2007 - 2021

Trump’s Inflation Timebomb

THE week has been dominated by trade wars, Italian insolvency, oil prices and Jeremy Corbyn. Start with trade. The mad Donald Trump ratcheted up his economic war on the rest of the planet by slapping a 10 per cent levy on $200bn worth of Chinese goods entering the US. This is set to rise to 25 per cent by the end of the year. That’s on top of the $50bn worth of tariffs on Chinese goods that went into effect in August.

If you impose import tariffs a la Trump, you increase the prices paid by your own consumers. This is inflationary. Typically, central banks respond to inflation by raising interest rates, on the assumption this makes it difficult for companies and consumers to add to the price spiral by borrowing and spending more. But higher interest rates in the US boosts the value of the dollar, because foreigners earn more keeping their cash in American banks. Result: a rising dollar hurts US exports, which is the opposite of what Trump wants. Paradoxically, the Chinese bilateral trade surplus with the US is hitting record highs, which may explain why Beijing has told Trump to take a running jump. Expect the global trade war to intensify.

Terra Pericolosa

Britain’s preoccupation with Brexit has diverted attention from the growing economic crisis in Italy. Over the summer, the rocky Italian economy – which never recovered from the 2008 Bank Crash – has teetered on the verge of recession. The new super-populist Lega-Five Star government has responded by proposing to slash taxes and boost public spending. To do so it will have to flout EU fiscal rules and borrow from Italy’s almost bankrupt banks. Result: foreign lenders are deserting Italy in droves, forcing a steep increase in borrowing costs this week and further pushing the rotten Italian banking system to the brink of insolvency.

An Italian economic crash – or a possible political showdown with Brussels, which is just as likely – will have serious consequences. Coupled with the new-found strength of the dollar, an Italian fiscal meltdown will spread panic through the Eurozone economy. It could even lead populist Italy to threaten to walk out of the EU. Watch this space.

Oil on Troubled Waters?

North Sea oil prices hit a four-year high this week. Oil futures markets – which gamble on prices months and years ahead – are all pointing to a further escalation. Petroleum supplies are tight globally because of Trump’s fresh sanctions on Iran – not to mention John Bolton, Trump’s national insecurity advisor, threatening “hell” against Tehran.

Of course, higher oil prices will only add to inflation – which jumped in the UK last week (to the UK government’s surprise). Trump’s solution has been to denounce Saudi Arabia and Opec for not pumping more petroleum, to offset the expected loss of Iranian supplies. But Saudi and Russia are currently happy to rake the fiscal benefit of firmer prices and say they won’t pump extra output (to bring prices down) any time soon.

Where will oil prices go eventually? Nobody can say for sure as everything depends on politics. But big petroleum traders like Mercuria and Trafigura are warning oil could spike to around $100 per barrel.

Hey Jeremy Corbyn

The UK Labour Party has rediscovered socialism – or at least a new version of public ownership. Jeremy Corbyn and Shadow Chancellor sidekick John McDonnell are promising to introduce a reform by which (eventually) 10 per cent of shares in all British companies with more than 250 employees would be owned by their workers. The annual share dividends would be split between the workers (capped at £500 per employee) and the Treasury. On this year’s profit figures, according to the Financial Times, that would yield £8.4bn in total, with £5.9bn going to John McDonnell.

I think there’s a great deal to be said for democratising company ownership and giving workers a stake in their own business. Indeed, this is a direction the SNP should go in. But the precise terms of the new Labour plan are far from perfect. For starters, simply flushing the bulk of the social dividend into the Treasury’s coffers is highly questionable. Why not create a stand-alone Sovereign Wealth Fund – or series of regional funds – to control the shares, in a model similar to Norway’s Oil Fund? These could have elected supervisory boards and spend income either on acquiring more shares, or spend income on socially-defined purposes; e.g. pensions. Eventually, democratic ownership of the whole economy would ensue.

Budget Goodies

Word to the wise: Chancellor Hammond has moved this year’s UK Budget to a Monday – October 29 to be precise. This way Hammond gets in ahead of the special European Council, set for November 17-18, that will agree (or not) the final Brexit deal with the UK. It also lets Hammond offer some pre-election goodies just in case Mrs May finds herself going to the country.

Comments (6)

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  1. Dougie Strang says:

    Thanks George. Really helpful summary, clearly articulated.

  2. Dougie Blackwood says:

    Tin Helmet Time.

    We have been on the brink of meltdown now for a good while. I will be amazed if Brexit does not all end in a walkout, leaving us at the mercy of all other economies to cherry pick any goodies we have left. Our mad Brexiteers will be delighted, along with the Mail, the Express and all the rest. In the unlikely event that May is ejected and we have an election just before we go down the plughole Corbyn will offer the kingdom of heaven to Scotland in a vain hope of getting his cannon fodder back. The more likely option is for May to be kept on as a figurehead that will take the blame for mismanagement while the puppet masters feather their own nests.

    We will need the starters pistol for IndyRef2 very soon.

    1. Jamsie says:

      The numbers do not stack up.
      She will not call a referendum anytime soon because of this.
      What part of this do you not understand?
      And if Italy needs to leave the EU what do you think will happen then?

  3. Willie says:

    I’m not so sure the Mad Donald is as mad as he is cast.

    Trade imbalances with China are huge. Indeed just look at how many products, and especially consumer electronics sold in this country are of Chinese origin.

    Trying to rebalance this deficit and onshore manufacturing capability and jobs is I suspect at the heart of the Trump thinking.

    And it is thinking that plays especially heavily in the economically deprived rust bucket states where manufacturing has come and gone.

    Does such thinking have a resonance here. Does Scotland need a trade balance or would we be happy, or allowed to run an eternal trade deficit whilst producing nothing.

    I’m not an economist, but when you see a country with a huge trade deficit, and an ever growing reliance on external manufacturing capability, you kind of get the Mad Donald Drift.

    But maybe he’s wrong and maybe we are too. Do we really need to produce anything when we can buy it all from China.

    1. Dougie Blackwood says:

      Greater England has a huge trade deficit. Scotland exports a great deal more than we import but without positive action and with a looming Brexit that may go down the tubes. As is often said here the alternative is obvious.

      1. Willie says:

        Yes Dougie, Scotland does indeed, unlike Greater England, have a trade surplus. It’s one of the reasons our colonial masters are so fond of us.

        How that trade surplus stand up once we are out of the EU will remain to be seen.

        One only need to think protective tarrifs and whisky, to realise how exposed our much lauded export could be.

        But we voted no at the indy referendum because we were promised that it was the way to keep us in the EU.

        More fools us because we’re getting our just dues now. And if the whisky industry, or our highly successful foreign student attracting education sector, or indeed any of the other success stories goes down the tubes, we’ll at least be able to celebrate our impoverished Britishness.

        Austerity after all is our national badge of honour and we should wear it with pride.

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