Strategic Global Intelligence Brief for March 5, 2018
Short Items of Interest—U.S. Economy
White House Civil War
There has been tension within the ranks of White House advisors from the start—not all that unusual. The people who are tasked to head up departments and provide policy advice are expected to compete with one another to advance the agenda of the group they head. Trump is now dealing with a breakdown between those who would be termed globalists and those who see themselves as nationalists. In the tariff battle, the nationalists have won against the likes of Gary Cohn, H.R. McMaster and James Mattis. They are deeply concerned that a trade war cripples the U.S. economy and compromises the U.S. national security position. The fear in some quarters is that this may be the last straw for the likes of Cohn, McMaster and Mattis and they will resign sooner than later.
Emerging Challenge for U.S. in Debt Market
It doesn't happen very often, but it happens. The U.S. finds itself in a position where interest rates start to rise and at the same time, the dollar weakens. In most situations, the dollar gains strength when the interest rates rise as investors see better returns. On occasion, the dollar sinks and that creates a real crisis. This situation provokes U.S. investors to seek better returns in other markets. It forces the holders of U.S. assets to make them more appealing by essentially putting them on sale. The U.S. has run up an enormous debt and deficit, but has not yet paid the price as the dollar was strong enough and the interest rates were low. A reversal of that situation makes the debt and deficit burden much worse and forces some very unpopular budget decisions.
The Next Big Shale Shock
About a decade ago, the U.S. oil sector started to change the world order, but it corresponded with a global recession and the impact was somewhat reduced. Now, the U.S. oil shale business is booming again and so is the economy of the world. The U.S. is on the edge of being the world's largest exporter of oil. It is now producing 10 million barrels a day. The U.S. has become an oil exporter as well. That role is only set to expand in the months and years to come. The power of OPEC has dwindled, although it has not vanished, but the U.S. now sets the global price of oil as it did prior to the 1970s.
Short Items of Interest—Global Economy
Assassination in Slovakia
The murder target was a well-read Slovakian journalist who had been doing investigative work exposing the work of the Mafia in the country. His work had already revealed many government interactions with organized crime. The expectation was that more revelations were forthcoming. The reaction in the country has been fierce as many have been growing deeply suspicious of their leaders. It was thought that somehow the country has escaped this scourge of many East European states, but most knew it was taking place. Now the lid seems to have been blown off and the anger is palpable.
Canadian Growth Slows
The expectation was that Canada would grow at about 2% in the fourth quarter, but the numbers did not cooperate. The growth was 1.7%. To make things worse, the third quarter numbers were downgraded from 1.7% growth to 1.5%. That has all but eliminated the gains that were made at the start of the year. Most of the blame for the slowdown has been placed on the consumer as they have suddenly become far less confident and active than was the case. Even a hike in the price of oil has not done much to lift the gloom.
Third Force Emerges in Sierra Leone Elections
This once-violent and war-ravaged country has made a comeback of sorts and is set for an election after the current president stepped down. Its politics have been dominated by parties of the center left, but there is a new player and he hails from the center right. A former member of the military junta and a UN official, he now advocates major change aimed at the young. Unemployment for those under 30 is 70%. They have lost patience with those who have been in charge since the nominal end of the civil war.
China Remains No. 1 Target
Even as the Trump threats are directed at Europe, Mexico, Japan and others, the main target is still China. The U.S. is certainly not the only nation that has objected to Chinese policies. Many have imposed a variety of barriers. China quite deliberately set out to promote its export economy. Over the years, it has used every tactic it can think of. It manipulated the currency lower to make exports cheap, subsidized export-oriented companies, blocked foreign investment and competition. The whole society is based on promoting low-production costs.
Analysis: China has been sending a whole host of diplomats and officials to the U.S. to try to work out deals, but these efforts have yet to yield much. China has indeed ceased its currency manipulation and there have been more openings for U.S. companies, but by no stretch of the imagination has China become an open economy. The U.S. wages battles over access, protection of intellectual property, counterfeiting and others. Those who hope that America has not fully embraced protectionism still hold out the possibility that all of this is negotiation and trying to force more concessions from China. The danger is that China concludes the U.S. needs them more than they need the U.S. For many sectors in the U.S. economy, this is abundantly true. It now becomes a matter of who blinks first. We all have to hope that this doesn't become a fatal version of chicken.
