Wednesday, 1 April 2015

HOW WILL THE 21ST CENTURY TURN OUT?

In 2009, I read “The next 100 years – a forecast for the 21st century” by George Friedman
George Friedman is the founder of Stratfor, a Texas-based strategic intelligence consultancy advising many major US corporations. Although described as a conservative Republican, his views would mirror those of many foreign policy realists in both parties. 

He assumes that military and economic power will determine the future. As he puts it, “anger does not make history, power does”. 

Looking back at the book six years later, it appears to have been prescient in many respects. 

He argued in 2009  that the United States would remain the dominant global power for the rest of the 21st century, because of its huge natural resources of coal and oil, its geographic immunity from attack in its fortress of North America, and its control of the world’s seas and of space.

Just as England’s strategic goal, as an island nation and a naval power, was to prevent Europe’s unification under one power coalition, America will pursue a similar policy on the Eurasian land mass. It will not want any one coalition – be it of Russia, China, Turkey or Japan – to dominate that land mass.

He was critical of the way American politicians sometimes approached foreign policy. Because America is so powerful, it has a much bigger margin for error than others, and it sometimes overuses that luxury. He said America is “adolescent in its simplification of issues, and in its use of power”. In general, I do not think President Obama can be accused of this, but some of his Republican critics can.

Other less powerful countries have less  margin to make mistakes. 

Most significantly in light of current events, he argued back in 2009 that Russia, following the eastward expansion of NATO to within 100 miles of St. Petersburg, was “in an untenable political position” and “unless it exerts itself to create a sphere of influence, it could itself fragment”. This is a credible explanation, offered beforehand, of Putin’s present actions in Georgia and Ukraine.

Both China and Japan he saw as vulnerable, because they are export economies, and they rely on the all powerful US Navy to keep sea lanes open for their exports of goods and their imports of raw material. Since 2009, China has spent heavily on its navy so this prediction may be overturned.

Friedman said that the European Union was a schizophrenic entity, in that its “primary purpose is the creation of an integrated economy, while leaving sovereignty in the hands of individual nations”. The current economic crisis is putting this proposition to the test, and one hopes Friedman will be proven wrong. But he has a point. EU’s states often set ambitious common objectives for themselves, but fail to match them with the necessary central authority.

He argued that there is a divergence of interest between Germany and others who will want easy relations with Russia, and more easterly EU members, who will fear again being sucked into Russia’s sphere of influence. Chancellor Merkel does seem to confronting this dilemma, if reluctantly.

Surprisingly, Friedman did not see China becoming as a great power. This was  because of what he saw as its inefficient allocation of capital, its corruption, its profitless exports and its unhealthy reliance on US consumers to buy its goods. Its one child policy will also mean that it soon will be an ageing society. It appears that the current Chinese leadership in confronting these challenges, but reorienting its entire economy will be a very difficult process. 

Surprisingly, Friedman saw Japan emerging as the major Asian power, notwithstanding its lack of resources and its very elderly population.  I believe this is incredible.  An elderly country cannot be a powerful country.

He ignored India altogether. I believe this analysis of the long-term balance of power in Asia was quite unconvincing.

He saw Turkey emerging as the major power across all the former Ottoman lands from North Africa to Central Asia. Here his predictions are more robust in light of subsequent events.  He argued in 2009 that Islamic fundamentalism will run out of steam because its real target, the liberation of women, is irreversible. Since he wrote his book, Islamic fundamentalism has actually increased in strength, but he is probably right in the long term.

Friedman speculated about the likely conflicts of the twenty-first century – including its wars. He believed the wars will be conducted by unmanned aircraft using high precision weaponry and guided from space. They will be backed up by small numbers of highly equipped infantry. The aim will be to destroy the electricity generation capacity and close sea lanes of the enemy. There will be modest casualties. Wars, he believed, would be limited, and would end with negotiated treaties. Pursuit of unconditional surrender would be off the agenda, because nuclear weapons would make it too dangerous. All this is true of wars between the big nuclear powers, but are hardly true of what we have been seeing in Ukraine, Syria, Iraq and parts of Africa.

Although some of Friedman’s speculations had a touch of science fiction about them, its basic assumptions about the realities of military power, and it’s reach, are credible and sobering, especially for those who might think that neutrality would protect a country from military conflicts.

Tuesday, 24 March 2015

GERMANY ALSO NEEDS TO GET ITS ECONOMIC ACT TOGETHER

All citizens of the countries in the euro zone should pay especially close attention to economic policy debate in and about Germany.

Simon Tilford ,of the  London based Centre for Economic Reform, had some very critical things to say about it in a recent publication entitled ,“Germany rebalancing ; Waiting for Godot”.

He said that Germany is not serving its own economic interests by running such a large balance of payments surplus. A country with such a surplus has to reinvest the surplus abroad and he says Germans have lost almost a third of what they invested abroad since 1999. This is because they invested it in property bubbles that burst, and other bad investments.

He says Germans would have been better off investing at home.  German money has gone into ghost estates in foreign countries rather than into Rand D, roads and schools in Germany itself. That would have boosted German wages, spending and imports.

Some of those extra imports might come from other Euro area countries, who currently have deficits and this would make the euro itself more balanced and sustainable. And that would be good for Germany.

While Germany has increased employment by 1 million since 2007, many of these extra jobs are part time.

Germany is one of the worst and most difficult places in the world to try to set up a new business. It is 114th in the World Bank rankings!

Its professions are closed to competition from other EU countries and Germany has the worst record for implementing structural reforms, recommended since 2012 by the  Heads of EU Governments, including its own Chancellor!

He says German businesses are saving rather than investing, and that this should be discouraged.

He urged Germany to boost its consumer spending power by cutting VAT and financing that by higher property taxes.  He said German wages needed to rise, and Germans needed the confidence to spend more.

