Friday, 30 October 2009

A New Monetary Order

The international pattern of settlements is hardly an issue that is likely to cause a great deal of excitement. And yet we may well become excited by it’s impact. In a thoughtful piece by Buttonwood in The Economist (see article), our attention is drawn to how the international pattern of settlements is changing, and how this will invariably alter the balance of economic and financial power in to world. Buttonwood reminds us that:

“Creditor nations tend to set the rules and the new global monetary system will be unable to operate without the approval of China, a creditor country that has capital controls and a managed currency. It has been assumed that China will have to move towards the Western model. But why not the other way round? Western countries adopted free capital markets, as the British adopted free trade in the 19th century, because it suited them. Will China now be able to call the shots? Uncomfortable as it might be for the West, the next monetary order is more likely to be made in Beijing than in New Hampshire.”

This is moderately discomforting. And yet a study of history would remind us that it is almost like a natural cycle of events. Professor Saul, in Chapters 3 and 4 of his work "Studies in British Overseas Trade 1870-1914" outlines the way in which Britain went from being a creditor nation to being a debtor nation between 1870 and 1914. The impact of the First World War saw the loss of London’s pre-eminence as a financial centre to New York, instigating the long decline of the British Empire. Reflective Americans would take note of this and draw a direct parallel with the British experience.

As a futurist, the decline of the US Dollar has been in my mind for some time. However, it has never been sufficiently pressing for me to do something about it. Perhaps now is the time to start to give some consideration to how a New Monetary Order might play out. The stock in trade view is that the Chinese Yuan will replace the US Dollar as the dominant currency. This contention needs to be given a serious review because there are a number of arguments against it that have not been stated.

If the Yuan doesn’t replace the Dollar, what will? This is another area that needs to be given some thought. In many respects, this could be the key question over the next couple of decades. A new monetary order is likely to reflect a new geopolitical order, and a view of the one without a view of the other is likely to be inconsistent. There are a number of candidates, such as the Euro, but that line of thought seems to be out of step with a lot of current thinking about our geopolitical futures.

Over the coming months, we shall be thinking aloud about how the new monetary order might develop. We shall be publishing these thoughts throughout our networks, and we welcome feedback and comment.

Buttonwood: Birth pains | The Economist

Tuesday, 20 October 2009

Second Bailout Repaid

A branch of Barclays

In October 2008 the Qatari Sovereign Wealth Fund took an equity stake in Barclays as part of a more general bailout package. Barclays looked to private overseas funding rather than seeking funds from the UK monetary authorities. This was questioned at the time, but it has meant that Barclays’ response to the financial crisis has been purely commercial, and that the strategies followed by the bank lack the political tinge that is now colouring the UK banks that did take public funds.

And now the issue of payback arises. The Qatari stake was acquired when Barclays was trading at under £2.00 per share. In recent weeks, Barclays has been trading in the range of £3.60 to £3.80 per share. The share have fallen back to about £3.60 on the news of the Qatari sale. However, if the BBC is right that 379 million shares are to be sold, if the stake was acquired at around £2.00 per share, and if the striking price is in the region of £3.60 per share, then the Qatari fund is likely to make a profit (i.e. net gain, not just sale proceeds) of £600 million.

This need not exercise us too much. The important question is – if the Qatari fund can make this much money out of a relatively small bailout (they only put in three quarters of a billion to begin with), then how much can UK Financial Investments Ltd make with the UK bailout of £37 billion? Very little futures work concerning the future PSBR is adequately factoring in the extent of the possible proceeds from asset sales. By 2018, when things become a bit more acute, there is still a very real prospect of assets sales being used to size down the National Debt.

On a separate note, this is the second bailout repayment that we have come across (click here for details of the first). Both stories have a happy ending for the institutions providing the bailout funds, and both bode well for the future of the UK debt.

BBC NEWS Business Qatar sale hits Barclays shares

Saturday, 10 October 2009

Beware Of Greeks Bearing Gifts

If one phrase captures the essence of modern American diplomacy, it is, as President Teddy Roosevelt advocated, to walk softly and carry a big stick. If a similar phrase were to be applied to European diplomacy, it is likely that it would be timeo danaos et dona ferentes. At the gates of Troy, the Trojans were warned to “beware of Greeks bearing gifts”. As it turned out, this was quite a good piece of advice. The Greeks gave the Trojans a horse, through which they were able to capture Troy. This cautionary tale came to mind when I learned of President Obama being awarded the 2009 Nobel Peace Prize (see article). Why would these modern “danaos” give this award at this moment in time?