Another 'War' to Worry About?
The attention of the world has been focused on the looming trade war between the U.S. and apparently every other country on the planet, but while this has been going on, there have been some very disturbing claims and assertions coming from Vladimir Putin and Russia. The most recent commentary has been as bellicose as anything that emerged from the Kremlin in the Cold War days. Many suggest that another arms race may be imminent between the U.S. and Russia.
Putin has been hailing the development of the "Avangard"—(RS-26 Rubezh)—an intercontinental missile that carries multiple warheads and is capable of flying at 10 times the speed of sound. It is being touted by Putin as a weapon that is capable of defeating any missile defense system the U.S. is capable of producing.
Analysis: It has been many years since the Russians overtly threatened the U.S. with this kind of capability. Since the collapse of the USSR, the official policy of both nations has been rooted in a slow and methodical elimination of the nuclear threat that loomed over both states. The thought was the old doctrine of MAD (Mutual Assured Destruction) was no longer the guiding principle. If Russia really has developed a missile that defies all U.S. attempts to defend against it, there is no other defense left other than MAD. The U.S. and Russia would be back to Cold War days where each promises to destroy the other if attacked.
This is not the only new weapon to be developed and deployed in recent months. There is a new air launched missile called "The Dagger" that can reach speeds of Mach 10. That is sufficient to defeat anti-missile systems currently deployed by NATO. Then, there are the increased numbers of cruise missiles that can be launched from the sea and ground. The Russian navy has also deployed a long-range nuclear armed torpedo. In short, the Russians have been arming themselves for a variety of purposes. These can still be seen as retaliatory weapons in the event the U.S. or NATO acts in a hostile manner, but they also provide significant first-strike capability.
The most feared scenario at this point is that Russia chooses to use one of these weapons in response to some U.S. action and essentially dares the U.S. or NATO to respond. Putin has been furious with the deployment of anti-missile systems in Europe and elsewhere along the Russian border—a move by the U.S. that was once banned by the ABM treaty, but which the U.S. abandoned in 2002. The Russians have threatened to become more engaged in Syria and elsewhere in the Middle East. They have suggested they would thwart any attempt to act aggressively against North Korea. These weapons would allow Russian attacks on any effort by the U.S. to intervene and then throw the issue back in the laps of the U.S. and NATO. Would they will be willing to escalate against Putin knowing what his new weapons can do?
German Stalemate Ends—Merkel Starts Fourth Term
The suspense has ended and Germany's Chancellor Angela Merkel has her fourth consecutive term. The sighs of relief can be heard all over Europe as Germany continues to be the economic foundation of the European Union. The Social Democrats (SPD) voted strongly in favor of combining once again with the Christian Democrats to form a "grand coalition." The third that did not support this agreement were mostly the younger members of the SPD. The rest decided that there were enough protections and guarantees to ensure their experience will not be as "junior partners."
Analysis: The last iteration of a grand coalition was engineered almost exclusively by Merkel and her Christian Democrats. The power was clearly in the hands of the center right and no key posts were offered to the center left. This time, the SPD gets key positions as far as the economy is concerned and in foreign policy. This also brings an end to the leadership of Martin Schulz. He has been tagged as a leader who could not unite his own party and failed in the general election to win support even as many Germans indicated they had grown weary of Merkel. The new leader is Andrea Nahles who has a reputation as a conciliator.
The threat to this coalition is the same one both of these parties faced in the election. They are losing support to alternative parties from both the left and right. The Christian Democrats worried that another election would only strengthen the far-right AfD, while the Social Democrats worried about defections to the Greens and the Free Democrats. Now, the question is whether these two parties will be able to cobble together solutions to issues like immigration, a deteriorating infrastructure, the status of the EU and the growing isolation of the rural areas.
'Bent on Self Destruction'
It is quite rare for economists of various stripes to agree on much. There are conservative economists and liberal economists and everything in between. They disagree on taxes, social policy, growth and a welter of other issues, but there is generally one thing they do agree on—trade between nations is generally a good thing. Not that it shouldn't be carefully managed and not that every trade deal or opportunity is a good one, but pursuing a policy of deep isolationism and protectionism is an unmitigated disaster. Trump's assertion that "trade wars are good" and that they can be "won" is patently absurd—especially for a global economy like that of the U.S.
