Posted by on May 27, 2015

Over the last week or so, we have seen why I hope the Republicans do not nominate Jeb Bush as the party’s presidential candidate.  Not because he is a bad guy, not because he has bad policies, and not because he would be a bad president – although the jury is still out on all of these.  But because he will be continuously forced either to repudiate his brother’s record or run on it.  As he has just demonstrated, the first will be difficult for him psychologically and, as a perceived act of family betrayal, politically.  The second is not something I would wish on anyone.  So, faced with this unsavoury choice, Jeb will attempt to waffle his way through, something that he has tried for the last few days on the question of Iraq.  Given Jeb’s modest rhetorical gifts, the last thing he and the Republicans need is this additional burden.

The Republicans need to exorcise the ghost of Dubya, not present the electorate with a constant reminder of it.

Greek End Game

I know that you have all heard it before, but the Greek end game truly appears to be here.

Even after all the slight of hand – including allowing the Greeks to pay the last instalment on their IMF debt largely with funds created by the IMF – the Greeks are running out of money.  The latest projections show them hitting the fiscal wall in the early part of June, when further payments to the IMF are due.  They cannot make these payments unless the last slug of money from their bailout is released.  This won’t happen unless they reach agreement with their creditors, including over the thorny issues of pension and labour reforms and the target for their “primary”[1] surplus.   Greek Prime Minister Tsipras has said that these are “red lines” for his government.

Even if they make a deal now, the Greeks will only avoid hitting the wall through a European Central Bank (ECB) subterfuge.  The deal will require parliamentary approval by certain of the EU countries.  This will take time that the Greeks don’t have.  So, while the EU is going through the charade of democracy, the ECB will lend money to the Greek banks to buy newly issued Greek government bonds, giving the government the lifeline it needs.  Of course, if the parliaments ultimately reject the deal, it won’t really matter; the EU taxpayers will already be pregnant through the ECB.  What would you expect from an EU run by Jean-Claude (“When it gets serious, you have to lie”) Juncker?

But I put the odds of striking a deal at a bit less than 50%.  The Greek strategy was clear: stonewall at the working party level and then make an end run with a direct appeal to Prime Minister Merkel of Germany and President Hollande of France.  Tsipras tried this at the recent EU meeting at Riga, Latvia, where he was rebuffed yet again; they gave him until the end of May to agree a deal.  The Greeks returned home and claimed that Greece has done its part – meeting the EU and IMF three-quarters of the way – and now it was up to the creditors to bridge the remaining gap.  Meanwhile, German Finance Minister Schaeuble, who clearly relishes the role of nemesis, thinks that the Greeks have welched on earlier commitments and stated that “(t)he problems are rooted in Greece.  And now Greece does have to fulfil its commitments.”

I have participated in many negotiations in my business career.  These do not strike me as the statements of two sides trying to reach a deal.  These appear to be two sides positioning themselves for a blame game after the talks break down.  We will know soon.

German Wages

Crèches closed.  Mail not delivered.  Trains not running on time – in fact, not running at all.   Flights cancelled for the lack of pilots.  After years of docility, the Economist reports that German workers are acting up.  And this is good news.

Labour market reforms back in 2004 and 2005, combined with wage restraint and the benefit of one of the strongest brands in the world (“Made in Germany”), has made the German economy hyper competitive.  Combine this with a traditional aversion to debt – the German word for which (“Schulden”)  has the same root as “guilt” or “sin,” with none of the fun bits – and Germany is running the largest current account surplus in the world, much to the chagrin of many of its trading partners.  They will be happy to hear that German workers are now demanding higher wages and getting them: up 2.7% last year in an environment of basically zero inflation.  Projections are for increases of 3% or above over the next two years.

This is good for Germany and good for the rest of Europe.  With the slowing in places like China, Brazil and Russia, Germany can no longer count on emerging market industries and nouveaux riches to buy up the country’s production goods and high-end consumer products.  A shift to domestic demand, fuelled by higher wages, would be welcome.  This could also give a boost to some of the other European economies, which could use a less competitive Germany.

