FYI | Mar 26 2009
By Greg Peel
Kevin Rudd scored a rare print of the sheet music to “Star Spangled Banner”. Gordon Brown had to be content with a box set of DVDs in the wrong format.
Much has been made this week of gifts amonst world leaders, with focus being drawn as Australian prime minister Kevin Rudd is in Washington to visit new colleague and president of the US, Barack Obama. Gifts amongst leaders are all a bit of a joke of course, for protocol dictates that such gifts are to the people the leader represents and not to the actual leader per se. They are thus duly catalogued and usually end up in some dusty storeroom. But gifts amongst leaders are nevertheless a subtle way of expressing approval, or lack thereof.
Kevin Rudd had already been given an “A plus” from Treasury Secretary Timothy Geithner, mostly for his capacity to frequently state the obvious and his courage to do so despite Australia’s irrelevance in the current state of the global economy. But a hungry press pack were keen to see just what the President actually thought of our man. The answer came in the form of a gift which, considering America’s propensity to jump up and sing its national anthem at the drop of a hat, was taken as a thumbs up. For the record, Obama scored a Thomas Kenneally biography of Lincoln in return.
When British prime minister Gordon Brown visited Washington recently however, all he came away with is a set of steak knives…er…DVDs of classic American movies. This was in response to no less than three gifts from Mr Brown, one of which was beautifully thought out.
Brown gave Obama a penholder fashioned from the HMS Resolute. Not only was the Resolute the sister ship to the HMS Garnett, from which the desk in the Oval Office is fashioned, it was a ship involved in fighting against the slave trade. What better gift could one give America’s first black president?
And just to rub salt into the wound, the US DVDs are in a different format to that in the UK and thus unplayable.
Gordon Brown is a man under seige. Having played Peter Costello to Tony Blair’s John Howard for about the same length of time, Brown, unlike Costello, was indeed finally passed the leadership just as the world was entering a financial crisis. Unelected, and suffering from a charisma by-pass, it has been left to Brown to restore the popularity of his party and to consolidate Britain’s global importance. Tony Blair was much loved until too many British soldiers died in Iraq. Brown had opposed the war, but now he is struggling to find any love at all, either within or without the Sceptered Isle.
As host of the upcoming G20 world leaders meeting in London on April 2, Brown has spent recent weeks trotting the globe to drum up support for his cause, being one of “united we stand”. Brown is determined the UK should lead the way in bringing together the US, Europe, and other nations into a clique of world governments standing shoulder to shoulder to fight the GFC with fiscal and monetary stimulus, and with global regulation. That was basically the outcome reached at the last G20, so Brown is taking the ball and running with it. He is trying to make his mark.
There is little else Brown can do, as when it comes to stimulus packages, Britain has been forced to lead the world. The way things are going, it appears that the GFC has left Britain in an even more parlous state than the US. Britain was thus the first to guarantee bank deposits, the first to move to a level of bank nationalisation, and the first to announce quantitative easing. While the US has since made similar, if not quite so drastic, moves, the last thing Brown wants is to be left looking like a shag on a rock. If it’s one in-all in across the globe, Brown can sell his rescue package to his people, and stave off defeat by a Tory party growing every day in popularity.
As such, the DVD “snub” (as it has been interpreted) is not a good sign. Is Brown overstepping the mark with a Unites States that, while wishing to overtly be part of a global world, is clealry covertly determined to remain the superior world power? And this week Brown’s world began to further crash around him.
Yesterday Czech prime minister Mirek Topolanek stood down following a vote of no confidence. Hence the Czech Republic becomes the third Eastern European country, after Latvia and Hungary, to see its government fall as a result of the GFC. Iceland is another European nation to have suffered such a fate, and there but for the grace of God goes Ireland.
The fall of the Czech government came as a shock because unlike other Eastern European economies, the Czech Republic is in a pretty strong economic position. The country is not one of the IMF’s basket cases. Indeed, the reality appears to be that Topolanek’s fall has less to do with financial difficulty and more to do with a few cross-benchers swinging the other way and forcing a vote. It was a political coup rather than an economic one. But Topolanek’s fall nevertheless has wider ranging consequences.
In a move orginally strongly criticised by French prime minister Nicolas Sarkozy at the time of his induction, Topolanek is currently the president of the European Union – a role in which EU leaders take turns. Sarkozy was against an inexperienced Eastern European taking on such a role at this critical time. If Sarkozy’s criticism did not bode well for European solidarity, Topolanek’s fall is hardly going to help either. Except perhaps that as EU president Topolanek has been quite critical of all things “stimulus”.
On Tuesday Gordon Brown made an appeal to EU leaders to stand solid on economic stimulus. But just as he was in New York being interviewed by the Wall Street Journal, Topolanek was in EU headquarters in Strasbourg telling all prepared to listen that Obama’s financial rescue plan was “the road to hell”.
