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Business elites fear a revolution is at hand

The backlash against globalism is coming unless more heed is paid to the interests of those left behind.


By Ambrose Evans-Pritchard, 9-2-2021


Davos Man is trembling. The cosmopolitan superclass is scrambling for ways to share a little of its income stream – as a prudent insurance policy – before the bottom half of western democracy takes matters into its own hands.

The new doctrine is enshrined in the Davos Manifesto, the digital billionaires’ answer to the Communist Manifesto of 1848. The cardinal code is ‘stakeholder capitalism’, otherwise known as looking after your workers, and agreeing not to trash society, or the local water system, or the planet.

There has been something grotesque about a lockdown crisis that has ravaged small firms and the manual self-employed even as the well-to-do accumulate trillions of excess savings. The Nasdaq 100 index is 40pc higher than before the pandemic. Listed global equities have risen in value by $24 trillion since March. The owners of wealth have made out like bandits.

“We’re on the brink of a terrible civil war. The US is at a tipping point in which it could go from manageable internal tension to revolution,” says Ray Dalio, founder of the world’s biggest hedge fund, Bridgewater Associates. Words no longer suffice. The pie will have to be divided.

Davos men and women know in their hearts that the economic dispensation of the last 20 years has been gamed by their caste, adorned in the ideological bunting of globalist virtue.

They know that staggering inequalities have festered, to the point where the average chief executive of an S&P 500 company earns 357 times as much as the average non-supervisory worker. The ratio was around 20 in the mid-1960s. It was still 28 at the end of Ronald Reagan’s term, which is an amazing thought.

They know that open physical and electronic borders have worked marvellously to their advantage, lifting the profit share of GDP to levels last seen at the end of Gatsby’s 1920s, while – by mirror image – cutting labour’s share of GDP through wage arbitrage.

Gold collar ‘brain’ workers have been able to float in a privileged sphere of monetised knowledge above frontiers and the nation state, the Anywheres of David Goodhart’s trenchant sociology. Blue collar ‘brawn’ workers in the West – the locally rooted, clannish Somewheres – have had to compete with Chinese wages.

“What is generating massive financial returns right now is intellectual capital. Labour is not being paid,” said Barclays’s chief executive Jes Staley at this year’s virtual Davos.

It has long been a rumbling theme at the World Economic Forum that something should be done about this, but few were listening hard enough to the primordial scream. They hear it now.

The storming of the US Congress on January 6 by Trumpian militias was not exactly Bastille Day for the Davos coterie. It was more of a cross between Mussolini’s march on Rome, and the autogolpe of a Bolivarian caudillo. But what it exposed is the sheer hatred felt against privileges and faux-righteousness of the post-national Anywheres.

Mr Dalio’s prescription is a peace-time ‘Manhattan Project’ to rebuild the crumbling base of western society. His model is Franklin Roosevelt’s New Deal, although one might equally look to Theodore Roosevelt’s Square Deal before the First World War – an assault against overmighty cartels and the practitioners of “predatory wealth” then derailing American capitalism.

The pandemic has accelerated the pathologies. The European Central Bank estimates that the lockdowns have brought forward the digital switch by seven years. A cascade of old economy insolvencies will come as moratoria expire.

The K-shaped recovery threatens to Brazilianise the social structure of Europe and North America yet further. Sao Paolo’s rich take helicopters to move from their urban fortresses to beach retreats, flying over gridlock and the carjack gangs. That is where inequality takes you.

“You’re going to get a very high risk of extremism coming out of this. We have to find some way to adapt, otherwise we’re in a very dangerous situation,” said Mary Callaghan Erdoes, head of assets and wealth management for JP Morgan.

It is unfair to use Davos Man as a foil. The WEF at times feels like a boot-camp for sinners, a forum for the moral improvement of corporate elites. The high-minded éminence grise, Klaus Schwab, is a product of south German Christian democracy, inspired by the doctrines of Pope Leo XIII’s Rerum Novarum on the ‘rights and duties of capital and labour’.

Rerum Novarum was intended to “refute the false teaching” of socialism, fast gaining traction among European workers in the 1890s. “The first and most fundamental principle...must be the inviolability of private property”. Yet it also called on the owners of capital to raise their moral game, and it feels contemporary. One thinks of Amazon and Uber.

“That the spirit of revolutionary change, which has long been disturbing the nations of the world, should have passed beyond the sphere of politics and made its influence felt in the cognate sphere of practical economics is not surprising. The elements of the conflict now raging are unmistakable...in the enormous fortunes of some few individuals, and the utter poverty of the masses; also, finally, in the prevailing moral degeneracy. The momentous gravity of the state of things now obtaining fills every mind with painful apprehension.”

This is Prof Schwab to a tee. He has been warning for a very long time that there will be backlash against globalism unless more heed is paid to the interests of those left behind, although one wonders if he also means the unfashionable cultural sensitivities of the Somewheres. (I doubt it).

My optimistic view is that today’s inequality will self-correct as the political pendulum swings back. In hindsight we can see that the Western liberal democracies blundered after the Lehman crisis in imposing fiscal austerity, offset by ultra-loose money and quantitative easing à outrance . The enrichment of capital was not matched by the enrichment of labour. The mix was poisonous.

