Communist Capitalism or Capitalist Communism?

As irony goes, this is pretty good. Communist China has been funding the US budget deficit for years, but now they appear to be moving up a gear and are embracing the full power of free markets to expand their empire. This is all happening in a way that the capitalist world want to argue with, but can't.

Deflated stock prices around the globe, have left so-called "strategic" national assets up for sale to the few remaining cash rich buyers out there, of which Communist China is one of the biggest. This week Australia has been centre-stage for this worldwide protectionism debate, as Chinalco - China's state-owned aluminium company - announced it would inject $19.5billion into Anglo-Australian mining giant Rio Tinto, which will increase their stake from 9%, and give them access to an even more significant share of the firm's most valuable Australian mines. Furthermore, another Chinese state owned firm, China Minmetals, announced it would pay $1.7bn in cash for Oz Minerals Ltd. the worlds second largest zinc miner.

The economics behind both deals is clear to see - and sufficiently compelling for the Chinese that there are likely more to come. Both Rio Tinto and Oz Minerals have been crushed by the global recession's effect on demand for what they produce. Both have seen their value plunge as a result, and are Lazarus-like stumbling along under substantial debt burdens. In Rio Tinto's case, not so chronically fatigued as Oz Minerals, they have debts of about $20bn coming due in the next 24 months (roughly the amount invested by Chinalco), that cannot be refinanced on attractive terms through international bond markets. Rio Tinto's stock price peaked at $552 last April, and has precipitously fallen reaching an annual low of $55. Similarly, China Minmetals will pay a 50% premium on Oz Mineral's significantly depreciated share price, which still may represent a complete bargain. Clearly for China, who's voracious appetite for metals and minerals drove commodity prices sky high until last year's bust, the timing is now right to start picking up these sorts of assets.

On the flipside, the Australian government is understandably uneasy about it's core "national" assets being sold off in such a fashion. Not least, because of a potential loss of control over decisions relating to these domestic based assets, but moreover because they are being sold to a country who's ideology is so different from their own. However, their hands are probably tied. Rio Tinto has told the government that failure to approve the contentious Chinalco rescue package could cost close to 5,000 Australian jobs. At its core, the performance of the Australian economy has always been heavily dependent on economic growth in the US, but more recently China has become much more significant. In particular, mining exports to China have led Australia to levels of prosperity over the past 15 years not previously seen. In terms of GDP, this sector has doubled its percentage contribution since 1993. Kevin Rudd, the prime minister, is a fluent Mandarin speaker who had made it clear that solid ties to Beijing are among his top priorities. With the mining industry in dire straits as the global recession deepens, it's unlikely that the government will go out of its way to insult one of the few flush folks left at the casino.

On the same tack, Australia is one of the most laissez-faire capitalist economies in the world, and is ranked 3rd in the somewhat subjective "Indices of Economic Freedom". These indices recognise "...an absolute right of property ownership, fully realized freedoms of movement for labour, capital, and goods, and an absolute absence or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself". To prevent free capital movements, and to block an international acquisition of the stake in Rio Tinto, would fly in the face of this ideology, but it is becoming more tempting to sacrifice the ideology for self interest. Likewise the Communist Chinese government is happily using capitalism against itself in its own best interest, and is likely to do this in many other parts of the world while asset prices on international markets are so historically cheap.

In great contrast to the current Chinese moves, for years many would be Democratic countries have at times sacrificed their ideologies in the pursuit of self-interest; regularly using subversive, anti-democratic, anti-laissez faire policy (i.e. what we would call Communist policy) to push their version of how the world order should be. A good commodities-based case in point is that of Chile in the 1970s, when despite US covert operations to the contrary, Salvador Allende became the first and still the only democratically elected Marxist leader anywhere in the world. He came to power after a particularly poor economic run for Chile during the 1960s, when there was a growing sense that international ownership of the then valuable mining resources that Chile had on its soil, was draining the country of it's chance to see domestic income grow.

When Allende took office in 1970, his immediate economic policy involved the nationalization of many key domestic companies, notably the highly valuable copper mines that had been stealthily acquired by various US corporations. The potential for nationalizations was a significant reason behind US opposition to Allende's reformist socialist government. The most prominent US corporations in Chile prior to Allende's presidency were the Anaconda and Kennecott Copper companies, and ITT (International Telephone and Telegraph). Documents released by the CIA in 2000 confirmed that before the elections of 1970, ITT gave $700,000 to Allende's conservative opponent, Jorge Alessandri, with help from the CIA and the US government on how to channel the money safely. Similarly the Anaconda and Kennecott companies had channelled funds back to the CIA pushing for further covert operations to undermine Allende's chances of winning the 1970 election. Allende won the 1970s election, despite the best efforts of these companies and the US government.