“The American recovery package,” said Topolanek, “will undermine the liquidity of the global financial market”, and “The United States did not take the right path”.
But things were only to get worse for Brown.
The is no love lost between Bank of England governor Mervyn King and former Chancellor of the Exchequer Gordon Brown. In 2007, when Britain’s regional banks were beginning to suffer the ravages of the subprime crisis, King denounced any interference as being anathema to the fundamentals of capitalism. But as a run suddenly began on Northern Rock, Brown stepped in to overrule the supposedly independent central bank. He ordered that the BoE guarantee Northern Rock depositors, and then took the further unprecedented step to ensure all deposits in all British banks were guaranteed. King was made to look like a fool before the masses.
Brown is currently on tour to roadshow his stimulus solidarity policy ahead of hosting the G20. Last night Mervyn King suggested, back in Blighty, that another UK monetary stimulus package was not really a very good idea. The question from the central banker is as to whether Britain can actually afford one. This is in direct contrast to the “everything it takes” line of the Britain’s senior politician.
To make matters worse, King went on to suggest that the BoE may hold back from implementing the lastest 75 billion pound stimulus, being that of quantitative easing (in which the BoE buys UK bonds). Such a move may be foolish, King suggested, were economic recovery to be not too far off and inflation to become a problem.
Clearly King was affected by the latest monthly CPI reading in the UK, which had annualised inflation running at 3.2% instead of the 2.5% economists had expected. His politician adversary, on the other hand, has been warning that deflation is the UK’s and the world’s greatest threat.
The impact of King’s statement was manifested in last night’s failed auction of UK gilts (bonds). Not since 1995 has such an auction failed (although an inflation-indexed gilt auction did fail in 2002). At the same time, yields on UK five and ten year gilts soared to levels not seen since before the quantitative easing package was announced.
The failed auction involved 40-year bonds. One argument for the failure of the auction is that the BoE’s quantitative easing package does not stretch that far down the curve. Hence there is not as much interest in buying 40-years when it is the prices of fives and tens the BoE will be supposedly pushing up. That far out is not close enough to worry about in an immediate GFC context.
The alternative reason offered for the auction failure is that bond traders are now simply worried that King is saying one thing and Brown another.
And just to throw more fuel onto the fire, one may not be surprised that neither Germany nor France is all that prepared to stand shoulder to shoulder with the UK anyway. The two dominant EU members have already been critical of quantitative easing, and thus critical of both the UK and US. They are pushing a more socialist policy of forcing rapid global regulatory restructuring in financial markets, rather than printing trillions in paper currency first and worrying about regulations later.
So here we have the UK and US (and Japan for that matter) on one side and the EU on the other. Within the UK-US alliance, Gordon Brown has supposedly been snubbed by Barack Obama. And within the UK, the government and central bank are at loggerheads.
This stage is not exactly set for a G20 love-fest next week.
Part of the problem is the very nature of a convoluted European Union and concurrent European Monetary Union. Members of the EMU are united under the one currency – the euro. The UK (and Sweden) are members of the EU but not the EMU. Thus the EU is not forced to follow any lead from the UK, as it can watch the pound sink or swim regardless. (Last night the pound fell heavily against the US dollar after the auction failed, while the euro rallied).
And just to confuse the issue even further, the European Central Bank does not have the capacity to implement quantitative easing in the traditional manner of buying bonds. There is no EU bond. Each member issues its own. Nor does the ECB have a mandate – like most central banks – to control both inflation AND economic growth via independent monetary policy. The ECB is only charged with controlling inflation as it pertains to the euro.
This difference here came to the fore early on in the GFC. When the US and UK were madly slashing interest rates in the face of what was to become the GFC, the ECB raised its rate from 4.00% to 4.25% given growing inflation fears. The ECB has since cut to 2.5%, but it has acknowledged its reluctance to move to quantitative easing, even if it could. It is not the ECB’s role to stimulate the economy. That is the individual role of member countries.
And as time marches on, the rifts between those members are growing.
It is acknowledged by all and sundry that G20 meetings are themselves no less than one big photo-op. The meeting itself is for the cameras – lots of class photos, smiling adversaries and stilted handshakes, but the reality is that whatever emerges from the meeting in London on April 2 will have been already determined before anyone even arrives. That is why Brown is travelling the globe in a snake oil roadshow.
The other great fear of world leaders, outside of global deflation and economic recession, is protectionism. Protectionist moves by the US government post the Crash of ’29 have long since been agreed to have been a cause of the Great Depression. But a global stance against protectionism is a fragile entity. For if one breaks, all must rush to break lest they become the Biggest Loser.
The way things are going, protectionism, at least covertly, is looking like it might be very hard to prevent. And what is the policy of the US to print whatever amount of reserve currency it takes to ensure the way of life of the American people, if not implicitly protectionist?