America has now switched to fiscal reflation on a colossal scale. A Keynesian labour economist heads the US Treasury. The Federal Reserve has adopted equality as its new lodestar and will try to accommodate deficit-spending. The Washington system as a whole is moving towards the sort of Manhattan war-economy that Ray Dalio wants. It is buttressed by Joe Biden’s ‘Buy America’ trade and procurement policies. A carbon-border adjustment tax will curb outsourcing to Chinese plants and help to bring home America’s manufacturing base.

The shift in Britain began in 2016. The triple eruptions of the referendum, the European elections, and Boris Johnson’s demolition of the Labour red wall have together led to a regime change. Had vested interests succeeded in overturning the outcome of Brexit, the consequences would have been nefarious for British democracy. But they did not succeed and that is of elemental importance.

Brexit has been a paradoxical episode because the Left aligned itself with the multinationals, bankers, and cross-border rentiers, and against its own working-class base. The British metropolitan Left – as opposed to the Jacobin hard-Left – never seems to have understood that the EU has locked contractionary fiscal policies and creditor supremacy into its legal structure.

The difficulty for Europe is that the existing treaty architecture favours status quo incumbents and is resistant to any form of transformational change. Trying to repeal the Acquis is like pulling teeth. The pendulum cannot swing back. It is jammed.

The Greeks voted for radical change in 2015. The Italians voted for radical change in 2018. Neither changed anything. Rebel leaders are invariably co-opted. The European institutional government in Brussels is as insulated from normal democratic pressure as the papal Curia. So the question I have is how the EU – and above all the eurozone – is going to reinvent itself in time to head off the backlash of the Somewheres.

For Davos man and woman, a solution to their burden may be coming soon: a wealth tax. Tim Bond from Odey Asset Management says governments face a choice between inflationary deficit spending and the easier path of one-off confiscation.

Fed analysis shows that the richest tenth in the US had a net worth of $80.7 trillion late last year, or 375pc of GDP and far above historical levels. A 5pc raid would generate $4 trillion, covering a fifth of GDP. It would pay for the pandemic nicely. The expropriation could perhaps be spread over several years to avoid tanking the market.

Mr Bond says it is much the same picture for the UK. If you wanted to focus only on the plutocracy – the 1pc – it would in theory generate the equivalent of 1.6pc of GDP annually for five years.

Whether you could in fact haircut the rich in this way without all kinds of political consequences and evasionary counter-moves is an open question. But the axe is going to fall one way or another. And it is happier end than dangling from a lamp post.

Germans fear the ECB is following the Weimar Reichsbank into an inflation trap 

Lagarde's largesse is stoking tensions with Germany that could rip the euro apart


Ambrose Evans-Pritchard, 7-6-2020


Christine Lagarde is taking a big economic risk by doubling down on stimulus when the eurozone money supply is already exploding at rates unseen since the launch of the euro. She is taking an even bigger political risk in doing so after Germany’s top court ruled that the European Central Bank abused its power in earlier bond purchases, straying from monetary management into broad economic policymaking without a treaty mandate.

Radical monetary policies are disturbing long-established relationships within German society, whatever the theoretical justification – less scientific than Frankfurt pretends.

“The ECB has no legal or democratic mandate for what it is doing, and it is giving the false impression that there is a free lunch,” said Thomas Mayer, Deutsche Bank’s ex-chief economist. “We are heading for a constitutional crisis in the European Union and there are no means for diffusing it. The euro is simply not viable and the next couple of years are going to determine whether it all breaks apart. The markets don’t understand what is happening,” he said.

“We could be heading for 1970s inflation. The ECB is creating all this money but at the same time the supply side of the economy is being constrained (by deglobalisation). If the German people wake up to 5pc inflation when this is over, they’ll conclude that the euro is out of control.”

Prof Mayer is author of Europe’s Unfinished Currency and a fellow at the Centre for Financial Studies in Frankfurt. His critique has hardened since his days as “Mr Euro” at Goldman Sachs in London. The ECB’s founding father, Otmar Issing, has reached similar conclusions, warning that the project has been fatally subverted by malpractice.

Prof Mayer says there is no consensus for treaty changes to permit debt pooling or fiscal transfers, so EU bodies are instead “bending the law” in order to hold the euro together. This has run smack into the Verfassungsgericht in Karlsruhe.

“The pro-euro economists are now trying to discredit the court because they have nothing else left. They say the judges don’t understand economics. It is shocking,” he said.

Prof Volker Wieland, a member of the five-man Council of Economic Experts, said it was a mistake for the ECB to expand pandemic quantitative easing when economies are bottoming out. “In a currency union of fiscally sovereign states, it cannot be the job of central bankers to rescue individual states and redistribute money,” he said.

The ECB may be right that a deflation spiral is the greater risk – and implicitly that inflation is part of the cure for Club Med debt dynamics – but it is in uncharted waters and economic opinion differs widely. Mrs Lagarde has no political margin for error.

The Verfassungsgericht ruled that the ECB had “manifestly” breached the principle of proportionality with mass bond purchases. The Bundesbank will be prohibited from taking part in QE operations from August onwards unless the ECB can meet the court’s objections. Markets are bravely assuming that politicians will not allow this to happen.

Every feature that the court disliked about the original QE scheme is pushed further in the €1.35 trillion (£1.2 trillion) pandemic scheme. It is open-ended and therefore increases fiscal risk, eroding the budgetary powers of the German parliament and violating the Grundgesetz.

