I read two weeks of my Economist subscription and this weekend’s US print edition of the Financial Times on my 14 hour flight to Japan. I have only previously flown through Japan (on my home from Singapore) and always wanted to spend time there. Now my goal is to be completed but I didn’t expect the wake up call on my flight out west.
There were several stories that need discussion – they span Anglo-Sino relations (the recent Chinese Premier’s visit to the UK), the persistent UK current account deficit, and the ongoing stagnation of the West in general. Let’s start with the persistent UK current account deficit.
In the US print edition of the Economist (Oct 27-23, 2015) the leader in the Britain section is called, “The Economy – The Other Deficit“. The article asks if the persistent, and in fact worsening, current account deficit with the rest of the world is a bad thing, and if the UK can keep it up (i.e. fund it without any long term negative effects). First one has to understand what comprises a nations current account defecit and it may not all be self-evident:
- The difference between exports and imports of good and services
- The gap between what British investors earn on foreign investments versus what foreign investors earn on British investments
- Transfers on money sent to and from Britain by migrant workers.
In summary it is a measure of how much Britain is borrowing, or lending, from abroad.
Before you can comment on the current situation you have to take account of a little history. Just before the dawn of the twentieth century Britain was a global creditor. It was a dominant force in manufacturing trade; it invested its surplus funds abroad; and it also possessed the worlds reserve currency. In the run up to the Great War its lead in trade was degrading as its main rivals were “catching up”. The Two World Wars change what might have been a gradual change in global economic and monetary policy leadership into quite an abrupt one. In just 30 years Britain’s economic hegemony was gone. But due to its open market and trade perspectives and some far sighted understanding of how an advanced economy might evolve, it was able, even as it lost is manufacturing dominance, to develop a world beating financial services sector.
While manufacturing trade is a shadow of its former self and negative, trade on services and other invisibles (as they are call) has been positive. The fact is, however, the net – the overall difference between what it exports and imports, has been negative for some time. The current account deficit has in fact been negative and growing for some time.
And so to the article in question: can Britain survive such a negative balance? Surely a country cannot exist as a net borrower for ever? The conclusion of the Economist is that it can at least for a while – given the favorable prevailing conditions, least of which is contingent on keeping the pound. Having a sovereign currency means that any persistent imbalance can be traded away with a depreciation (or appreciation) of ones’ currency. even at the risk of a little inflation.
At the same time the management of the UK economy, the fifth largest in the world (GDP, current prices), is very competently organized and so, compared to the euro zone, the dollar zone, and the yen and yuan, its a good bet for medium term investment. As such the conclusion is positive. However, the role of the UK vis a vis the Euro zone is in question and that question will come to the fore in a national poll sometime in 2016 or 2017 when its people will be asked if they want to stay in the EU. I suggest that the UK cannot and must not leave the EU. In fact it is most strategic for the UK to stay in the EU even more so as it cozies up to China. And that leads us to the next story.
China and Britain
- US print edition of the Financial Times, October 24/25 “The pomp and the circumstance“
- US print edition of the Economist, October 24-39, “Britain and China – We can pivot too“.
Both articles discuss the pros and cons of Britain’s pivot to China. Knowing what I know about history, and after reading both articles, I can only say, “go Osborne/Cameron, go!” Britain is at a key point in history for several reasons. And the country’s leaders seem more attuned to the goals of a global trading nation nation banking on an idea of the future, than some of the less visionary press and politicians looking for some free riding or clever sounding spin.
Did you know that from early 1900 Britain was strategically allied with Japan? In the run up to the Washington Naval treaty of 1921, Britain was forced to break its alliance with its erstwhile eastern partner by a greater desire to survive a partnership with America that was replacing Britain as the global economic hegemon. Until that time Britain had been focucsed east in order to protect its Indian, Burmese and Hong Kong assets.
The Naval Conference itself was called when the major nations of the world realized they could no longer afford to support the residual military spend after the Great War and they needed an “out” to save money, but also avoid losing face. Britain was nearly broke so there was little they could do but comply. America had yet to discover the Marshall plan and the real size and plight of Europe’s need for reconstruction and Japan was just finding its feet. This period, 1920-1924 is not unlike the period we find ourselves in now.
The west is losing – see the last story below – and Britain is in a unique position to exploit the change in guard. China as a world power is rising – in 2005 Britain’s GDP was higher than China’s – now China’s is four times that of Britain’s. China’s economic growth has become the largest single component that drives global growth. Yet trade with Britain remains small compared to many other large and developed nations.
Britain alone sits between the old and the new, the east and the west, with trade, political and financial experience and a past that can be leveraged. She can operate as a go-between and a safety valve. It no longer has the navy, or the army, that once heralded gun-boat diplomacy, but it has the experience, the systems, the governance, that can help orchestrate a global currency, a global trading systems and a globe spanning empire. In short, Britain has the economic and political nouse to help glue the two polars together. This is why Britain is nuzzling up to China: Cameron and Osbourne believe that Chine will represent the future for a lot of things globally, and its better to be on the inside, than the outside.
I reject those that suggest the UK is fawning after China; I think Osbourne and Cameron know exactly the game they are playing. It is fraught with huge risk, yes: China’s economy might blow up or there might be a massive human rights disaster at any time. But given the alternative, remaining in the silo of the West when it is effectively asleep at the wheel and not able to rouse itesellf, China is a smart move. And more importantly, China would have to sneeze vary badly if it is not take its likely spot from America as the largest economy (in current prices – in PPP it is already) and in a few years be part of the global reserve currency.
The last article I wanted to highlight for you was in the same weekend edition of the Financial Times It is in the Comment and Analysis section, titles, “The Fraying of an Aging World Order“. This damming piece really just brings home the issue for how the West is stagnating at just the time as the East, and some rather challenging mideast and rogue nations, are strengthening.
The West is not declining as in falling apart – well – not exactly. There is risk in our current political systems as we do seem to have come to a point where our political leaders and systems are stuck in the mud, little able to forge one direction or another. It seems we are in a funk – going through the motions with gentle abandon, sipping our tea and tending to our roses. At the same time other parts of the world are catching, in some places have caught up, with the West. So the decline is not quite absolute; the difference between the haves and the have nots is closer than ever before. And this gap closing is causing strain on the global stage.
This is a sad article as it reminds us that our nations, our peoples, our leaderships, are transient things. Even though I write this now and you read this, with the freedom that comes form our forefathers blood, it does not follow that our sons and daughters, or their children, will read and write such as we. We have to fight for our way of life – and the sooner that our liberal and progressive friends, on the left and the right side of the isle remember this, the better we and the rest of the world will be.