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Sunday, 17 December 2017

Mutually assured destruction?

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I wrote on Friday morning that all things financial were in a grid-lock and hence I took myself off early, only to pop in to see a friend for tea on my way home. He retired at a sensible age from a senior position in British industry and now chairs a small company, sits on a few boards, grows vegetables and ascribes to the truism that life is too short to drink bad wine, albeit none of these necessarily in that order of priority. As we would, over tea, we chatted about the Eurozone, the US debt ceiling crisis and this and that and he suddenly brought a concept into the conversation which was the mantra of the cold war namely “mutually assured destruction”.

We arrive in the office this morning to the news that something of a compromise has been reached between the warring parties in Washington and an increase in the debt ceiling will go to both houses of Congress today. As it is worded, both sides seem to have lost. The tax increases called for by the liberal wing of the Democrats are absent and the expenditure cuts called for by the right are also well below what they had wanted; it is precisely what it says on the tin – a compromise solution. That is all well and good but faced with what my chum refers to as mutually assured destruction, they didn’t have much of a choice.

The fact is, however, that the US has moved no closer to resolving its chronic overspending habit than Michael Schumacher has to winning a Grand Prix. A root and branch review of public expenditure is now due in the United States in the same way that it has been done in the United Kingdom and – pardon the old comparative chestnut – even in Greece. It looks as though the UK might be hanging on to its triple A rating even after the US has lost its one – who would have put money on that as recently as twelve months ago? The structure of the political system and culture which American history has created makes comprehensive politics even more difficult in Washington than it is London, Paris or Berlin and this is made more difficult by the presence of a faction which is resistant to acknowledging that, although America might not necessarily be a super-power in decline, it is certainly a super-power in a changing world.

In the same way as winning World War I marked the beginning of the end of the hegemony of the British Empire, so winning the Cold War against the Soviet Union looks to be doing the same for Uncle Sam. It took us nearly fifty years to adapt to sitting on the low chair at high table. I am not saying that America is past it, over the hill and in terminal decline but it does have to work out what its role in the new world order is to be and it must at some point begin to cut its suit to match its cloth. A very, very large debate looms in Washington but as yet there is nobody there prepared to engage. We have taken a very tentative first step in what might prove to be a very long journey where we neither know the direction, the route nor the final destination - and as I was once told “If you don’t know where you’re going, you don’t know when you’re lost”.

Dollar/Swiss panicked its way through 80 cents on Friday – the Greenback has lost over 25% against Swissy in just twelve months – and the response of this rate will be key in assessing the impact of the “resolution” – you can’t use the Euro because it still has far too many issues of its own. So far the Dollar has rallied just three quarters of a point from its 78.40 cent low and the Swiss who are today celebrating the 720th anniversary of their particular independence won’t even be in to watch it happen. They would probably be enthusiastic sellers of their Midasian currency. America might have pulled back from the brink but it is still in intensive care and Congress might have to learn speedily what the Eurogroup has already had to, namely that one grandly trumpeted resolution no longer makes everything else suddenly go away. The markets are watching you with considerable scepticism.

Meanwhile, the papers are full of the news that HSBC is trumping both CS and UBS with a radical shake-up and with 10,000 redundancies – some reckon that this is just an interim retrenchment and that the final number could be as high as 30,000. The bank has had a cracking quarter and some might be perplexed by Stuart Gulliver’s aggressive stance. This is why I hold HSBC shares – they don’t live on past glories and wait until their business is in decline before they take strategic business decisions. Banking is looking ever more like a busted flush and the sooner bankers (most especially of the investment variety) get the message that they are no longer the Masters of the Universe, the better. HSBC was first of the big guys out of the blocks in taking a substantial hit on its consumer finance business in the US at the beginning of the credit crisis. The others eventually followed, some still kicking and screaming. Has HSBC done it again?                              

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