Much has been made of whether or not President Obama deserves the prize. There is, however, a much more subtle process that has been lost in all of the vituperation. In explaining the award, the Nobel Committee cited the President’s willingness to act within a multi-lateral international framework that is characterised by the rule of law rather than brute force, which uses exhortation over threat, that encourages rather than rebukes. In many respects, this is the basis for the comment that President Obama has been given the award for being everything that President Bush wasn’t. And that is the clue to the subtle process.

Few would argue that President Bush wasn't a man who carried a big stick – and who wasn’t afraid to use it too. In his short time in office, President Obama has acted as a team player in building a consensus for international action. This is essentially a European approach to foreign policy. In this regard, Obama is starting to turn out to be something of a ‘European President’. However, this world-view is not shared in Congress – particularly in the Senate, which is important to US foreign policy and which may well return to the Republican party in November 2010.

The award of the Nobel Peace Prize to President Obama for the promise of a more inclusive American foreign policy creates something of a dilemma on Capitol Hill. If Obama actually develops to fulfil his promise, he will have done so on an essentially European agenda. He will have acted through international consensus, using international institutions, and will have started to restore the image of the US in the international arena. If, on the other hand, he fails to fulfil his promise, he will be able to point to his opponents in the Senate for frustrating this promise, thus weakening the image of US at a time when collective international action is needed over a variety of issues. A handy argument to have in the run up to the 2012 Presidential Election!

Perhaps a practical example might highlight the dilemma. In December, President Obama will go to Copenhagen to look for a consensus, through the IPCC, on climate change. He goes representing the chief refusnik on the Kyoto Agreement. We hold that America is now a decade behind the rest of the developed world on this issue. There is an expectation that Obama will look for an agreement on climate change, but, in doing so, will have to compromise American interests as part of the cost of catching up. He will return to the US with a deal that may look pretty poor on its own, but which may have to be accepted in order to make progress elsewhere (such as Iran and North Korea). Will the Senate endorse the lesser evil in order to obtain the greater good?

Possibly not – a poor climate deal will have a real impact on American jobs, in a recession, and just before an election season. There are costs associated with a climate clean up. Europe has, effectively spread these costs over the past decade whilst the US hasn’t. As an example, if the US government were to use a Pigovian Tax to bring American car usage to the Kyoto norms via the price mechanism alone, we calculated that, in 2008, the federal tax would need to be between $18 and $19 per gallon of gas. This is a huge cost to absorb in one single hit. The size of the action needed underpins our view that the Senate will not ratify a climate agreement.

And this is where the Nobel Peace Prize is something of a mixed blessing. It has tied Obama to a European agenda in foreign policy and has given the role of spoiler to the Senate. The Senate undertook this role willingly in the 1990s, but we are in a different world today. In the 1990s, the US had fiscal surpluses. It now has deficits. This means that what the world thinks about America matters more today than it did in the 1990s. If the Senate becomes too unilateralist, it may find itself explaining why it is that foreigners are not so willing to buy US Treasuries.

Either way, President Obama can find a satisfactory outcome. He will be able to claim all of the benefits if things go well. And if they go badly, he can blame the Senate. I now find myself thinking that the cause of re-election for Obama in 2012 has been strengthened somewhat. I am also reminded of the Europeans who bought Manhatten for a bag of glass beads. To have subborned the US President for a mere bauble has to be one of the best buys of the century.

As an aside, in 2005, as part of our ‘America 2025’ project, we published a scenario looking at the future of US foreign policy to 2025 in which there is an uncanny parallel between events as we saw them possibly unfolding and as they are currently unfolding. Click here to access the scenario.

Saturday, 3 October 2009

The Paradox Of Saving



The savings ratio interests me enormously. The Keynesians point to the paradox of thrift. At an individual level, thrift is a pretty good idea. It is living within our means, it is ensuring that we do not take on more responsibility than we can afford, and so on. However, if we all were thrifty, then consumption – a key drive to our economic prosperity – would be much less than it otherwise would have been. The paradox is that, at the individual level, thrift enriches us, whilst at the collective level it impoverishes us.

If NIESR are right, and the ratio goes to 6.1% this year and 8.9% next year, then there is - in the words of the Chartists - a trend reversal. This is an important aspect of the 'New Normal' adjustment over the next ten years or so - the repairing of household balance sheets. In recent years we have become accustomed to inflation boosting our household balance sheets through house price inflation and through the rises in the stock markets. That has now come to an end, and looks to be at an end for some time to come.  If asset price inflation isn't going to bail out households, they will simply save more as a means to repair their balance sheets. It means that the recovery in the UK will have to be export led.

It’s just as well that the Bank of England has allowed Sterling to devalue, isn't it?

The return of thrift: The feel-bad factor | The Economist