Trade Agreements – the New Protectionism

Trade Agreements – the New Protectionism

2 May 2016

THE “UNREPEATABLE” MISTAKES OF THE 1930s According to the IMF (and pretty much everyone else, I believe) the Great Depression of the 1930s was made worse by protectionism. After the financial crisis that blew up in 2008, leaders of the Group of 20 (G-20) economies pledged to “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports.” They all agreed that a return to protectionism would be a disaster. The World Trade Organisation (WTO) is not a promotor of liberal free-for-all trade. It is an organisation of 162 countries based in Geneva (where else?) that employs 640 Secretariat staff. It particularly promotes the interests of developing nations and negotiates and monitors international trading rules. As we shall see in a moment, developed nations are showing an increasing wish to do their own thing. In its own words: “WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions.” Agreements are negotiated and then ratified by member countries one by one. Many of them ratify with qualifications that they individually require. The phrase “bureaucratic nightmare” comes to mind. The Doha development agenda has been under discussion since 2001. It is easy to suspect that these negotiations will occupy entire (probably highly agreeable) working lives. Consider this sinister undertaking: “Virtually every item of the negotiation is part of a whole and indivisible package and cannot be agreed separately. This is known as the “single undertaking”: “Nothing is agreed until everything is agreed”.” Nothing is agreed until everything is agreed. Wow. IS INTERNATIONAL TRADE REALLY CONDUCTED BETWEEN NATION STATES? The WTO was founded in 1995 on the premise that international trade is an activity that takes place between nations. As far as this applies to undemocratic nations it is at least partly true. North Korea, for example, exports a fair amount to China. I’m guessing that the nations involved monitor this pretty closely. Yet much of what passes for political debate seems to assume that we all function in this way. Don’t take my word for it. Listen to Donald J Trump on...

OSTRICH POST II – DADT

OSTRICH POST II – DADT

25 Jan 2016

Don’t Ask, Don’t Tell (DADT) was a (now repealed) US official policy that insisted that gays serving in the military must take part in a cover-up. On the grounds that they kept their sexual preferences a secret they were excused from being openly bullied, discriminated against and dismissed. Something that everyone knew to be untrue (the idea that the US military was staffed entirely by patriotic heterosexuals) was sanctioned in a big game of “let’s pretend”. If everyone acted as if it were true it would be just as if it were actually true. But DADT turned out to be too convenient a device to be confined to such a narrow issue. It was perfect for the treatment of subprime mortgages! It was clear to many insiders that people who had no realistic chance of repaying were being granted loans to buy properties that had to rise in value to bail out the borrower, that these debts were being insured on terms that didn’t come close to reflecting their risk and that the loans were being repackaged and sold on, backed by credit agency ratings that were uninformed and irresponsible at best. Yet even when the crisis was unfolding at speed, banks and other financial institutions were saying publicly that everything with which they had been stuffed was AAA quality. Check out The Big Short for a great explanation of the story. The trouble with DADT is that it is like a Ponzi scheme. Once you have started to pretend, you have to keep going. The morons working at the soon-to-be rescued banks did not mean to buy toxic junk. But once the mistake was made the easier option was to keep playing along. Like a trader who hides loss-making positions in the bottom drawer (or a secret computer file), the final thing you can try to buy is time. You literally decide to wait for a miracle.    Something like this is going on with Quantitative Easing (QE = DADT). As I have pointed out elsewhere, the truth that QE was a device for inflating asset prices in order to save the banks from marking them to market was spun into an officially...

Monday 19th October

Monday 19th October

14 Oct 2015

Next Monday is an evocative date for those of us who worked in the City of London in 1987. The nineteenth of October became known as Black Monday (not the first or the last) as global stock markets went into meltdown. The Dow Jones Industrial Average fell by 22.6% in that single day. At one point during the trading day it was reported that the Chairman of the SEC (the U.S. Securities and Exchange Commission) had mentioned the possibility of suspending trading. Naturally this increased the level of panic. It felt all the more dramatic because the previous Friday, the 16th, had seen the Great Storm that felled trees all over Southern England. My wife and I drove into work that morning through streets that had been laid to waste a few hours before. The City was spookily quiet and the stock market felt abandoned but was also very weak. It turned out to be an eerie harbinger of the full scale panic that was to follow. If you search for explanations of Black Monday you will generally read that the stock market was overheated, partly inflamed by excited takeover activity. In September 1987, the ad agency Saatchi & Saatchi made an approach to buy Midland Bank. Nothing better exemplified the mood of the time – that anything was possible for the new money of the eighties. The Conservatives, led by Margaret Thatcher and Chancellor Nigel Lawson, had won the General Election on 11th June, seemingly confirming that the corpse of socialism had been buried and that capitalism could bring prosperity to anyone with the ambition to pursue it. It is certainly true that the developed world stock markets had risen substantially in 1987. By mid-July the FTSE 100 was up by 45%.  In that sense, prices were high though of course that is not the same as saying that they were expensive. All value is relative, as we know. As stock markets rose, bonds fell. This is a classic danger sign. Ten year gilt yields rose from 8.8% in May to 10.1% in September. High street savings accounts paid 9%. From today’s perspective, it seems incredible that equities were so popular. In relative...