The liabilities are real. The Bundesbank has extended almost €1 trillion of “credits” to Club Med peers – above all the Bank of Italy – through the ECB’s Target 2 payments network. Large losses will be crystallised whether the euro holds together or fails.

Hans Werner Sinn, ex-head of the IFO Institute, says Italy is insolvent. Covid-19 will push the debt ratio to 160pc of GDP this year. He proposes an international forum in 2022 to forgive part of Italy’s debt – akin to the London conference in 1954 resolving Europe’s post-War debts. Such a settlement could cost German taxpayers €150bn. “The Bundesbank would have to be recapitalised by the German state,” he told Die Zeit.

Under pandemic QE, bonds purchases deviate from the capital key (GDP share) and are therefore skewed towards Club Med. “There is no exit strategy. The ECB is not paying the slightest regard to court ruling,” said Prof Gunnar Beck, a lawyer for the plaintiffs and a Euro-MP for the anti-euro AfD party.

Prof Beck said the immediate crisis will be defused by an EU fudge. The German court will go along with it. “These judges don’t want to be seen as gravediggers of the eurozone project,” he said.

Yet the long fuse is lit. Plaintiffs may push for an injunction to tie the hands of the Bundesbank. There will be a fresh case against the new PEPP scheme. The next ruling may pull the plug altogether.

Mrs Lagarde said the ECB is accountable to the European Court – not the German court – and that EU law has primacy. This evades the issue. The Verfassungsgericht ruled that Euro-judges are themselves exceeding their powers – ultra vires, no less – and are making up the law as they go along in an “incomprehensible” fashion.

It declared that member countries are the “Masters of the Treaties” and that the EU is not a unitary state. Karlsruhe has never accepted the European Court’s claim to primacy and it cannot be found in the Treaties.

The backlash against the ECB’s latest move has so far been muted in Germany because key figures in the Left-Right coalition are content to let central bankers save EMU. But this quiescence is misleading. German taxpayers suspect that they are being taken for a ride. Resentment is festering.

Prof Thorsten Polleit from Bayreuth University said the combined fiscal deficits of the eurozone this year will be around €1.4 trillion, roughly the sum that the ECB plans to buy. “The ECB is simply financing budgets with the electronic printing press. This is a massive monetary expansion,” he said.

The Institute of International Monetary Research says “broad” M3 money has been growing at a 19pc rate over the last three months (annualised) and will rise further “The Germans wanted to be good Europeans and bequeathed the Bundesbank to monetary union. But now they are being outvoted by countries abusing the system. It is a Frankenstein monster,” he said.

Pandemic QE is different from post-Lehman QE. Banks were crippled after 2008 and drastic central bank stimulus was needed to offset monetary contraction. This time M3 is turbocharged. Monetarists say it will catch fire as Covid-19 recedes and “velocity” returns to normal.

Prof Polleit said the ECB is walking in the steps of the German Reichsbank in the early Twenties. “We’re not heading for hyperinflation of course but in some ways it is similar. The Reichsbank started buying a little, and then a bit more, until they realised that it was out of control,” he said.

Weimar inflation was a diabolic disturbance of the settled social order. Speculators made fortunes overnight. Diligent law-abiding citizens were pauperised, losing their bank savings and paper securities. The sense of injustice drained the Weimar Republic of its legitimacy.

While Weimar inflation stemmed from the upheavals of the First World War, Germany did succeed in stabilising the mark and controlling prices for a while. The rot set in when the Reichsbank stepped up money creation to cover falling tax revenues.

Inflation spiralled higher in early 1923 after French troops occupied the Ruhr to extract war reparations. Germans stayed at home under a policy of passive resistance, a form of lockdown. Printed money covered the shortfall.

A jump in inflation to 5pc today would be less dramatic but it would nevertheless be corrosive. Home ownership rates in Germany are the lowest of the big OECD states. Half live in rented property – the working class – and few have much financial wealth beyond bank savings. An inflationary bubble would impoverish them, while enriching others. It is a formula for a Trumpian turn in German politics.

Oxford professor Richard Werner said the euro has become a doomsday machine. “In the end it destabilises every country in one way or another. It will be Germany’s turn next,” he said.

One thing is beyond doubt, the monetary union cannot last for long without the political consent of the great Deutsche Volk.

Aqui lanço um tópico que me parece muito importante para investir.

Quais são os sectores que vão sofrer histerese com a crise, ou seja, mesmo depois de a pandemia ser debelada e a economia recuperar, vão ficar com níveis de vendas e prestações de serviços bastante abaixo dos máximos de 2018-2019, pelo menos por muitos anos.

E quais são os sectores em que isso não vai acontecer, e vai tudo voltar ao máximo de facturação a médio prazo.

Até agora não encontrei uma única análise com previsões sobre isto.

Stranded fossil states are the next traumatic chapter of the great energy shift


By Ambrose Evans-Pritchard, 12-2-2020


We know what a stranded fossil state looks like. It took five years for the halving of oil prices to defund Venezuela’s rentier petro-regime and reduce what used to be Latin America’s richest country to a humanitarian basket case.

