China, Russia and Trump

The President of the USA is due to arrive in China today. It has been much heralded as the first great occasion when the newly enhanced President Xi will be able to demonstrate his mastery of the regime and the magnificence of the show that can be put on for Mr Trump.

In the run up to this visit, Trump has been forced to recognise that there is a very longstanding and close alliance between Russia and China. He has admitted that any plan more tightly to contain North Korea depends almost equally on the two powers that have land borders with that 'rogue state'. While China has been the main supplier of essential imports to the Pyongyang regime, Russia has also been a friendly facilitator over many years.

There is little room for doubt that both China and Russia are sorry that North Korea has developed its nuclear capabilities so far that Kim can be bombastic to the USA: and, by implication, a major nuisance to Russia and to China. On the other hand, they have noted both Trump's reciprocal bombast towards Pyongyang and his deeply ambiguous situation in regard to Russia.

As Secretary of State and as a presidential candidate, Hillary Clinton took a high moral stand on Russia's adventurism in the Ukraine, both the Donbass region and Crimea: she was a major influence on the introduction of sanctions that have affected Russia's trade and the general standard of living of the population negatively and [in a few areas] dramatically. Hence, Russia used all the covert means at its disposal [which are vast] to ensure that Trump had the best chance possible in the general election one year ago. It is very doubtful whether the mass of Russian intervention in any way swayed the election result which, like the Brexit vote in the UK, reflected the despair of swathes of US voters at the failure of the economic and social systems to maintain the American Dream in the rustbucket. The sheer originality - which the literati dismiss as the absurdity - of Trump's approach was combined with a deeply instinctive populism to grab people's attention and stimulate the enthusiasm of the 'forgotten people' in pockets right across the USA. It is noteworthy that Bernie Saunders almost hit the same note from a different pitch, in enthusing the metropolitan young: against him Hillary Clinton displayed increasingly platitudinous arrogance, shouting instead of speaking and thus diminishing any impact that her actual sentences might have achieved.

Russia and China have doubtless agreed a common approach to Trump; based on flattery interspersed with spoonfulls of bitter realism. Mr Xi will spend the next couple of days honouring and further educating the US president. President Putin will be in the same room with them in the following days at the pan-Pacific  conference, and it is there, rather than Beijing, that any new understanding on how to deal with North Korea will be agreed.

At the end of the Gorbachev years I twice made the [supposedly] direct flight from Moscow to Beijing, which each time made a heavy - unannounced - landing in Novosibirsk. This was necessary because the old Illyushin aircraft could not carry enough fuel for a non-stop journey. Both times the most conspicuous cohort of passengers were people with massive bags full of empty bags; whose business was to buy up whatever consumer goods were available from the new workshop-factories in China and take them back to Moscow in their many bags. They had a hard time with Russian customs on the way home [doubtless lessened by cash handouts when the KGB turned a blind eye] but their trade was highly lucrative. Russia has never facilitated the sort of entrepreneurial activity that enabled China to build up its balance of payments surplus with the industrial west, and is still largely dependent on China to supply the everyday manufactured goods that middle England takes for granted [and which mostly come into Britain from the emergent economies, not least China]. In exchange for this mass of imports - which are no longer imported by individual chancers as they were in the 'nineties - Russia can pay in oil and other materials; and by allowing Chinese firms to become farming contractors, mostly in the far east where the supply of Russian labour and enterprise are most thinly stretched.

Russia and China are hugely and closely inter-dependent all along the longest international border in the world. This interdependence was slightly set back by the extremities of the Cultural Revolution in China, and then by the economic chaos that followed from the collapse of the USSR. But the long northern border of Russia with China - right to the very eastern point of the Asian mainland - remains, even though other former-soviet republics now border China to the west. The two economies are even more closely symbiotic than that of Canada with the USA, and there will be no room for doubt that the briefings given to President Trump will have emphasised the point. To general surprise, 'The Donald' appears to have been paying more attention to his briefings of late than he did in his early days in office. He is to be watched, closely, over both his days in Beijing and in the ensuing wider conference. Great-power politics could well be reshaped; with North Korea as the carcass to be picked over; rather than the existential threat that it appeared to be in White House demonology just a month ago.