Patriot Act

As a libertarian, I should be dead set against the “metadata” collections undertaken by the National Security Agency (NSA) under Section 215 of the Patriot Act.  And I guess I am, although I have a hard time getting as worked up over privacy issues as I do over other acts of government intrusion.   But I do find it interesting that no one, at least to my knowledge, has linked this issue to the IRS’ scandalous targeting of conservative groups.  After all, the argument for continuing Section 215 is that the NSA would never misuse the data it is gathering, a claim that is being made shortly after another part of the government did precisely that.

As you know, the IRS originally claimed that 6,500 emails relating to the scandal were lost in a system failure, with no back up, but now these appear to have been miraculously found.  Maybe the NSA had them all along?

The Dragon and the Bear

I am no geopolitical genius, but I can look at a map.  And when I do this, what do I see?  I see Russia sprawling across more than one-eighth of the inhabited land mass of the world, with a shrinking population of 143 million, a faltering and incredibly corrupt economy, and major quantities of every natural resource.  And right next to Russia, and sharing the world’s sixth longest border, I see China, with a population of 1.35 billion, a booming economy (although for how much longer, nobody knows), and an insatiable appetite for every natural resource.  Not that long ago, the countries had an undeclared war over this border, when they were allegedly brothers in the fight against world capitalism and the Chinese were almost exclusively peasants (albeit, thanks to Russia, nuclear armed ones).

Whenever I ponder these facts, I am even more mystified by President Putin’s behaviour.  Sure, generals always fight the last war, but Putin is supposed to be good at this geopolitical stuff.  It strikes me that he is allowing his obsession with America to blind him to a much more ominous threat at his front door.  It is with interest, therefore, that I read two recent articles (one entitled “An uneasy friendship” in the Economist and the other  entitled “Xi and Putin: Camaraderie Of Mutual Convenience” in The Wall Street Journal) each making the point that the obviously subordinate role of Russia in the relationship with China could become a point of friction.  It is very early days, but this is something worth watching. 

Marco Rubio Drinks the Kool Aid

Marco Rubio, Senator from Florida and Republican presidential hopeful, was recently asked about the Iraq war.  Sadly, he responded that the “world is a better place because Saddam Hussein is not there.”  I say sadly because, first, he is probably wrong and, second, he is certainly beside the point.  He is running for the presidency of the United States.  Not the presidency of the world.  He needs to change his perspective.

Matt Levine

Most mainstream business commentators have a stronger knowledge of grammar than finance.    That’s why it is always a pleasure to find someone, like Michael Lewis, who actually knows something about the subject on which he is paid to write.  Another member of this very select group is Matt Levine, who writes for Bloomberg View.  I recommend all of his stuff, including this recent brilliant piece on a particularly convoluted derivative structure employed by Deutsche Bank and the clearly bogus accounting treatment they applied to it.  The way the bank sailed through the financial crisis was always very suspect.  But if this transaction is representative, then there is no real mystery.  They lied.  Simple.

Roger Barris, London


I Wish I Had Said That…

Mrs Warren’s message boils down to: Americans are right to be furious, Washington is run by special interests, government is broken and the economic pie is shrinking – and the solution lies in more Washington, and trusting government to distribute pie more fairly.  How would she resolve that paradox?,” the Lexington column in the Economist, commenting on the basic fallacy of Senator Elizabeth Warren’s world view.  Liberal reformers have tried to change the way government works since time immemorial.  I guess the difference this time is that she really, really means it.


[1] The “primary” surplus is the balance of the Greek government’s accounts before consideration of interest and principal payments on its debts.  The primary surplus has to be positive to start making a dent on the government debt.  The argument is over how positive it has to be.  Currently, it is negative, which implies further budget cuts or tax increases are necessary.

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