Once the downward spiral began, it became self-feeding and unstoppable. The economy has contracted by two thirds. Nearly five million people have left the country since 2018. It is the world’s largest refugee crisis after Syria.

Brent oil prices today far exceed Venezuela’s extraction costs, but that is irrelevant. What matters is the ‘fiscal break-even cost’ needed to sustain the socialist Chavista machine. The International Monetary Fund thinks this is over $200 a barrel. The Orinoco tar sands - the world’s largest crude reserves on paper - produce high-cost dirty crude that will never be viable in the post-Paris era of decarbonisation. They are worthless.

Venezuela is the first to go of RBC Capital’s ‘fragile five’, but several others are heading towards social collapse and sovereign insolvency. Behind them in this grim parade come the big beasts of the Persian Gulf, and arguably Russia since it depends on fossil revenues to cover 60pc of its budget.

The timing of this massive geopolitical upset is subject to hot dispute. Yet there can no longer be any doubt that the twin-pincers of draconian carbon curbs and plummeting renewable costs will sweep away much of the old energy order, and that markets will bring this forward demolition job soon enough with Schumpeterian ferocity.

“The world still looks more or less as it always was, so it is hard for people to believe that tomorrow is going to be completely different. But things are moving incredible speed,” said Professor Alan Riley, a global energy expert at the Atlantic Council.

“Nobody wants to talk about the geopolitical implications because they are too disturbing. Once it starts we are going to face crises in the Middle East and Russia at the same time. We could see several more Syrias,” he said.

Mohammed Barkindo, OPEC’s Nigerian secretary-general, is fully aware of the threat. I was in the room in Davos when he let rip against the virtue flaunters and the green colonialism of his old Western masters, so blithely willing to consign his country to insolvency with scarcely a second thought.  “Here in Europe it is about sloganeering but we live with climate change on a daily basis. For us it is double jeopardy, ” he said, shaking with emotion.

Nigeria is caught between the Devil and desert. Fossil fuels are its fiscal and economic lifeblood. Yet the UN warns that the country is at existential risk of desertification and a water crisis in the North, and floods in the South.

Nothing to do with us? The UN also says Nigeria will be the world’s third most-populous country by 2050 with 300 million people, and what are they going to do if they cannot survive in their own country?

Mr Barkindo’s home-state has made heroic efforts to break its oil curse. It has tried to cut the fiscal break-even cost from $130 to $60 since 2017 yet still relies on hydrocarbon revenues for half its national budget. Austerity has eaten into core infrastructure spending, shutting off the only way out of the economic trap. In the meantime, Boko Haram jihadi terrorists and the Delta Avengers do their worst. So spare a thought for the human casualties of the great energy transition.

The protest reflex of Extinction Rebels and the green movement is so ingrained, and the habit of indignation so strong, that their own success escapes their notice. In reality finance have already bowed to their agenda, and technology has already killed fossil fuels, or at least mapped out a path where this is irreversible. All that remains is the mopping up job by dynamic markets.

In that respect Greta groupies and denialist nutters are almost a mirror image, each hurling insults at the other in an obsolete discussion.

My advice to green friends is to accept your victory and learn to be magnanimous. The task henceforth is what to do about a billion stranded losers - because they are most surely coming your way.  My question to denialist friends is why buck better, cheaper technology?

We already know that Nigeria, Angola, Algeria, Libya, Iraq, Iran, are near the front of the line for a decarbonisation crisis. What is new is that the IMF has begun to issue warnings at more than sotto voce volume to Saudi Arabia and the Gulf states themselves.

Its latest fiscal report on the region said that the Gulf's $2 trillion wealth cushion will evaporate by 2034 unless states take radical action, end subsidies, and shrink their exorbitant patronage systems. This timetable is based on the benign scenario (depending on your point of view) of the International Energy Agency and the oil establishment that peak crude consumption remains a faraway threat beyond 2040.

But the IMF also warns that the tipping point could hit by 2030 if there is a global carbon tax rising to $50 a tonne by then, cutting real oil prices to $37 and accelerating the process.

The City has already moved a step further. The London-based Principles for Responsible Investment, a $90 trillion alliance of investment funds, thinks the shock will come by the middle of the 2020s, a view informed by its own market antennae. Electric vehicles will displace 70pc of the world’s car fleet by 2040, and coal will disappear from economic life everywhere.

The premise is that awakened societies will force their leaders to switch to all-out war on climate change within five years, leading to an “abrupt, and disorderly” change in the policy regime. This is broadly my conclusion as well.

The orthodoxy in Riyadh is that even if peak oil demand does arrive soon, it will not make a dent on oil prices and might even cause them to rise. Markets will cut off funding for commercial drilling and shrink supply. Gulf states with national oil companies and the lowest cost of production will be the last ones standing in those circumstances, gaining market share and still enjoying fat rents for decades.

Just as likely is the ‘race-to-the-bottom’ scenario. “If you think that your oil is not going to be worth much, you have to get rid of it now,” said Daniel Scholten, a technology professor at Delft University and author of ‘The Geopolitics of Renewables’.

This is happening in Norway. The government plans to drill like never before in the Barents Sea, raising the country’s total oil output by 40pc in the early 2020s. It is the last chance to extract the wealth for the Norewgian Pension Fund before the window slams shut. Game theory dictates that others must follow, while laggards will end up with stranded assets.