QE For Ten Years: Saving the Banks and Smashing Society

My last blog began with a second reference to the ten years that have elapsed since the collapse of Northern Rock told the public - and the unobservant Econocracy - that there was a crisis already well developed in the world of banking. More than a year before the Northern Rock event hit the British system, the USA had had its own crisis in the collapse of several institutions which the Clinton regime had induced to accept 'sub-prime' mortgages. The term sub-prime was not in common currency in the UK, and the USA was far away, so not much notice was taken of those events even in the London money market.

Within the US financial system, it had slowly become apparent that the sub-prime mortgages had been sold on [in the manner described yesterday] as parts of securities which were just bundles of debts where the borrowers would [in the main] carry on making the payments they were contracted to make: thus the buyer of such a security was effectively buying a cash-flow of future payments. The original lender of the money would retain the duty to collect the payments and pay the interest on the security, and there would be an allowance for the proportion of the borrowers who would default on their payments. So the original price of the security was based on a supposedly objective view of what it would yield to its owner during the term for which it was valid. On that basis, the security could be sold on, for inclusion in larger or more inventive types of security. The sub-prime mortgages were a category where the borrower was very likely to default, and the continuing decline of the old industries in what were quickly becoming known as the 'rustbucket' areas meant that many families lost their main earnings and could not afford the repayments. Defaults on payments of sub-prime mortgages seemed, at first, an American problem: but during 2007 an increasing proportion of securities traders became worried about UK securities that included packages of mortgages issued by banks and building societies whose lending had become [by all historic comparison] reckless.

Among these was Northern Rock, which was borrowing credit in the wholesale market [see last two blogs in this series for details] in order to lend to new customers. The lending was reckless: more than 100% of the asking-price for the house was available to clients who were taken at their word as to how much they earned. This sort of lending [in which the Rock was only the most conspicuously adrift from traditional caution] led to clever traders realising that securities based on Northern Rock loans, and securities containing a 'repackaged' share of Northern Rock, may not perform as promised. So the wholesale market stopped buying Rock securities: and the Rock had no ready money in its tills beyond the usual daily turnover. Hence, as customers heard the rumours and queued with their documentation to demand their own money, the firm failed and [as explained previously] the government instructed to Bank of England to provide the money that the customers were demanding. After the crisis the residue of the Rock was sold off: its trading branches were taken over by Virgin Money and most of them are still trading, and the mortgage debts were sold to firms that managed the run-off so that most of the securities that the Rock had sold were successfully [and profitably] carried forward to their terminal dates.

Behind this happily makeshift resolution of the crisis caused by one smallish [albeit prominent] firm, the financial markets as a whole were beginning to panic about the multi-trillion pound market in securities that had been built up by 'innovative' firms that had been making their own paths to untold wealth by taking the fullest advantage of the market freedom created by the Thatcherites on the urging of the Econocracy in 1986. Within a year of the Northern Rock crisis, there was an emergent crisis throughout the market. Nobody could be sure which securities contained how big a proportion of debt that might become 'sub-prime' if the root provider of the cash flow failed. So the Bank of England was instructed to copy the US Federal Reserve, which had already begun an indefinitely large open-market operation which it called QE: Quantitative Easing. Though the detail is mind-bogglingly complex, the principle is simple. The banks were told to form an orderly queue, and slowly to arrange their portfolios of securities so that they could present government bonds at the Bank of England which would [in essence] 'print money' with which they bought the government securities [and just kept them in their vault, metaphorically]. Thus any bank could get cash by selling government securities to the Bank, and use that cash to fund the orderly winding-down of the 'assets' in the market. Those that were considered 'toxic' were disposed of cheaply, and holders of the rest of the mass of securities could resume trading, albeit cautiously. Nobody realised, when Britain adopted QE in 2008, that the queue would continue shuffling to the Bank asking for cash until now: but that has happened. it has saved the banks and the wholesale securities trade that lies behind the banks; but it has been ruinous to the economy in which human beings depend, and to the society that binds humans into a community. This is the subject for the next blog.