Category Archives: Economic

Britain, Economic, Iran, Society, United States

Gulf of Oman: The stakes could not be higher

US-IRANIAN TENSIONS

THE attacks on the Japanese and Norwegian oil tankers in the Gulf of Oman have brought the simmering tensions between the United States and Iran to a new incendiary level.

Even before last week’s incident, President Trump demonstrated his hostile approach by imposing heavy sanctions on Iranian oil exports and withdrawing from the conciliatory nuclear deal negotiated by President Barack Obama in 2015.

Washington has directly blamed Tehran for the tanker explosions, backing up the claim with the release of video evidence which appears to show members of the Iranian Revolutionary Guard handling what looks like an unexploded Iranian mine on the side of one of the damaged vessels.

It should be acknowledged that Iran has “categorically” denied any responsibility, arguing that the attacks were perpetrated by someone who wants to damage the country’s international reputation.

It certainly came at an awkward time for the Iranian government, which was hosting talks with the Japanese prime minister Shinzo Abe, whose nation is dependent on Iranian oil imports. In theory, at least, it seems irrational that Iran would damage the interests of its own fragile economy with an assault on one of the biggest customers of its oil supply. But economic rationality is not always paramount. And there are several reasons why certain figures in the Iranian regime might actually welcome an escalating crisis in the US.

Outsiders tend to regard the Tehran government as a theocratic monolith, but in reality, there is a division between the pragmatists, led by president Hassan Rouhani, and the fundamentalists who follow the head of state, supreme leader Ayatollah Ali Khamenei.

Iran’s hawkish hardliners, who are growing in confidence, contend that a more aggressive diplomatic policy would have a number of advantages. A coalition with America would serve as a distraction from Iran’s economic woes, which have left the country plagued by public discontent. Posing as the patriot saviour in a national emergency, the hardliners could rally the people against the US, crackdown on dissent and strengthen their grip on power.

According to this narrative, ruthlessness, not diplomacy, is the best way to force Washington to back down on sanctions.

And if things do escalate, the disturbing reality is that these Iranian hardliners certainly have the capability to wage war against America. For if war does break out, the US will find defeating Iran much more costly than Saddam Hussein’s Iraqi regime during the two Gulf war campaigns.

Iran is three times the size of Iraq and the Revolutionary Guards which make up the special forces are well-equipped and battle-hardened. The Iranian military possesses an array of sophisticated armaments, including stocks of ballistic missiles.

But even low-tech equipment could cause severe damage to the US if it came to war in the Gulf. If only one Iranian torpedo boat from a swarm of 40 or 50 managed to break through the US defensive screen, it could still sink or cripple an American ship. And it would only need a few drones to reach a target for the results to be devastating.

Nevertheless, it is unlikely the US will back down. Given its colossal military power, it is rightly still regarded as the world’s military guardian.

In Washington, an anti-Iranian sentiment prevails, a legacy of the hostage crisis of the 1970s. America’s anti-Iranian allies such as Saudi Arabia and Bahrain will also be ramping up demands for action.

 

BRITAIN will be left in an awkward position if conflict does erupt. It is unlikely that the UK will have any direct military involvement, but diplomatically – as Foreign Secretary Jeremy Hunt has said – it would be unthinkable if Britain does not tacitly support the US.

If that does happen, British expats and commercial interests in the Gulf would be in a vulnerable situation. And in Britain itself, our stuttering economy – like the rest of the western world – would be severely hit by an oil crisis arising from a war.

It came as no surprise that, following the tanker attacks, oil prices in global markets became extremely volatile. After all, 30 per cent of the world’s crude oil passes through the Strait of Hormuz which borders Iran.

In this combustible situation, the stakes could not be higher. We can only hope that a mood of restraint and common sense will ultimately prevail.

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Banking, Britain, Economic, Government, Politics, Society

Carney says leaving the EU could restore faith in democracy

BREXIT

THE Bank of England Governor has said that Brexit could restore faith in free trade and democracy if the UK leaves the EU with a deal.

In a statement that is sharply at odds with his previous warnings that Brexit could spark chaos, Mark Carney said that a managed departure would show voters that they matter and encourage them to trust the parliamentary system again.

But he also warned that a No Deal Brexit would spark an economic shock – something which he says the whole world should be trying to avoid.

The Governor said millions of workers feel let down and left behind by globalisation – and the only solution is to give power back to the people.

He added that a Brexit deal may be a step towards a world where families are comfortable with free trade because they feel in control.

The Governor said: “In many respects, Brexit is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability.

He said Brexit could lead to new “international cooperation”, allowing for better cross-border trade deals and a more effective balance of “local and supranational authority”.

Mr Carney’s backing for Brexit if a deal is struck marks a major change of tone.

He has long been accused by Eurosceptics of opposing our departure from the EU and whipping up Project Fear.

And in the run-up to the referendum, he was attacked for politicising the Bank of England when he claimed Brexit could trigger a recession.

Last year, Mr Carney claimed the vote to leave had cost households £900 each by damaging economic growth – and he has always been one of the loudest critics of No Deal.

The Bank also claimed No Deal could tip the UK into its worst recession for a century, knocking a third off house prices and triggering a dramatic surge in unemployment.

Mr Carney warns again that a deal is needed to avoid chaos – although he does sound more upbeat about the future following an orderly exit from the EU than he has done previously.

The Governor said Britain’s departure from the European Union comes at a time of growing risks for the global economy. The Canadian also said that No Deal would be “a shock for this economy”, and that UK investment has not grown since the referendum of 2016 was called, saying it had “dramatically underperformed”.

Mr Carney used his speech – given to senior business figures at London’s Barbican – to warn them that China is increasingly risky and businesses around the world are taking on worrying levels of debt.

He said: “China is the one major economy in which all major financial imbalances have materially worsened. While China’s economic miracle over the past three decades has been extraordinary, its post-crisis performance has relied increasingly on one of the largest and longest running credit booms ever.

A 3 per cent drop in the Chinese economy would shave 0.5 per cent off the UK, he warned.

On Corporate debt, he said a surge in high-risk business lending has worrying echoes of the US boom in unsustainable loans which led to the 2008 financial crisis.

Mr Carney also took a swipe at Donald Trump, who has cracked down on imports from China. The US President once tweeted: “Trade wars are good and easy to win.”

Mr Carney batted away Mr Trump’s casual brag, saying: “Contrary to what you might have heard, it isn’t easy to win a trade war.”

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Banking, Britain, Economic, Financial Markets, Government

Brexit: Economic shocks can be positive

BRITAIN: ECONOMIC

A NO DEAL BREXIT would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism (ERM) in September 1992.

But such shocks, if they trigger the right policy response, don’t necessarily have to be negative.

That is why it is fascinating that the Cabinet Office is now contemplating about what “Project After” Brexit actions should be.

It should come as no surprise, then, that both the Bank of England and the Treasury have similar thoughts.

In the immediate aftermath of the 2016 referendum to leave the EU, Mark Carney played a central role in shaping fiscal policy. Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing (QE) was launched and an emergency £100bn line of credit for the banking system was created.

In the event of a No Deal Brexit the Bank should be able to do more. Threadneedle Street is known to believe, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Government – and the Chancellor Philip Hammond – is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

What should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better and improved commuter routes into Manchester, Leeds and other northerly centres.

The most direct and easiest way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced quite sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc. Gaining a competitive edge is going to become increasingly prescient.

The best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

 

DREDGING Ramsgate harbour might help. But within international commerce, money speaks the loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would rapidly deploy their best logistical skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. One of the biggest concerns is that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that.

But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.

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