Prof Scholten said we are moving quickly to an unrecognisable global order where there are no longer energy importers and exporters. Most countries will be ‘prosumers’, generating their own needs locally, first with solar, wind, and batteries, and in the next phase with such technologies as green hydrogen. Global energy trade will wither on the vine.

“It is going to get really ugly for the petro-states, and soon. What worries me is that the world will stop caring about the Middle East, and we’ll just have failed states everywhere falling apart,” he said.

Russia may avert a crisis because of its strategic depth and because natural gas is deemed a climate ‘bridge fuel’, though how long gas remains safe is no longer clear. Liquid air batteries have begun to undercut gas ‘peaker’ plants for renewable back-up even in Texas, where gas is more or less free right now.   

Nor are all Gulf states alike. Abu Dhabi has been riding both brown and green horses for a long time. It hosts the net-zero city of Masdar. Its sovereign wealth fund ADIA invests in cutting-edge renewables. “They are heavily into things like battery technology and it gives them lead in market intelligence. They are prepared for what is coming and are going to endure for longer,” said Helima Croft from RBC.

Whether the Saudis can make the switch is another matter. The House of Saud’s survival is built on an uneasy concordat with Wahhabi clerics and a cradle-to-grave welfare system that it can no longer afford. “The social contract is ‘we give you money, and you keep quiet’” said Prof Scholten.

Prince Mohammad bin Salman makes the right economic noises, leaving aside the rather large matter of his consular etiquette. But is his McKinsey plan to break oil addiction and diversify into everything from car plants, to weapons production, and a robotic half-trillion dollar tourist city on Red Sea called NEON, just a string of castles in the air? And can a capricious police-state dynasty ever reach authentic technology take-off?

The IMF says revenue tithe paid to petro-states by oil consumers in Europe, America, China, and the around the world has collapsed by $1.5 trillion a year since 2014. The richest have yet to tighten their belt accordingly.

The long view is that rentier petro-states are inimical to democracy, political pluralism, and market creativity. They are inherently corrupt. The sooner they are gone, the better it is for the world and above all for their own people.

Getting from A to B is going to be traumatic.

Será que afinal vamos aquecer 3 ou 4 graus?

https://www.theguardian.com/environment/2019/nov/27/climate-emergency-world-may-have-crossed-tipping-points

Acabei de receber um dividendo da Alstom (francesa) no valor ilíquido de € 1320. Destes, houve retenção na fonte estrangeira de € 396 e retenção na fonte portuguesa de € 370. No total, com a comissão, comeram-me 59% do dividendo.

Há alguma forma de obter a devolução de uma das retenções? Há-de haver alguma, penso eu, pois temos direito a evitar a dupla tributação. E isto é com uma empresa francesa, portanto da UE.

Se alguém souber, por favor digam-me. Mesmo que exija muito trabalho e papelada estou disposto a ter o trabalho.

Porquê as taxas de juro nulas ou negativas?

Ora aqui fica uma ideia para tentar explicar o fenómeno.

Hoje recebi um dividendo extraordinário da Alstom, no valor de 15% da cotação.

Há 3 semanas, recebi um dividendo de 9% da Altri.

O ano passado, recebi um dividendo extraordinário da Ramada e este ano ela já pagou outro (mas já não está na minha carteira).

E ao todo, só tenho 10 lotes de cada vez. A frequência destes dividendos muito altos parece muito maior do que antes.

Será que as empresas estão a distribuir $$ assim porque não têm bons planos de investimento que deem um mínimo de garantia de rentabilidade? E que por isso preferem livrar-se das montanhas de cash que têm?

(Já agora, outra coisa que estão a fazer em grande escala é a compra de acções próprias, o que vem a dar no mesmo)

Portanto, talvez as empresas antevejam uma Grande Estagnação para as próximas décadas, senão estavam a investir na expansão do negócio e não a distribuir o cash.

Mas se vier essa estagnação, a probabilidade de correcção forte na cotação das acções é grande.

Logo, os grandes investidores não se importam de parquear o $$ a render zero ou ligeiramente abaixo de zero em depósitos (pelo menos uma boa parte do $$) pois as alternativas têm grande risco. Ou seja, se vierem aí correcções fortes em vários activos, quem tinha o $$ a render -0.5% pelo menos preserva quase todo o capital. Isso pode hoje estar a ser considerado o menos mau.

Trump's trade war with China is no longer about fair trade - but complete decoupling

JEREMY WARNER
Follow  Jeremy Warner 21 MAY 2019

Presidents Xi Jinping and Donald Trump have exchanged "beautiful" letters, but they are on a collision course to wider conflict


For obvious reasons, the judgement of history has not been kind on Richard Nixon. Yet even the most duplicitous of political leaders are likely to have redeeming features; the big positive for the disgraced one time US president is China.

Nixon’s meeting with Mao Zedong in Beijing in 1972, it is widely accepted, was one of the most important and impactful diplomatic initiatives by a US president ever, if not the most important. The  consequences were far reaching, and - until the advent of Donald Trump at least - were also widely judged to have been an overall success.

Nixon’s visit ended 25 years of isolation for China during which there had been virtually no communication or trade with much of the outside world. With Western relations restored, China set about an ambitious programme of free market reform, tapping into the abundant wealth and knowhow of Western markets as a pathway to development and growth.

