A "Warm, Very Positive Feeling"
Chris Sanders
The rush to war is picking up speed along with inflation, as British money supply growth and tensions with Russia grow apace. In the short run it's great for sterling; in the long run, who knows? You can bet the new prime minister doesn't.
The accession of Gordon Brown to Number 10 has been accompanied by the usual cognitive dissonance. Brown's first speech touted his intention to bring about real democratic reform, whilst his government has lost no time in pushing for even more stringent powers of arrest and detention. The War on Terror, such as it is, lost no time in reaching Albion's hallowed shores on the first day of Brown's new job, in the form of a handful of foreign doctors employed by the National Health Service who allegedly burned a car in Haymarket and drove another burning vehicle towards the airport terminal building in Glasgow. This is a far cry from the days of a real dirty war, when the IRA rocketed Heathrow, assassinated Lord Mountbatten, blew up a hotel- housing most of the government during a conservative party conference and nearly killing the prime minister in the process - destroyed most of Bishopsgate in the City, and killed and wounded scores in attacks on Harrods and Victoria Station. None of these things was deemed enough of a threat to warrant the effective repeal of civil liberty, even though Britain has a large Irish population. For some reason, the government of our day appears to believe that an alleged threat from South Asian Muslims is more dangerous than that from Irish Catholics, in spite of the fact that the latter have been conspicuously more successful in carrying out acts of violence within the United Kingdom.
The currency markets don't seem to be bothered by the "threat" to the UK, with sterling hitting twenty-six year highs against the dollar. The currency markets love the pound. From a US perspective, it is the currency of the biggest non-US economy where English is the spoken language. This makes it an easy first stop for US investors alarmed by their own government's cavalier disregard for the US economy. And one year deposit rates are nearly 1% higher than dollars. For other international investors, Britain has the merit of not being the United States, a matter of special importance to oil producing countries most of whose revenue is denominated in dollars. The British at least do not have a history of freezing assets. In consequence the financial account of the British balance of payments is hitting new highs.
The irony of Arabs buying sterling and UK real estate as their oil revenues soar is lost on the currency markets whose lot is not to reason why but just to follow the trend. Ironic it is, and never mind the war on terror. The UK itself, once one of the world's most significant oil producers, is now a net energy importer needing to find earnings from somewhere to pay for it. In six short years the UK has swung from enjoying an annual surplus of £7.5 billion pounds in oil and gas earnings to an annual deficit nearly as large.
The North Sea represented a windfall for the UK economy and a get-out-of-jail-free card for British politicians. The marginal rate of corporation tax on oil and gas producers is 40%, while in earlier years, the Special Revenue Tax rate of 75% on oil and gas earnings (after development costs were recovered) ensured that her Majesty's coffers stayed full while her governments dismantled the industrial economy and sold it to foreign corporations. This has been wildly profitable for the financial sector and the lawyers that made the arrangements and whose share of corporate profits has risen steadily. This is the sharp end of the transformation of the UK from an industrial to a "knowledge-based" service economy.
The loss of this revenue and, even more important, the need to finance a future of growing energy imports, represents a real challenge to the government, but not one that it appears to be prepared to discuss in public. The City is beginning to worry about inflation, and not before time. Broad money growth is roaring ahead, just as it did in the late 80s when sterling was pegged by Nigel Lawson to the D-mark. Today it is pegged for all intents and purposes to the dollar, the better to help the Yanks finance the war for oil. Worries about a housing bubble are predictable but premature. There is no lack of credit and liquidity, no stomach in the Bank of England for the quantitative measures necessary to cool things off, and no where else for the asset owning public to hide from the inflation that is most certainly much higher than the ridiculous numbers being published by the Office of National Statistics.
All this underlines the importance of energy and relations with energy exporting states, which are conspicuously bad, be it Venezuela, Iran, Iraq, or Russia.
Things began to go wrong in relations with Russia in October 2003 when the Russian government arrested Mikhail Khodorkovsky. This has been treated, in the western financial press at least, as an egregious assault on democracy and free markets. As it happens, Khodorkovsky had negotiated a long term oil supply contract with two Chinese regional governments, performance under which would have required Russian oil production to increase massively. This no doubt informed Khodorkovsky's foray into Russian politics in 2003, and doubtless, too, concerned the Russian government whose prerogative in both managing the Russian state's foreign policy and the natural resources of the nation were arguably being usurped. Those oil producing states that can defend their resources have shown considerably more reluctance to deplete them rashly than those who cannot defend them, which tells one just about everything one needs to know about the difference between the UK and Mexico on the one hand, say, and Russia on the other.
Russia is now the largest oil producer in the world, and the marginal supplier of petroleum and natural gas to Europe. Europe might reasonably be thought to have an interest in getting along with the Russians rather than provoking them, as NATO seems determined to do with the construction of missile sites in the Czech Republic and Poland. Asked what they think by pollsters, the citizens of those countries appear to have great common sense, and have registered their opposition. Their governments appear to know better, confirming yet again that democracy in the West is not to be trusted to the little people.
The stated aim of the two bases in question is defensive, to protect Western Europe from a North Korean or Iranian missile attack. Neither country possess the means to deliver such an attack. The only conceivable military rationale is to threaten Russia, which has said consistently that if the West goes ahead then Russia will respond in kind.
That is no doubt the message that Russian president Putin conveyed to both George Bushes in Kennebunkport on July 2. On Friday, July 13, a US delegation including Henry Kissinger, George Schultz, Robert Rubin and Sam Nunn, in other words, unelected members of the real United States Government, repaid Putin's visit to the US by calling on him at his home near Moscow.
It is a pretty safe bet that what Henry Kissinger described as Putin's "frank manner" and the "warm, very positive feeling" with which he himself departed Russia in fact meant the talks were a complete failure. The following day, Saturday the 14th, the Russian government announced that it was withdrawing from the Conventional Forces in Europe Treaty.
This is, in short, a major crisis, in which major oil consuming states have invaded one producer, Iraq, are encircling another, Iran, and are picking a fight with a third, Russia. It is not going to end tomorrow, or even next year or the year after that.
Welcome to Orwell's Oceania. Every day while you are visiting London, you will be photographed around 300 times, so look your best.
