Strategic Global Intelligence Brief for August 20, 2018

Short Items of Interest—U.S. Economy

Are We Saving More?

According to the latest revised data, we are indeed saving more—a lot more. It was held that the average U.S. person had a savings rate of about 3.2%, but the revised numbers have this rate at about 7.2%, nearly twice. The revision comes after looking again at expenditures and checking some assumptions that had been in place since before the last recession. In particular, there was an examination of the wealth effect, which assumes that people spend more as they feel wealthier. There has not been a huge difference in what people take in as there have been few wage hikes, but people have become a lot more frugal about what they spend their money on. This has been noted by those who have been watching the slump in retail sales. The good news is that people are in a better position to withstand the ravages of another downturn.

Do Big Companies Equal Low Wages?

It has been argued by some that the sheer size and concentrated power of the larger business operations is enough to force down wage and salaries and that these companies have far too much pricing control. This topic is going to be front and center at the annual meeting of the world's central bankers in Jackson Hole, Wyoming. Of course, the attendees will also discuss their interpretations of the global economy and whether this will be cause for them to raise or lower rates. Beyond that, there will be controversial conversation over whether the largest companies are using their power to depress wages and/or drive up prices for the consumer. The next step is deciding what, if anything, can be done about it.

Are Quarterly Statements the Enemy?

Recently, President Donald Trump added his voice to those who have been criticizing the way the stock market gauges success among publicly-traded companies. It has long been asserted that requiring quarterly gains is encouraging companies to pursue short-term goals over longer-term plans. That often means cost cutting, even though that compromises future expansion. Those who criticize this approach think that twice a year, or maybe even annual reports, would let companies focus on longer-term growth. Those who defend the quarterly report say that it allows investors to correct mistakes fast enough to save a company from real distress.

Short Items of Interest—Global Economy

Pakistan to Address Debt

It is not clear how long this determination will last as Pakistani Prime Minister Imran Khan is not the first Pakistani leader to declare the size of the national debt a major priority. As he takes office, he has stated there will be a new austerity plan put in place and the goal of the country will be a budget that gets it back in the good graces of the world's financial community. This has always been the kind of thing that creditors and global aid groups like to hear, but the reality remains the same. Leaders in Pakistan preside over a deeply fractured society and often the only way to keep a semblance of peace and order is to buy off the discontent.

No Moves Toward Denuclearization Yet

It is still hard to figure out what the angle in Pyongyang might be. The U.S. has not lost its enthusiasm for a deal, but neither is the U.S. in a hurry to take away the sanctions. The North Koreans have not done much of anything to address the core issue, but they have returned the remains of Americans killed in the Korean War and there have been many reunions between family members separated at the border years ago. On the one hand, the time seems right to pursue the deals the U.S. and North Korea struck as far as food and other supplies.

Turkey Moves Closer to EU

Not that Turkey and the Europeans are quite ready to bury the hatchet, but the rift that developed between President Trump and Turkish President Recep Tayyip Erdoğan has provided an opening and the Europeans seem very keen to capitalize on it. It gives Europe a stronger position in the Middle East as well as in parts of the Balkans.

Trade War Over?

If there is one thing that we have all learned about the current White House it is that nothing is set in stone. Everything is a constant negotiation and positions are very fluid. Not that every politician is not similarly inclined, as they all have to answer to constituent demands that shift constantly, but President Trump has taken this variability to new extremes. This is not good for those who crave consistency, but it also means that no policy is ever really dead and no direction ever really established. This characteristic has been most evident when the U.S. is dealing with other nations. It has been the stated policy of the administration. President Trump has repeatedly asserted that he wants to keep these nations guessing and off balance. This has been the way he has conducted business for decades and it should be no surprise that this remains his preferred strategy.

In just the last few days, there has been a complete change in the strategy employed against China and it would be fair to say that this latest twist and turn took many by surprise. After weeks and weeks of positioning the Chinese as the No. 1 enemy of the U.S. and the single biggest threat to the economy, there is supposedly a new plan being developed that will essentially end the nascent trade war that has been evolving. Details are still sketchy and there is ample opportunity for another reversal of position, but for now, it seems there is a ceasefire in the offing.