While the US government hostility to the Allende government is unquestioned, it's role in Augusto Pinochet's military coup that overthrew and killed Allende in 1973 remains a highly controversial matter. What is clear is that the CIA spent $8mm between 1970 and the coup in September 1973, and covert US activity was present in almost every major election in Chile in the decade between 1963 and 1973. Categorically, the US was more protecting its own interests in Chile than pursuing its professed democratic liberalism. Henry Kissinger, who was US National Security Advisor in 1973, was quoted as saying after the coup: "I don't see why we need to stand by and watch a country go Communist due to the irresponsibility of its own people. The issues are much too important for the Chilean voters to be left to decide for themselves." Similarly, Gerald Ford, spoke of the military coup, saying that: "I think this is in the best interest of the people in Chile, and certainly, in our best interest." Thankfully for the US, Pinochet got US economic interests in Chile back on track, but in doing so ordered many of the purges that saw more than 3000 supporters of the Allende regime killed, thousands more tortured, and many thousand more forced into exile. Sounds a bit like what happens in parts of Communist China, only more dramatic.

As the world is more and more being forced to turn to the Chinese for access to capital, there is an interesting new paradigm being created. The Chinese are using Capitalism against the arch capitalists, embracing free markets in a way that the G7 world has encouraged for many years. The problems of loss of control of domestic interests for the likes of Australia will play out over the coming years, but were always part of the downside of having fully international capital markets. Comparing the Chinese invasion of Australia in 2009 with Chile in the 1970s, where self-interests were being protected abroad in the most un-democratic and anti-Capitalist of ways, is extremely ironic. It seems universally true that ideology goes out the window when self-interest is at stake.

As Ralph Waldo Emerson said, "Every man alone is sincere. At the entrance of a second person, hypocrisy begins."

Nostalgia - it ain't what it used to be...

When I left school at 18, I spent a year in Perth, Western Australia, as a "gap year" student/ dosser prior to heading on to university the following year. I had a pretty good deal, working as a sports coach (an Irishman teaching Australians to play cricket - obviously) and English teacher at a nice public school on the outskirts of Perth - accommodation and food taken care of, and about $50 Ozzie a week to pay for a few beers. I was out there with a good mate of mine, who was also Irish, and both of us played some rugby in the not-so-competitive local leagues. We met a few other Irish expats out there through the rugby, and found ourselves involved in the local Gaelic football leagues pretty quickly, even though neither of us had ever played the game back when we lived in Ireland. The usual weekend routine was rugby on saturday afternoon, and Gaelic football on Sunday morning, followed by a few pints in "Fenians", the comically named Irish pub opposite the WACA cricket ground in Perth.

The expat Gaelic-footballing playing Irish lads, were typically guys who had left Ireland in the mid-to-late 80s, during some pretty rough times in their nominal homeland. They fled the country in search of work and greater opportunity, as so many Irish people had done in the generations prior to them. Perth, where these guys had fled to, was starting to develop as a mining town as China's growth spurt had led to exports of iron-ore and nickel from the region, and jobs related to that industry were pretty easy to come by. All in all, these guys seemed to have a pretty good deal; Perth had a cracking climate, the cost of living wasn't too high, and job security seemed pretty intact.

It was interesting to talk to these guys after a few beers on those Sunday evenings. As is standard for Irish-themed pubs around the world, there was a hackneyed Irish band playing the Wild Rover or similar in the background, with the gaps between songs typically filled with the lead singer lamenting the distance between himself and the "old sod" (Ireland). The same sort of laments would be heard from the lads we played the football with, and the odd "collection box" would be pushed around with the funds being sent back to fight "the cause" that these guys had long lost the understanding of 10,000 miles away. They had almost become more "Irish" than they ever were when they lived in the 3rd world country they had left behind. There was definitely a case of remembering things with rose-tinted spectacles, as I'm pretty sure even during the good times that Ireland couldn't have provided these guys with the same quality of life they enjoyed in Perth. This isn't a specifically Irish trait - expats in faraway lands tend to associate themselves with their fellow country-folk and reminisce enthusiastically about what they've left behind. What maybe is an Irish trait is the depth of the passion that goes with it.

On the flipside, it would seem that those who stayed in Ireland ironically don't like the place anywhere near as much as those who've left it. That certainly seems to be the message flowing through the domestic airwaves currently. Following, albeit from abroad, the problems Ireland is having on the economic front, it seems that "the Irish" are desperate to excoriate each other for the mess they think Ireland has been turned into. Ireland certainly has its problems, perhaps more so than most, but the willingness of its people to write itself off is a level above anything you'll find elsewhere. It hasn't taken long to forget where Ireland was when my Gaelic-footballing friends in Perth fled the country in desperation.

To put this all into perspective, over the past 24 years GDP growth in Ireland has averaged 5.5% annually, with the pace increasing in the last 8 years. Unemployment was reduced from 15% to 4.5% over that time and public debt was reduced from 130% to 30% of GDP. This literally took Ireland from 3rd world to 1st world. The per capita GDP has risen from nowhere to literally being in the top 5 in the world. These are backward looking statistics, granted, and not enough was done to force real change in public services while the sun was shining, but I can't believe that the current economic doom mongers think that Ireland is heading back to its early 80's level of destitution. For a small, open (in the trading sense) country there seems to be an amazing ability to convince itself that its problems are peculiarly "Irish" in nature, as though the economic health of the country is part of a grand conspiracy of the Irish people against themselves.