At the time, Nixon almost certainly didn’t realise the full import of his rapprochement, which was in any case initially intended for the narrow purpose of merely splitting the People’s Republic off from the more pressing enemy of Soviet Russia. But it was to morph into something much bigger.

Nixon's initiative was born of a more hopeful age, when multilateral cooperation was thought a natural panacea that would help prevent the ravages of past wars and allow nations to progress together to mutual advantage. The ultimate aim was no less than integration of China into the global economy, making it subject to the same “Washington consensus” as ruled in the West. China could in time be made more like us, it was believed.


That strategy has been turned on its head by Donald Trump, who more than anyone has come to represent today’s anti-globalisation backlash. To begin with, his trade war with China could reasonably be justified as an attempt not to trash free trade, but merely to win fairer trade.

As the new kid on the block, China had been allowed a degree of latitude which would not have been tolerated in others. It has ruthlessly taken advantage of the West’s open markets and rules based international system, but has been slow and reluctant to abide by their obligations.

This asymmetry might have been acceptable in China’s economic infancy, but the region has long outgrown its early development goals, and many parts of urban China are now as prosperous as Europe and even America. Trump’s demands are entirely understandable, even if his method of going about achieving them look questionable. It’s high time China started playing by the rules.


Yet over the last month, Trump’s underlying purpose in launching the most serious trade war since the 1930s have become clearer and a great deal more worrying. His goal is not that of merely leveling the playing field, or indeed cracking down on China’s penchant for intellectual property theft. Nor is it even first and foremost about Chinese containment. Rather, after more than 40 years of growing interdependence, it is about completely decoupling the US economy from its Chinese counterpart. That much is now obvious.

What Trump is attempting is a complete reversal of the process begun under Nixon; his stated aim is to replace a world governed by multilateral rules and institutions with one of self contained nations as adjudicated by bilateral arrangements and alliances according to self interest.

It scarcely needs pointing out that this is the sort of complex that existed before the first and second world wars; it is inherently unstable, naturally leads to confrontation and is very unlikely to be a satisfactory answer to the shared problems and challenges of today’s world. It is indeed the perceived failings of this system that led in the aftermath of the second world war to the establishment of the multilateral world Mr Trump is now so keen to dismantle.

Having benefited beyond the dreams of avarice from forty years of American led globalisation, corporate America is now being bent behind President Trump’s quest for a siloed and regionally divided world.

It is only possible to speculate on what Google has been promised in return for its historic decision to stop supporting its Android operating system on Huawei mobile phones; Silicon Valley has always had an uneasy relationship with Trump, who has warned that he is looking “very seriously” at antitrust action against companies such as Alphabet, Google’s parent company.

By the same token, Google has long harboured grand ambitions for the Chinese market. These are now presumably toast thanks to the Huawei decision, so even though Google may have had no option but to comply with the President’s edict, he will still be judged to owe the company big time. The Google decision is afterall the biggest single rocket yet fired in Trump’s escalating trade war with China. Calling off the anti-trust hounds is the least he could do.


What makes Huawei such a defining case is that the company is deeply representative of China’s wider integration into the world economy - not just in terms of its penetration of Western markets, but also in its use of global supply chains. The Huawei mobile phone is for instance barely a Chinese product at all, relying heavily as it does on key components and systems from the UK, Korea, Japan, Germany, and yes, the US too.

This is not because Huawei doesn’t have the technology, but because there was no point in reinventing the wheel and it wanted to bind the rest of the world into shared interest in the product.

If the President is serious about decoupling, then international supply chains will need to be replaced with local ones. Mr Trump might count that as a win, but the duplication and loss of efficiency, nevermind the importance of trade as a way of binding nations together in common interest, is going to be dramatic.

There is nonetheless an opportunity for Britain amid the madness. If America is giving up its position as upholder of the multilateral, rules based system, then there is a vacancy as standard bearer which the UK, with its strong tradition of rule of law, could usefully fill.

The world is fragmenting once more, but all is not yet lost. Nixon was right all those years ago. The way to deal with China is to absorb it, not to isolate it. But any system of cooperation must always be a two way street. For the Chinese, participation must come at the price of reciprocity, accountability, transparency and compliance.

Italy’s defiant coalition warns of financial ‘Armageddon’ if Brussels picks a budget fight

Ambrose Evans-Pritchard, 5-10-2018


Italy’s insurgent coalition has warned of a financial cataclysm of global proportions if the eurozone authorities reject the country’s budget plans and ratchet up economic stress as a tool of pressure.

“If anybody in Brussels is stupid enough to think they can use the ‘Greek textbook’ against us, they will find that the crisis is not Greece squared, but Greece cubed,” said Claudio Borghi, economics chief for the Lega party and chairman of the budget committee in the lower house of parliament.

“In Greece, the EU managed to turn what started as small problem into disaster through their own mismanagement, but this would be a thousand times worse. It would be Armageddon,” he told The Daily Telegraph.

Tensions in Rome have reached fever pitch on reports of a crisis meeting on Wednesday night between Italian president Sergio Mattarella and Mario Draghi, the president of the European Central Bank. The Italian press have raised the possibility of a ‘Commissariamento’, a drastic step that would effectively put Italy under EU economic control.

