DABERIAM LXXXVII

November 2014

Some time ago my comments were grouped into three global areas – North and South America, Europe and Africa, and Asia.  It seems that these remain the primary global divisions.  The stock market upheavals of the last few months are now history, but the fundamental issues remain unchanged.  However, a new paradigm (and I use the word advisedly) is developing, or, if it is possible, two:-

One is the growing crisis in the ability of the West to create “Leaders”.  The second is the change in global energy supplies.

The leadership issue in advanced economies is most acute in Europe.  The EU is a massive multi-tiered bureaucracy generating conflicting policies that respond to vested interests and little else.  Europe has no leader, and the revolving door of Presidents cannot produce rational direction or control its bureaucracy.  The job of any leader of a government, corporate entity or business, is to weigh the conflicting interests of individuals, departments, etc, and decide where priorities lie, evaluate threats and determine the direction of travel.  As the state takes a greater and greater percentage of a nation’s earnings, it takes on a greater responsibility for balancing the conflicting demands made on it.  As the pot gets bigger, it attracts more groups who wish to dip into it.  Political leaders elected by popular vote are not well equipped to either understand or make the decisions required to run the enormous departments that they are responsible for.

How does a Minister with no business experience and a three to four year time horizon run a Department of State of many hundreds of thousands of people and billion dollar budgets? Or expect to do anything very useful?  In the case of Europe, even the limited capability of an elected politician is not available as the revolving door of the presidency has a negligible time horizon.  One of the more bizarre consequences is to see German politicians hijacked by “Greens”, that are subsidised by EU grants,  into a policy of closing its carbon free nuclear energy capabilities and consequently forcing it to use its oldest and dirtiest coal-fired power stations, which rely on Lignite, the most polluting form of coal, while at the same time acquiescing to taxing consumers and industrial companies, carbon tax etc., consequently endangering its industrial and economic base as it makes its primary industries less and less competitive.

In other areas, the economic policy, as opposed to the industrial policy, of Europe is crippling the financial systems by propping up high levels of debt and failing to allow it to be restructured, written off, at the same time as reducing liquidity in the European markets by forcing the banks to carry bigger reserves, so reducing their ability to provide liquidity for the markets.  This will in due course cause a meltdown in the European Bond Market.  The leadership hole in the middle of Europe and its conflicting policies also bear some responsibility for aggravating Russia as well as contributing to the confusion in the Middle East.

The North American continent is producing paradigm shifts in the world economic order.  The USA’s oil and gas production is making the largest energy consumer self sufficient.  Canadian, and soon Mexican, oil production will rise to the point that North America will be a net exporter of energy in the very near future.   Without any government direction, US industry is taking enormous advantage of this situation and its economy is regenerating at a growing rate.  For example, major German industrial companies are migrating to the USA and Mexico to take advantage of cheap energy!

US wages are beginning to rise and capital expenditure in the US from both domestic and foreign companies is also rising.  This is producing a Goldilocks scenario, a growing domestic economy and increasing government revenues as well as improving the balance of trade.  The US Government drastically restricted its expenditure after the crisis and the US banking system has to a very large extent written off its bad corporate and mortgage debt portfolios.

Politically, there is a high chance that sensible legislation will get enacted now that the Upper and Lower houses are in Republican hands.  While the US cannot on its own revitalise the world’s economy, it is some help and will certainly contribute to stabilising South America, but here the political situation and the incompetence of governments is the major tailwind.

The Asian region is stabilising as China manages its downward ratcheting of economic growth.  China faces many economic problems but it is, as I have often commented before, one of the few countries with a competent and sophisticated leadership. The halving of the Chinese growth rates will for some time have a knock on effect on the commodity producing countries.  The over supply of raw materials, from coal to copper and oil to gas, is pushing prices down, where they are likely to remain for the foreseeable future.  This is fundamentally good news for the majority of the world’s population.

These enormous economic changes leave us with a certainty that predicting the course of events is a lot more difficult and policies that try to maintain the status quo are doomed.  This is particularly relevant in Europe where the lack of leadership in political, economic and industrial policy has become endemic.