The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Icy Moscow Streets Cause Break in Coverage

Readers of the Parallax Brief may have noticed that there have been no updates since Thursday night. Alas, my beloved slipped on ice near our apartment in Moscow and fractured her right fibula in three places, so I’m sure you’ll all understand if I confess that my priorities lay elsewhere over the weekend.

Ironically, I was actually considering writing about the situation on the pavements (sidewalks) here in Moscow, which of late have left treacherous a distant speck in the rear view mirror on their remorseless drive toward impassable.

Moscow seems to have entered a climatic netherworld too cold to melt the ice and snow completely, but not cold enough to keep it frozen all day. We have a slow, incomplete melt during the day, exposing a core of perma-ice made diamond tough by four months of compacting, which is then lubricated with a thin film of water from the day’s melt.

Walking becomes an exacting challenge, to say the least.

Yet shockingly for a country where this happens every year, the authorities – certainly in Moscow – refuse to put salt on the ground. Salt would allow the ice to melt at temperatures below freezing. Mixed with grit, it would provide grip, too. But instead, the Moscow City Government has an army of workers put down grit only, along with the occasional blob of what looks like wet aggregate, to provide grip. Of course, even in the center, it’s woefully inadequate.

Why no salt, I hear you ask?

Unbelievable as it may be, the Moscow City Government does not salt the pavements because it believes salting would ruin shoes.

As reasoning goes, that is one of the most risible lines of thought I’ve heard in a while – even by the standards of Russian bureaucracy – but it seems the authorities actually wear their refusal to put salt on the streets as a badge of pride. If you shoes get spoiled, a Moscow official apparently told the Moscow Times last year, bring them to us and we’ll replace them.

So, hey, you may need to have a gymnast’s balance and the reactions of a mongoose to escape the Russian winter without a tumble or seven, but at least the damage to your shoes will be restricted to that caused by water, grit, and massive amounts of slush and mud.

Are they insane? Have they never heard that a spoon of vinegar in a cup of water removes salt stains from leather? And quite apart from the whys and wherefores of old wives’ tales about shoe care, surely public wellbeing takes priority over shoes?

When my girlfriend was admitted to hospital, she was told by an administrator that already that day that one facility had administered treatment for over 160 fractures – and it was only 3pm. Imagine how much it costs for the x-rays, bandages, casts, beds, hospital utilities, and staff wages to cope with that volume of traffic.

Even if one is immoral enough to believe that shoes are more important than the misery, pain and suffering caused by slipping over, surely the cost to every tax payer of treating all those fractures (and probably strains, sprains, bone chips, bruises, cuts and ligament damage, too) that would be prevented had pavements been salted is greater than the cost to the same taxpayers of replacing the shoes that wouldn’t have had to have been replaced without the supposed salt damage.

It’s a simple equation: cost of treatment minus cost of shoe replacement equals START SALTING THE STREETS, LUZHKOV.

Filed under: Russia, , , , , , , , , , , ,

Currency Update: the Pound and the Ruble

Pound Sterling

No sooner had the Parallax Brief written to defend a weak pound as counter-intuitively desirable for the UK economy, than sterling took a savage mauling on the forex markets. The pound plunged today (Wednesday, January 21) to as low as USD1.3713, only a whisker above the 23-year low of USD1.3682 of June 2001.

Ambrose Evans-Pritchard, in his now regularly terrifying blog, argues:

“For the first time since this crisis began eighteen months ago, I am seriously worried that [the] British government is losing control. The danger is blindingly obvious. The $4.4 trillion of foreign liabilities accumulated by UK banks are twice the size of the British economy. UK foreign reserves are virtually nothing at $60.6bn…

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged… Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?”


Prichard points out soberingly that sterling is now teetering on its twenty-year support line, and another fall could send it crashing through the line toward dollar parity. Should this happen, Britain would very likely be faced with a full blown financial crisis, and perhaps even the first British default in modern history.

If omens are anything to go by, the presence of Jim Rogers does not bode well. The Bank of England must have groaned when it read his interview in the Financial Times, arguing that the euro is a far better bet than sterling. Some of you may remember that it was the Quantum Fund, then co-owned by Rogers and George Soros, which broke the Bank of England on Black Wednesday in 1992.

For what it’s worth, I’m not sure I agree with Rogers. First, he only seems to ever talk these days about how truly wonderful Asia is as an investment opportunity, and again in his interview today he appears to making a point not against the British economy, but against the British economy compared to Asia: “The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west?” 

Second, his argument regarding the euro is debatable. If Britain is compared to the euro’s strongest member, Germany, Rogers has a point, but what about Britain compared with Greece, Italy, Spain, or Ireland? There are many who would argue that a currency is only as strong as its weakest link.

Finally, Britain isn’t the only country in dire states at the moment. European banks are just as heavily indebted and leveraged as American or British banks, and the eurozone economy isn’t exactly moving along at warp factor eight at the moment. Sooner rather than later, the hawkish ECB is going to have to face facts, swallow its pride, put a pommander under its nose, get down to the zero rate lower bound and crank up those printing presses.

