nationalist approach at home. It is coming to a point where the two are incompatible. A more globalist approach at home would imply a political loosening within China – with all the attendant risks of disintegration. However, a more nationalist approach overseas would imply a more confrontational approach to foreign affairs – with the attendant risks of greater isolation.

The Chinese government may be able to buy time by appealing the WTO decision, but this is not a long term solution. In the long term, China has to decide if it wants to join the club of developed nations (and loosen up politically) or if it wants to maintain the status quo (and sacrifice some of its industrial destiny). At present, it is hard to see which view will predominate. However, it is a space to watch closely in the coming years.

Monday, 17 August 2009

Carbon Equivalence - The Currency Of Climate Change

As part of my subscription to The Economist, every now and then I am sent a copy of their glossy companion – Intelligent Life. Normally there is usually a rapid correlation between my desk and the rubbish bin because I find the magazine full of vacuous glossy rubbish. This year, something interrupted the trajectory of the magazine, and I am quite glad that it did. Buried in the articles on cars, wine, food, and fashion is a thoughtful little article about carbon equivalence (see article).

When discussing the green agenda, the conversation normally becomes bogged down in meaningless statistics. The idea of carbon equivalence is to establish an exchange rate for our activities so that we can weigh the choices that we make. For example, we have previously calculated that the amount of US corn derived bio-diesel used to fuel an SUV for a month could feed a family of four in Mexico for a year (see post). In making such comparisons, a comparator is needed. The British Physicist David MacKay proposes using the ‘Kilowatt Hours Per day (kwh/d) as the base unit of account in comparing various activities.

The article very kindly points to Professor MacKay’s book on the subject, which is available as a free download from here. This is an immense step forward. If we can establish the currency of carbon reduction, we will then be able to measure and monitor our activities. From a policy perspective, we will be able to establish a value for the taxation of activities that do not enhance the carbon profile, and we will be able to calculate the import duties to be added to the goods of those nations that provide a carbon subsidy to their economies – such as China, India, and the US – by not effectively tackling the issue of carbon reduction.

I have to admit to being surprised to find such a forward thinking article in a glossy magazine. Perhaps I ought not to be too hasty in throwing away future editions?

Friday, 14 August 2009

The Poodle Bites!

There are those in Europe who see Britain as a European puppet of the US. It is claimed that the UK likes to ape the behaviour of the US, it has adopted an economy similar to that of the US, and it follows the US lead in foreign policy, and it has been rather uncritical in it’s support for US military policy. De Gaulle is once reputed to have said – at the height of the Cold War - that the UK was an unsinkable US aircraft carrier stationed off the coast of Europe. And yet, whilst there may have been a grain of truth in this assertion in the past, the situation may now be changing.

The British cherish a number of their institutions, and, as such, are held beyond criticism. One such institution is the monarch. Even republicans in the UK have to admit that we are currently served by a particularly good monarch. It is acceptable (but unpopular) to criticise Constitutional Monarchy as an institution, but it would be unacceptable to criticise the Queen as a monarch. Even American criticism of George III doesn’t feel right to British ears.

Another revered institution in the UK is the National Health Service (the NHS). The NHS is a curious institution in that it is closer to the European model of healthcare than it is the American. Funded through taxation, the NHS provides basic care to all at which is free at the point of use. President Obama appears to be suggesting that the US healthcare system reforms itself towards a European model. Conservatives in the US have responded by attacking the NHS (see advert). They have been aided and abetted by Daniel Hannan – a Conservative British Member of the European Parliament (see clip). Britain is absolutely incensed by this.

The government has rolled out John Prescott to answer these criticisms (see video). US commentators are also being rolled out in the defence of the NHS (see video). In the face of intense tabloid scrutiny, two of those appearing in the advert have retracted their statements (see report), claiming that they have been misrepresented. Even Stephen Hawking has added that, despite a claim to the contrary in the Investors Business Daily (see here for an interesting example of ‘we got it wrong but actually we’re right’), he is both a UK citizen and has received free treatment from the NHS for over 50 years. However, these are short term issues in the middle of the ‘silly season’, when there is little ‘real news’, and will blow over in a couple of weeks. We ought to be looking at some of the long term trends that this issue highlights.