The meeting follows a surge in risk spreads in Italian 10-year bonds to more than 300 basis points this week after the coalition submitted a defiant budget plan. This sent tremors through the Italian banking system - highly sensitive to bond rates -  and risks setting off a credit crunch.

The fiscal revisions released last night are slightly less radical but they still breach the eurozone’s Stability Pact.

Luigi di Maio, the Five Star leader and Italy’s vice-premier, said the country would not be cowed. “We’re watching the markets but if there is a choice between the bond spreads and citizens, I will choose the citizens,” he said.

La Stampa said Mr Draghi expressed alarm over the budget fight, warning that politicians in Rome are vastly underestimating the delicacy of the situation as the ECB winds down its bond purchase programme over the next three months. “Italy will have no safety net,” he reportedly said.

There is a back-stop rescue facility known as the OMT but this requires involvement by the EU bail-out machinery (ESM), under draconian conditions, with a vote in the German Bundestag. This option would not come in to play until the crisis was already far advanced, and even then it is doubtful whether the Lega-Five Star alliance would ever accept such terms.

Claudio Borghi, economics chief for the Lega party CREDIT: SIMONA GRANATI - CORBIS/GETTY IMAGES
Mr Mattarella, a pro-EU centrist of the old guard, has some say over budget compliance and could theoretically invoke his constitutional powers to uphold Italy’s membership of the euro. Officials are studying clauses in the constitution to determine the exact extent of his prerogatives.

If the independent budget office (UPB) issues a harsh verdict on the fiscal forecasts over coming days, or warns of any threat to the country’s long-term debt sustainability, this could strengthen the president’s hand.

“This is complete madness,” said Mr Borghi. “They can’t do it unless they send in the army and you can’t do this to a lawful government with a majority in parliament that is doing nothing out of the normal. If they try, there will be a real revolution.”

The coalition is infuriated by a Reuters story citing anonymous EU officials and diplomats in Brussels warning that Italy faces “massive debt restructuring” on its €2.3 trillion (£2 trillion) public liabilities on the current course.

One described the Italian budget as “complete insanity”, saying it relies on “ludicrous growth assumptions”. Another said that delusional markets were clutching at straws and had not yet grasped the full gravity of the clash between Rome and Brussels.

As always in such cases it is hard to tell how much of this is a pressure tactic; an attempt by the European Commission to recruit the bond vigilantes to scare Italy and act as their enforcement gendarmes.

“If there is a deliberate political and financial attack on our country, we will defend ourselves. The Italian people went through this before in 2011 and they are no longer afraid of the spreads,” said Mr Borghi.

He declined to comment on the government’s ‘plan B’ defences, but earlier proposals for a ‘minibot’ parallel currency are written into the official coalition contract - should it be needed to inject liquidity into the banking system and prevent the sort of asphyxiation that brought Greece to its knees in 2015.

“All I will say is that the EU should have learned after what happened in Greece that once you start talking about debt-restructuring, you are igniting the fire,” he said.

The budget dispute between Italy and the EU is in one sense contrived, more political theatre than economic science. The latest plans project a deficit of 2.4pc of GDP in 2019, 2.1pc in 2020, and 1.8pc in 2021. This is hardly a shocking figure.

France is still near 3pc and has been a persistent violator but is forgiven “because it is France” in the unforgettable words of Commission chief Jean-Claude Juncker.

In part, the showdown is over EU theology. “The rehabilitation of the eurozone’s fiscal rules is at stake,” said Neil Mellor from BNY Mellon.

Mr Juncker said this week that if Italy was granted a free pass on the revamped (and contractionary) Stability Pact, it “would mean the end of the euro, so you have to be very strict”.

At the same time there is a strong suspicion in Rome that the EU is raising the stakes to teach Italy’s eurosceptics a lesson. Luigi di Maio has come close to accusing France and Germany of conspiring to bring about regime change.

Yet it is also clear that Italy’s budget figures are fiction. They rely on a surge in economic growth of 1.5pc to lower future deficits. Daniele Antonucci from Morgan Stanley said the best they could hope for was 1pc growth. Brian Coulton from Fitch said the trend rate was no higher than 0.7pc. Reforms are going backwards so, if anything, the speed limit may fall further.

The Lega-Five Star government argues that years of depression have left Italy with a large ‘output gap’, meaning that any fiscal stimulus will turbo-charge the economy through a high fiscal multiplier.

But this is contested. The ‘hysteresis’ damage from the slump has allowed labour skills to atrophy and may have destroyed part of the economy permanently. Both the Commission and the OECD say the output gap has already been closed. They argue that there is no slack, and no such low-hanging fruit to pick.

Lorenzo Codogno, former chief economist at the Italian Treasury and now at LC Macro Advisors, said Italy was still “miles from compliance” under the revised budget figures.

Moody’s and Standard & Poor’s will issue their verdict on Italy’s sovereign debt rating over the next month. A one-notch downgrade might be manageable. If the markets start to fear further slippage to junk status, it would set off a mass exodus by foreign investors.

The Norwegian pension fund, the world’s biggest investor, said on Friday that it would be forced to liquidate its holdings of Italian debt under its mandatory guidelines if the country falls below investment grade. The lesson of the Greek crisis is that it does not pay to be the last out of the door when things go wrong.