The equally parlous state of the rest of the world might just be sterling’s saving grace.

The Ruble

Yesterday, the Parallax Brief argued that the step-by-step, managed devaluation of the ruble was approaching its endgame, and today we received further confirmation. First, the ruble held steady against the basket for the third straight day, and second, according to Russian business daily Kommersant, the Central Bank of Russia (CBR) yesterday hosted a meeting in which it informed bankers that the devaluation process was over.

The more wonkish among you can read this article from Bloomberg, in which MDM Bank’s Nikolai Kashcheev argues the CBR may now employ a dirty float.

CORRECTION: I mistakenly wrote that “the Quantum Fund, then co-owned by Rogers and George Soros, which broke the Bank of England on Black Wednesday in 1992.”

It has been pointed out to me that Rogers was long gone from Quantum by the time it broke the BofE. Shame on me. 

Filed under: Economics, Russia, , , , , , , , , , , , ,

Global System More Fragile than we Think

Much of my recent reading has been dominated by the financial crisis sweeping the world. Working in an investment bank at the moment feels rather like being a office cleaner for the Pentagon during the Cuban Missile Crisis: there is no respite from the torrent of apocalyptic news but there is little one can do to influence the situation.

However, while the effects of the current credit crisis and financial turmoil on economies, job markets, and businesses are difficult to underestimate, there is also a broader, global issue at play. Until recently, I had assumed that globalization was a new phenomenon, driven by modern developments in logistics and communication. But if you, like me, assumed this, you’d be wrong.

Paul Krugman, Nobel Laureate for Economics takes up the story:

“…our grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment.”

I first heard of this ‘first great globalization’ when watching Naill Ferguson’s excellent television series, The Ascent of Money. In it, Ferguson alluded briefly to a world which was, in relative terms, as financially interconnected as it is today.

Serendipitously, I stumbled on Krugman’s op-ed at around the same time, and what makes the first great globilization such a frightening story is the tightly corresponding similarities to the world of today: technological advances, increasing integration, and full blown globalization that fueled unparalleled economic growth.

Further, people of the time, like now, assumed that war would be so unprofitable and economically damaging that it would never happen. Of course, we now know understand the fallacy of this thinking, but the story has some sobering implications for the world of today. Krugman explains:

“But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together…

Can things fall apart again? Yes… the belief that economic rationality always prevents war is an equally great illusion. And today’s high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.”

Certainly worth a read for those interested in history, economics, and geo-politics and foreign affairs. And something else that is of interest is Ferguson’s recent review of a book covering a related subject for the Financial Times.

The point I’m trying to make is that while we live in a stable, interconnected, increasingly prosperous world, it only takes one financial or economic shock handled in the wrong way to bring nationalism back into vogue in one or two places, encourage countries to pull up the barriers, and, at the very least, lead to a domino effect that sends us drifting away from the model of increasing integration and division/specialization of labour which has made the world more prosperous than ever before. Conflict is unprofitable, but it didn’t stop us last time, and to think it will this time is folly.

I would hope we would now be more mature, but I’m not so sure. It is well known, for instance, that the Smoot-Hawley Act expedited the onset of the Great Depression, yet China and Russia have both overtly sidestepped toward a more protectionist stance of late, and dark rumblings of an Sino-American trade war can be heard just over the horizon.

You have been warned.

Filed under: Economics, Foreign policy, , , , , , , , , , ,

Redwood Supporter in Sense of Humour Shocker; the Pound

So coldly logical is John Redwood’s delivery that he has been dubbed “Mr Spock” in his time, but for one of his supporters at least, wit is not “a difficult, alien concept, captain.”

Responding to Redwood’s short blog on the pound’s latest fall, one poster drolly asked, “I wonder if we can persuade Obama to invade us in the name of ‘regime change’?”

Of course, he then went on to spoil it with a paragraph of right-wing invective about the UK going bust, his sterling savings being devalued along with the pound and me-me-me, but at least his opening gambit managed to raise a cackle from here in Moscow.

On this matter, I’ve been rather irritated by the right’s response to sterling’s drop. Although the phrase “strong pound” sounds very nice, in a chest out, chin up patriotic kind of way, it really wouldn’t be very beneficial in current times.  

A weak pound lowers the relative cost of British goods and raises the relative cost of foreign goods. This has three, extremely beneficial effects: First, British goods become cheaper in both the home market and export markets, materially aiding British companies. Second, encouagement to buy British will help rebalance the UK’s current account deficit. Finally, making foreign goods more expensive will bring at least a small amount of inflationary pressure to bear on the British economy. The Bank of England’s precipitous interest rate reductions, and the current yields on British gilts, give a pretty terrifying indication of just how very close we are to slipping into full blown debt deflation. Anything to encourage inflationary expectations in this environment can be considered A Good Thing.

In boom times, these factors might be negative, as they would likely fan the flames of inflation and discourage saving. And of course, much more of a drop, and investors may get frightened off British investments, and especially our gilts, making financing our current, essential-for-survival budget deficit more expensive — or perhaps impossible — which would be an outright Russia 98-style disaster.