Analysis: In the textbooks, there are two rationales provided to justify trade between nations. The first and easiest to grasp is absolute advantage. There are some resources that are rare and possessed by only a few nations. Those that have these resources can trade them for other things they want or need as they have that absolute advantage. Not every nation can cultivate the cocoa bean. Those that can produce it have the edge in the chocolate game. Not every nation has cobalt or lithium or gold or oil and so on. The fact is that absolute advantage is pretty rare as there are always a few places where these products can be obtained.
The far more common rationale for trade is comparative advantage as this allows nations that produce much the same thing to trade with one another anyway. The idea is that a given nation makes or produces what it can most efficiently and trades that for products and services that it doesn't produce as efficiently. This means that a nation gets maximum value for the things it trades and consumers get the best prices all around. Since the days of mercantilism, trade has been viewed as a very good thing and a way for nations to enrich themselves without impoverishing others. The most powerful nations throughout modern history have been trading nations. Those that threw up barriers to trade have been uncompetitive and backward.
The U.S. has faced a dilemma as far as producing steel and aluminum for many years. On the one hand, this was once a major industry in the U.S., employing tens of thousands of people. The U.S. exported steel all over the world and imported relatively little. This all began to change shortly after the Second World War. The ravaged economies of Europe and Asia set about developing their own strong steel sector and governments poured money into the effort. Because these states were building this industry essentially from scratch, they were building state of the art facilities (everything they once had was destroyed by war). The U.S. industry didn't need to move in that direction—at least that was the opinion. Soon enough, the steel sector in the U.S. fell behind technologically. There were union issues and management issues and political interventions that hardly helped steel become competitive. Restrictions were imposed on what could be scrapped and how it was done. That limited the modern mini-mills as they depend on scrap steel. The litany of wrong moves is very long. Today, the steel and (to a lesser extent) aluminum industries are struggling.
Reversing this trend is not a short-term proposition and would require a great many changes to how the industry is dealt with in the U.S., but what is abundantly clear is that imposing tariffs on steel that comes from outside the U.S. is a very bad idea and one that does not fix the U.S. steel sector. The Trump move would be panned as short sighted and destructive on its face, but the fact is, this tactic was tried recently and was every bit the failure it was expected to become. The Bush administration also imposed steel tariffs. The action cost over 200,000 jobs almost instantly. It was an unmitigated failure. The tariffs were lifted, but the damage was done.
As the rest of the world reacts to this decision, there will be the inevitable retaliation. This is what is meant by a trade war. You cut off my export, I will cut off yours. Trump now threatens tariffs on cars from Europe and who knows what other products. This provokes these nations to cut off the U.S. in response. The U.S. relies on exports for over 15% of its GDP—that is now in real danger. The real price will be paid by the consumer who will see the costs of everything they buy go up substantially and quickly. This policy is self-destruction on a massive scale and places those glowing predictions of growth in the U.S. economy in real danger, and fast.
Years ago, I read one of those little snippets of inspiration that come with one's daily planner. Most of these are pretty trite and offer limited insight, but on occasion there is one that sticks. It stated that, "the harder I work, the luckier I get." This little gem has been attributed to Thomas Jefferson (but doesn't appear in any of his writings), Mark Twain (ditto), Samuel Goldwyn (who thought he was quoting Jefferson). In truth, this probably came from Edgar Smertz—some guy who was trying to fill the 365 pages of a calendar. It really doesn't matter who said it, as I believe it.
I do not have much faith in luck or accident or anything similar. We don't have bad luck or good luck. We just exist in a world where things happen—most of them wholly unplanned. The only real control we have is how we choose to react to these things. Even that control is ephemeral as we can't possibly anticipate everything. My bout with cancer is not bad luck, any more than not having cancer for the previous 64 years was good luck. It just happens. I know that I am experiencing much less trauma than many of the others I see in the waiting room and far more than many of those I see throughout the rest of the day.
My reaction is all I have even a modicum of control over. The first three weeks of treatment were smooth and uneventful, but now that I am in the fourth week, the situation is changing. I can no longer eat much due to the pain in my throat. I knew this was coming, but it still angers and frustrates me. I am far weaker than I was. I knew that was coming as well. Now is the real test. I am halfway through. Soon readers will be learning of my airline and hotel adventures again, but for now, I just have to cope and dream of the day I can eat solid food again!