Bundesbank back in charge of ECB, sending shivers through Italy


By Ambrose Evans-Pritchard, 8-3-2018

The European Central Bank has dropped its long-standing pledge to boost stimulus if conditions deteriorate, signalling the triumph of German-led hawks and marking a major turning point in the eurozone’s monetary regime.

The approaching end to the QE-era pulls away the protective shield for Italy and the high-debt Latin states, and for thousands of “zombie companies” kept afloat on monetary life-support.

Mario Draghi, the ECB’s president, successfully deflected attention from the policy shift by breaching central bank etiquette and attacking the Trump administration’s tariffs on steel.

“Unilateral decisions are dangerous. If you put tariffs against those who are your allies, one wonders who the enemies are," he said.

The ECB’s pious defence of the trade system may irk Washington, since the EU has higher protectionist barriers than the US. The eurozone’s current account surplus topped $485bn (£350bn) last year, or 3.5pc of GDP, and is now the biggest single distortion to the global trading system.

While part of the eurozone surplus reflects ageing demographics, the scale chiefly stems from policies framed by neo-mercantilist ideology that it refuses to change. 

This was made worse by fiscal contraction imposed on southern Europe during the EMU banking crisis, which crushed internal demand and forced the Latin bloc to claw its way back to viability through exports. Peter Navarro, Mr Trump’s trade adviser, blames Europe for dumping the consequences of its own warped pathologies onto the rest of the world.

The ECB’s shift in guidance amounts to a tightening of policy, even though the bank admitted that it will not come close to achieving its 2pc inflation target this decade.

This leaves the eurozone with minimal safety buffers in the next cyclical downturn, vulnerable to a Japanese deflation trap. “They are going to face a problem when the next shock hits,” said Lars Christensen from Markets & Money Advisory.

The ECB has been soaking up eurozone sovereign bonds for the last three years under its QE programme, masking the true fiscal position of vulnerable states. This "golden age" is coming to end. The loss of the ECB shield leaves Italy nakedly exposed to market discipline at a delicate time: in the grip of populist convulsion following the rout of pro-euro elites.

Bond purchases have fallen from a monthly peak of €80bn (£70bn) to €30bn. This reduction has already had powerful effects. Janus Henderson says its key gauge of money supply growth – real six-month M1 – has dropped to the lowest level since the Great Recession. It points to a marked economic slowdown later this year.

“As September draws nearer, all those kept afloat by QE and easy money policies may come under scrutiny”

The bond-buying scheme will expire at the end of September. While it can in theory by extended – and may be softened by a symbolic taper until December – the bar for further QE is high. “A major shock would be required for the ECB to change its mind,” said Frederik Ducrozet from Pictet.

There are technical reasons for this. The ECB’s balance sheet will reach 44pc of GDP by the autumn, beyond levels thought safe by the US Federal Reserve. Former Fed chief Alan Greenspan says the ECB is already out of its depth in treacherous waters.

There are also political reasons. Germany is on the cusp of overheating. There is mounting anger in the Bundestag – where the anti-euro AfD party chairs the budget committee – over the true motives for emergency policies so late in the business cycle. Real interest rates in Germany are minus 2.5pc, evoking cultural memories of Weimar.

The Governing Council has in any case tied its own hands by signalling that further QE would risk illegal financing of governments. This leaves the ECB  in an invidious position if there are further court challenges.

The unanimous decision on Thursday to drop the "easing bias" is the clearest sign yet that doves cannot keep testing the political patience of the German, Dutch, Slovak, and Nordic central banks.

As September draws nearer, all those kept afloat by QE and easy money policies may come under scrutiny. Barnaby Martin from Bank of America says 9pc of Europe’s companies are walking dead with interest payment costs above their earnings. This has led to a systemic misallocation of capital that will come home to roost. “The liquidity support for zombie companies will fall away. Europe may experience a "flash" jump in default rates,” he said.

The problem for Italy is that QE has flattered its fiscal profile. Fabio Balboni from HSBC says the ECB has mopped up half the gross supply of Italian debt and shaved at least 100 basis points off Rome’s borrowing costs. The underlying picture – adjusted for the cycle – has been worsening. A depreciation allowance of up to 250pc turbo-charged investment and gave the economy a sugar rush, but only by drawing forward fiscal stimulus.

The county must refinance debt equal 17pc of GDP this year, one of the highest ratios in the world.  There are no obvious buyers. Italian banks have been selling, rotating the proceeds into accounts in Germany or Luxembourg. It is slow capital flight. This pushed Italy’s Target2 liabilities in the ECB’s internal payment system to a record €444bn even before the victory of the Five Star Movement and the anti-euro Lega in the elections. It may take a mucher higher yield to entice the money back.

Italy has little margin for error since public debt has risen to 132pc of GDP, near the limits for a country with no sovereign currency. The trend growth rate of the economy after two decades of structural depression and labour hysteresis is too low to whittle away the burden.

Bad loans in the banking have come down to 15.3pc after the clean-up of Unicredit’s liabilities but this is still high. Lending has not recovered.  The state rescue of Monte Paschi has turned into a bottomless pit. Banco Carige and Credito Valtellinese are still in trouble.

Mr Draghi made a heroic effort to talk down the implications of the ECB’s tightening tilt and fool the markets. He did succeed in weakening the euro. But there are limits to his magic. The Bundesbank is back in charge.