Analysis: So far, this is typical diplomatic maneuvering—talks about more talks. The significant part of this new declaration is that it has a date attached, which could serve as a deadline to get an agreement in place that both sides can agree on. The goal is to have this plan worked out by the time President Trump meets with the Chinese leader Xi Jinping in November. The two nations have committed their governments to engage in talks and planning right away and it appears that no subject will be considered off limits. Thus far, there is only speculation as to what the two sides will spend their energy on. Speculation has centered on three areas that have been at the top of the list of concerns for the U.S. in recent years.

The first and, perhaps, most important is access to the Chinese market. It has been an issue for a long time as China has an elaborate system of barriers that make selling into China difficult. There are tariffs and more are being imposed every day due to the trade atmosphere, but it goes far beyond these taxes. Regulations limit what the U.S. can import and then there are the subsidies that are given to domestic producers. The Chinese system of distribution is complex and essentially closed. U.S. companies struggle to get their goods and services in front of the Chinese consumer. This is, however, an area where some chance of a breakthrough could develop. China has started to pay far more attention to the needs and desires of the consumer and they are demanding more access to the imports that come from the U.S., Europe and Japan.

The second issue is protection of U.S. intellectual property. China has been notorious for copying, replicating and essentially stealing U.S. technology and counterfeiting U.S. brands. The issue has been enough of a problem that many U.S. companies have avoided selling into China and have eschewed any sort of cooperative arrangement with Chinese companies. This is another reason that U.S. companies are selling as much into China as would seem appropriate. The U.S. has demanded that more attention be paid to these protection efforts, but Chinese authorities have been very reluctant to pursue these cases. In order for the U.S. to accept further Chinese pledges on the subject, there will need to be concrete steps taken.

The third issue is currency manipulation, which can be especially controversial. The basic idea is that a country takes steps to adjust the value of its currency to promote exports. If the national currency is weak, it is easier to sell overseas and harder for one's consumers to buy over nation's imports. The easiest way to alter the value of a national currency is to alter the interest rate as set by the central bank. The lower the interest rate, the weaker the currency, as investors will have less desire to hold that currency. There are other mechanisms that can be used in tandem with these interest rate adjustments, such as pegging one's currency to another or to a basket of currencies so that the exchange value is managed. The problem is that countries adjust their interest rates for many other reasons. The U.S. had been lowering the Federal Funds Rate for several years as it sought to emerge from the recession and every other nation will do the same. It is a fine line between manipulating rates to boost the performance of a sluggish economy and hiking them to boost exports.

No Longer the Mobile Society

One of the less obvious advantages the U.S. system has had for years has been the ease with which people can relocate and their willingness to do so. The old pattern was repeated often. If one lost their job or simply wanted to see what else was out there, it was a pretty simple process of packing up one's stuff and finding a new home. The same language was spoken in all 50 states, the laws were the same, even the malls and stores were the same. Somewhere along the way, this changed for a variety of reasons.

Analysis: There are many factors that make it harder to move than before. It may be the need to care for one's elders or it may be that moving means losing custody of a child. It may be that a spouse has a good job and can't easily replace it. It may be that selling one's house is next to impossible or that prices are too high in the places where jobs are plentiful. For these and other reasons, the average person now finds it very hard to relocate for work and must try to find employment in a narrow range, which can be challenging if that whole city or region is experiencing economic stress.

Sweden Faces New Issues

The Swedish model has been held up as one of the most humane and sociologically conscious in the world. It is routinely listed as one of the happiest states in the world—at least as measured by what Swedes value the most. It is described as a democratic socialist state and by some as welfare-state capitalism. Social services are vast and complete and taxes are high to pay for all them. In past elections, the contest between competing parties has been almost exclusively over economic issues, but the differences between the parties has been minor. There were only some tweaks suggested as far as the social policies were concerned and some reduction in taxes, but not to the point that these programs would be drastically changed. This year's election is quite different. The issue at the top of voter's mind is crime and, by extension, the immigration policies of the country over the last few decades.