But so far so good.

Filed under: Economics, Politics, , , , , , , , , , , , , , ,

Toxic Bank a Supine Move to Avoid N-Word.

Britain has become the first nation to attempt to resuscitate its banking system through the creation of a so-called ‘toxic’ or ‘bad bank’. The government hopes to transfer to an ‘aggregator’ those assets which are dragging the banks down, leaving the banks free to perform their usual economic duties, and, fingers crossed, leaving the tax payer with a nice profit once the world economy recovers from its economic heart attack.

The business community breathed a sigh of relief when it learned of the government’s plan, but is it a really good idea?

I’m afraid the obvious answer is no, it is not a good idea. The government should have bitten the bullet and nationalized all banks of systemic importance. It should have nationalized them back in October instead its of original bailout. And it should have nationalized them instead of this latest bailout. Ultimately, it’ll probably have to nationalize the banks anyway.

The government’s chosen alternative, the ‘bad bank’, in effect argues “even though the market says these assets are worth X, we are willing to pay Y,” because the only way the government can make these banks solvent again is by paying more than the market would. Of course, it hopes prays that in doing this it will finally purge the financial arsenic from the banking system’s blood stream, allowing for recovery, while getting valuable assets at an ultimately profitable price. But how likely is the government to be able to successfully second guess the market? And will this really prepare the ground for recovery?

Nobel Laureate Paul Krugman is skeptical:

“Now, maybe private buyers aren’t willing to pay what toxic waste is really worth… But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make [the banks] solvent again?”

Krugman believes that the government, in effect, is handing the banks a huge stack of tax payers’ cash, while taking risks that the banks cannot.

“What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.”

Clearly, something had to be done. The banking system is currently on life support, breathing only through the mechanisms the government provides. Last time things were this bad we tried turning off the machines, causing the Great Depression. Doing nothing, therefore, was not an option. But gifting the shareholders and management of the banks should not have been the first course of action.

Of course, a Labour government nationalizing banks is a public relations open goal for the Conservative Party, and this government is nothing if not supine, so perhaps we should have expected Brown and Co. to writhe and thrash a bit before succumbing to the inevitable.

But the sooner the government plucks up enough courage to use the N-word, and makes an announcement that it is nationalizing the British banking system for a strictly limited period of time, the better it will be for everyone.

Filed under: Economics, Politics, , , , , , , , , , , , ,

Time for RBS, HSBC, and LloydsTSB-HBOS to become British Sberbanks

News slithered uncomfortably down the wires yesterday that the British government had agreed to convert its GBP5 bn of Royal Bank of Scotland preference shares into ordinary shares, taking its stake in the beleaguered bank to 70%. RBS is now, effectively, a nationalized government bank.

Predictably, the denizens of the Right have savaged the decision. On his excellent blog, John Redwood, made some wholly rational points about the move:

“…RBS will announce losses of over £6 billion, or one third of the government capital… The government is now risking huge sums of money. Of course I hope they get the terms of the scheme right and that credit starts to flow again. Even if that were it happen, I will still worry about the high risk…”

Mr. Redwood is reasonable, but wrong. He is right to argue that we don’t really want the government to be risking our money. He is also correct to question, as he did earlier in his piece, whether the government should be dabbling in nationalization in this day and age. “Didn’t we,” Mr. Redwood and many others from the Right seem to be asking, “get past this in the 70s?”

But the Right is completely missing the point. In ordinary times, people like Mr. Redwood would be right. But these aren’t ordinary times. This process is not ideal, but given the alternatives, we must hold a pomander under our noses and plough ahead.

Willem Buiter, Professor of European Political Economy at the London School of Economics and former chief economist of the EBRD and member of the MPC, argues in his latest blog for the FT that the banks are:

“…dead banks walking, held up both by actual government financial support (directly through capital injections and indirectly through such facilities as the Special Liquidity Scheme and the Treasury’s guarantee on new bank debt) and through the anticipation of future government financial support.”

And he’s right. These banks would have gone bust but for implicit or tacit government support. We tried doing nothing and letting banks go bankrupt between 1929 and 1932, and it led to the Great Depression, so I would respectfully suggest that repeating that course of action would not necessarily be best for the country. This leaves us with two options: bail outs or nationalizations, of which nationalization is surely most desirable.

Nationalizing the banking system, along the Swedish model, would give us the best chance of defibrillating inter-bank lending, boosting credit provision, and, most important, would provide tax payers the best chance of getting a return on their investment in the long run, while avoiding moral hazard by wiping out current shareholders and the banks’ egregious management.

What the Right need to understand is that we who argue for nationalization aren’t communists, and would never countenance such actions in usual circumstances – even in a ‘normal recession’. But without government support, the British banking system will collapse, consigning the country to untold misery and hardship. None of us wants that. Given the remaining options, nationalization best fits the bill. And better nationalize now than try injecting capital, buying up bad debt – and generally throwing the kitchen sink at the problem in the hope of avoiding the inevitable – only to have to nationalize every major bank anyway.

Filed under: Economics, Politics, , , , , , , , , , , ,