In contrast the Governor of the Bundesbank, Jens Weidemann has said in a speech in Switzerland, that in the last year, German wages have risen by 3%, which is a real increase, because prices have remained static. Others say that , as many Germans are approaching retirement age, it is understandable that they would want to save a bit more.

BUT ITS CENTRAL BANK HAS SENSIBLE THINGS TO SAY ABOUT HOW TO CURB FOOLISH BORROWING BY GOVERNMENTS

In a recent speech , Jens Weidemann asked the sensible question...how can we use market disciplines, rather than mere threats from Brussels, to get countries to run their fiscal policies sensibly? 

In other words, instead of the European Commission making a futile attempt to discipline France for its budget deficits, could a way not be found to get the bond markets to do the job by charging countries, like France, that are borrowing unsustainably to stop doing so, by charging such countries a significantly higher interest rate than countries that are being responsible?

That would require a change in the rules banks must follow in calculating the risks attached to different types of lending that they do. 

DO NOT TREAT GOVERNMENT BONDS AS RISK FREE

It would require, Weidemann  said, an end to the preferential regulatory treatment of government bonds, which includes banks not needing to hold capital reserves against investments in government bonds, whereas they do have to hold reserves against the possibility that other lending they do might go wrong.

This preferential treatment of sovereign debtors of banks is based on the assumption that government bonds are free of risk, an assumption that contradicts the no bail-out clause in the EU Treaties and therefore reduces its credibility.

It is also a nonsensical assumption, as we can see in the Greek case. There IS a risk that governments will not pay, and rules that assume the opposite are unrealistic.

When banks are not required to hold any capital reserves against government bonds, the result is obvious; they will hold too many government bonds, and their solvency is thus becomes directly threatened by a sovereign default. That is imprudent.

 Hence,  Weidemann argued, lending by banks to governments should be backed by adequate capital, in the same way as other lending by a bank has to be.
He said there was another special treatment that should also be ended.

........AND DO NOT ALLOW BANKS TO BUY TOO MANY BONDS OF ANY ONE GOVERNMENT

As a general rule, to avoid concentration risks, bank loans to a single private-sector borrower may not exceed 25% of the bank’s liable capital
But that does not apply to a bank holding of its own governments bonds.

That is a mistake.

In future, large exposure limits should also apply to sovereign debtors too. For example, Greek banks should be prevented from buying too many Greek government bonds. That would break the doom loop between banks and governments, whereby fiscal difficulty for a government endangers its banks as well.

From a financial stability perspective, particular problems are posed by the fact that banks often only have government bonds issued by a single country in their portfolio – those of their home country.

Not only do the euro-area banks hold more government bonds on their books than ever before (€1.9 trillion), the home bias has actually become even stronger in the crisis countries in recent years.

In Italy’s case, for instance, 97% of the euro-denominated government bonds held by the country’s banks were issued by the Italian government!  That is really unhealthy and has been brought about by bad policy in the supervision of banks.

Friday, 20 March 2015

GEORGE OSBORNE

George Osborne, current Chancellor of the Exchequer in the UK, is the subject of a biography entitled “The Austerity Chancellor” by Janan Ganesh of the “Financial Times”.

“Austerity” is obviously a relative term, given that, after four years of it, the UK still has the second largest structural deficit in the developed world after Japan, and debt that is £100 billion more than was planned back in 2010. Austerity is not over, in that current plans, accepted in principle by both parties are to turn the deficit of 5% of GDP into a surplus by 2019/20. Politicians who think the Northern Ireland block grant will be increased, if they protest enough, should keep that in mind.

Janan Ganesh blames this continuing financial gap on the under performance of the overall EU economy, which provides the UK with its export market for its services and goods. In that sense, Mario Draghi ‘s comment that he would do “whatever it takes” to underpin the European economy may have contributed as much to the recent recovery in the UK economy as anything Osborne himself did.

George Osborne came from a comfortable London home, did his degree in history, and could have entered many professions, but chose politics from an early age. He worked first as a political advisor to the Major Government in the Department of Agriculture during the BSE crisis, and then to William Hague when he became leader of the Opposition. Although a metropolitan Londoner, he succeeded in being adopted as the candidate for the safely Conservative Tatton constituency, near Liverpool.

He has always managed to stay close to whoever was leader of his party, and briefed several of them on how best to exploit the ordeal of Prime Ministers Questions. He has a talent for devastating one liners.

His close and trusting relationship, as Chancellor, with Prime Minister David Cameron is in marked contrast to the destructive relationship that existed in the New Labour government between Chancellor George Brown and Prime Minister Tony Blair. According to Ganesh, Osborne is an unabashed admirer of Tony Blair, as a master politician, and holds Brown in ill disguised contempt.

Osborne and Cameron do not have identical political views. Osborne is a classical liberal on social as well as economic issues. Cameron has a more sentimental streak, with his emphasis on “the Big Society”, an attempt to encourage voluntary organisations to be more active in tackling social problems.

Will Osborne still be Chancellor after the General Election?

Polls show that, while voters like David Cameron much more than they like Ed Miliband, 52% of them profess to “like” the Labour party, while only 33% “like” the Conservatives. 

Incidentally this is less than the 40%, who say they like the Lib Dems, which suggests that, despite huge efforts, the Conservatives have yet to shed the harsh image they acquired in Mrs Thatcher’s later years.

Voters have low expectations of Ed Miliband, and this means that, in the campaign, he has an easier job than Cameron, unless he makes some big mistakes.

All he needs to do is perform above very low expectations, and people will be favourably surprised. In contrast, the Conservatives will have the much more difficult task of exposing the contradiction between Labour’s professed commitment to eliminating the deficit, and their simultaneous opposition to “austerity”.