First and foremost, the most obvious fall out is that Mr Hannan’s career now hangs in the balance. He has been disowned by his party leader (see report) and there are those who argue that he is now unelectable. Indeed, Mr Cameron needs to put a great deal of distance between himself and Mr Hannan because this gives his political opponents ammunition in the forthcoming General Election. Conservatives who I have spoken to off the record are dismayed that a small incident like this could affect the chances of the party being elected.

The second point to note is that the UK is now being pushed closer to Europe and further away from the US. How long this process will last is difficult to say, but I suspect that there are those in the State Department who are wondering what would happen if the US were to lose its main voice within the EU. The UK has defended many US policies within Europe in recent years, but that resolve is weakening. In the future, when a US President comes to Europe looking for additional troops and resources for long term engagements such as Afghanistan, they may find that the political price for such support is much higher than it is today.

Thirdly, there is a growing British indifference towards the views of the US. A case in point might be that of Mr Megrahi – The Lockerbie Bomber. There is currently an application before the Scottish Justice Minister for the repatriation of Mr Megrahi to Libya on compassionate grounds (see story). By and large, the families of the UK victims are quite sanguine about Mr Megrahi’s release, whilst the families of the US victims are against the release. The Obama administration has taken up the case for the families of the American victims, but the US has run out of political goodwill in Britain at the moment. In this sense the poodle is about to bite back. It will be interesting to see if Mr Megrahi is released in the next few weeks.

It is possible for the Obama administration to repair the damage caused in the UK by his critics in the US. After all, he didn’t exactly endorse the adverts. However, it does mean that the US will have to be a bit more conciliatory in its dealings with Britain if it wants to strengthen its ties to Europe. A key test later this year will be how willing the US is to act in step with the rest of the world at the Copenhagen meeting of the IPCC. From a British dimension, that advert about the NHS has made President Obama’s job just that little bit harder.

One of the dangers of keeping a lap dog is that there are occasions when it might be tempted to bite the owner. Now is such a time.

Thursday, 13 August 2009

The First Signs Of A Double Dip?

The July unemployment figures are something of a mixed bag. On the one hand, unemployment rose by only 24,900. This is not good for those who have been made jobless, but it does suggest that the forecasts of 3 million unemployed this year belong more and more to the realms of fantasy. On the other hand, if we accept our crude rule of thumb from last month (see post), we would have expected unemployment to rise by only 10,000 to 11,000. This deviation from trend is not insignificant, and demands our attention.

It is entirely possible that there are seasonal factors affecting this figure. In July, somewhere between 400,000 and 450,000 undergraduates would have left university to enter the jobs market. Some, if not the majority, of this increase could be explained by the increase in graduate unemployment reported elsewhere. However, there is also the possibility – one that we must take very seriously – that we are starting to see a double dip recession come into play. It is too early to say one way or the other, but this is a matter that does need to be closely monitored.

Another interesting factor coming into play is the geographical incidence of unemployment. The BBC has a really good graphic to show this (see graphic). Unemployment is now starting to become concentrated in the West Midlands, in addition to the traditional areas of high unemployment. This is not difficult to explain – the West Midlands is heavily dependent upon the automotive sector which has been hit very hard in this recession. What is interesting are the political consequences of this.

The West Midlands are a key marginal battleground politically. Margaret Thatcher won them over, to underwrite her period in office. They were won by New Labour in 1997, and have helped to keep the government in power ever since. As Gordon Brown is now seen to be the architect of the current recession, will he be able to maintain the New Labour majority in the region? I suspect that this is where the next General Election will be won – or lost.

BBC NEWS Business UK jobless total climbs to 2.4m