Analysis: As compared to the majority of American cities, there is no crime in Sweden. There are no cities that have anything close to the murder rate of Chicago or any other major U.S. community. There is strict gun control and there are very few crimes committed with a gun. However, that number has been rising every year as it seems that those wanting a gun can find ways to obtain one. The country has changed dramatically, according to the police. They report that there is considerable gang activity and that was not the case even a few years ago. Recently, there were waves of violence that struck most of the major cities and involved everything from shootings to throwing hand grenades and Molotov cocktails. Hundreds of cars were torched, along with homes, stores and government buildings. The riots involved hundreds of people and took days to disperse.

The reasons for the outbreak of violence are a matter of deep controversy and there have been no shortage of theories—most of which reveal more about the bias of the theorist than anything else. At the top of the list as far as the political campaign is the immigration policy pursued by the country for decades. The approach has been relatively open and Sweden has traditionally welcomed refugees and migrants from all over the world. In recent years, the numbers have swelled to a point that Swedish tolerance has been tested. The majority of the violence has taken place in neighborhoods with large immigrant populations. Those who support the far-right Swedish Democrats assert this is due to the violent nature of these immigrant cultures, while others point out that Sweden has not done much to assimilate or welcome the new arrivals. They can't find jobs and they find their cultural norms clash with those of the Swedes.

This year's campaign has hinged on the issue of immigration. The party most likely to win the majority of the votes is the center-left Social Democrats and are currently in power with Stefan Lofven as prime minister. The Moderate Party, led by Ulf Kristersson, has been running ahead in the polls. It is highly unlikely that either party will win enough seats in parliament to rule alone, so they will need to form a coalition. The party that will have considerable influence on this coalition will the very nationalistic and anti-immigrant Swedish Democrats who are a close third, with almost a quarter of voters favoring them. Neither the center-left or center-right wish to ally with them, so that may force some kind of "grand coalition" between the left and right. Either way, the immigration issue will loom very large.

China's Asian Critics

It would seem that China's enemies have all been among the western states of Europe and the U.S., but that would be a misnomer. Some of the fiercest critics of the Chinese approach to economics and political strategy have been other Asian states. The latest to blast the Chinese has been Malaysia's Mahathir Mohamad. The venerable leader is still a power in the region in his 90s after a political comeback and he has been referring to the Chinese as the "new colonialists." They have not dealt with Malaysia fairly when it comes to trade and he argues they have been exploitative and far worse than any of the western trading partners.

Analysis: The rebuke from Malaysia is not unusual as China is a very dominant player in the region. This evokes a dependency and hostility among these nations. Historically, the Vietnamese have been at odds with China and that has only intensified as they have become economic rivals. The governments in Thailand have cooperated at times but suspect that China backs those that opposed the government. Japan and South Korea are rivals going back centuries and the wounds of World War II are still very fresh as are those that stem from the Korean War. The Philippines had been cozy for a time as the mercurial president of that country, Rodrigo Duterte, sought to distance himself from the U.S. But, Duterte has learned that China maintains its national interest above all. The Taiwanese are obviously suspicious and with reason, given the number of times that China has threatened them.

Historical Interpretations

I have always been fascinated with history and have gone through many phases as far as my reading goes—war histories, economic history, social and so on. Every period interests me. I am well aware of the limitations placed on the historian, as there is nobody to interview in many cases. Even when there is, there is no way to know precisely what can and can't be believed. I know that history is written by the victors and bias is unavoidable. Still, there is a lot to learn when trying to keep an open mind. I also enjoy historical films, despite knowing all the liberties taken. As with most history, the reader or watcher is at the mercy of the storyteller and can only remember that interpretations are just that.

Over the weekend, I watched the three-hour version of Alexander the Great by Oliver Stone. I remember that it was highly controversial at the time it was made in 2004, as it implied that Alexander was bisexual. Today, this is seen as anything but astonishing because historians have written extensively about the ways of the Greek, Roman, Persian and other elites. It was not seen as the least unusual and the fact this is dealt with openly now says more about the self-censorship that often plagues history. The interpretations of the past are rooted in the norms of the present.

There remain many deep mysteries around Alexander, most notably his motivation for the conquests that occupied a decade and a half and spread his rule wider than anyone thought possible. Stone is a polemicist and structures this to make Alexander's quest a noble one, emphasizing the ways Alexander would be considered a good and fair king. Other historians do not see it this way and identify Alexander as a man who simply loved war. That is the thing about history: We may agree on the basic facts, but the interpretation of those facts is up to us.