The fact is that there is little that is peculiarly Irish about the problems there. Of course there are major issues in Ireland, but the domestic view seems to be that "the Irish banks" and the "corrupt Irish politicians" were responsible for the collapse of Lehman Brothers, the US subprime market and the interdependence of global money markets; I'm impressed that these relatively small parts of the world order apparently manage to wield such power. In my view, regardless of how the economic maelstrom plays out, Ireland has clearly progressed from the 1980s in the fundamental fabric of its institutions; there is no great conspiracy of corruption any more. The problems are not peculiarly Irish; they are just an Irish brand of the same issues that can be picked up, perhaps even in starker terms, in the Sydney Morning Herald, The Daily Telegraph, or the Times of India.

On the Irish Times newspaper website this week, one of the "most read/ most commented" articles was from a guy called Brendan Landers, who left Ireland in the eighties, and took up residency in Canada. His article is entitled "After 16 years in Canada, I came home to Ireland. Big mistake. A really big mistake." He discusses how the development of the Celtic Tiger, and the Irish brand had appealed to him - that the Irish government had sent emissaries throughout the diaspora, asking "us" to come home and take our place in the new Ireland, with the promise of jobs, prosperity, vindication and a proud place in a new Ireland. "And we poor fools, chose to believe them."

He goes on - "Things were good at first. We found jobs that paid well. So what if the houses cost a fortune - all our savings went into the deposit and we still had to borrow a small fortune - weren't the universities free for our kids and won't they have a wonderful life without the shadow of emigration hanging over their heads? And weren't the old-age pensions going up? And wasn't this a grand new country after all its troubles?

Question: What's different about this that separates it from any other nation that you can think of? Not a lot in my view. The same gung-ho attitude to personal debt, that can be found in any number of countries.

He goes on: "We baulked when we saw the subversion of progressive initiatives like the Freedom of Information Act and the Equality Agency". Try the Blair government out for size matey, or the Bush government/ Fox news approach to broadcasting political opinion. Nothing unique here.

"We gaped in disbelief as successive ministers for finance behaved like lumpen proletariat lottery winners, squandered billions of euros in budget surpluses and pumped up inflation." Look around buddy, nobody can beat the speed at which spendthrift Gordon the Brave went through the UK's tax revenues as Chancellor of the Exchequer, or Dubya reversed the US surplus into the biggest debt burden the US has ever seen. Around the world, governments spent like the world order had changed for good. Nothing "peculiarly Irish" about any of this.

He goes on: "But the final nail was hammered into the coffin of our disenchantment when the financial crash came and the Government's first instinct was to make the poorest and most vulnerable sectors of society pay for its mistakes. We finally had to admit to ourselves that the golden circles hadn't gone away, they'd just put on new coats." On reading this I was thinking, honestly, dry your eyes mate and get some perspective.

As it turns out, my reaction wasn't anything like the norm. There has been an outpouring of praise, sympathy and to be honest, collective apathy as to this "woe is us" approach to the Irish end of the financial crisis. The only response that I read that I liked was the one from "John, Ireland" - "I agree with you Brendan, maybe you should re-emigrate, it's all you are good for!"

Ireland has its problems, no question. Right now, perhaps most notable is the story of the deposit shennanigans between Anglo Irish Bank and Irish Life & Permanent, which reads like the old-style corrosive practices of a Charlie Haughey government - i.e. a return to the eighties style of unaccountable and at worst corrupt governance. Nonetheless, even this tale will be and has been replicated across the financial globe. Rightly, or more probably wrongly, banks across the world were using all manner of tools that shift assets and liabilities on or off balance sheet at different times to make their accounts look better. Not breaking the law in the process, but certainly not making it any easier for shareholders to see "the real picture".

Who knows. But there is nothing particularly Irish about this issue, or in truth the vast majority of Ireland's problems. As bad as things may be, a little dose of perspective wouldn't go amiss. Something that perhaps the Irish as a race aren't genetically modified for. We're far better at nostalgia, which as they say, "ain't what it used to be".

Case for the worst job ever...

Early during my first year at university I was involved in a "getting to know each other" conversation with some of the guys at the dorms I was living in. The topic of discussion was "What's the worst job you've ever had". It was pretty clear from the outset that I wasn't going to win this contest - my various bar-work, waitering and delivery jobs didn't really cut it against the real contenders. The ultimate winner, was the son of an abattoir owner from Northern Ireland. He told a story about his first day working for the "old man", where his chores ranged from tenderising recently slaughtered pigs with several thousand volts to throat slitting the poor animals, presumably for some religious requirement of a section of the abattoirs custom. We were impressed.

In a similar vein (perhaps the wrong word to use), I was impressed this week by a lady called Ann Bevitt, who was quoted in an article addressing the hot topic of bonus payments to bankers, and the potential litigation work that will arise because of the lack thereof. A partner at the City law firm Morrison and Foerster, Ms. Bevitt was quoted in a typically understated British way: “It’s not always the most uplifting type of work in this economy but there are always a lot of issues we need to deal with." Much like my pig-disimbowelling friend, I was impressed by what humanity will do to earn a crust.

In the current environment, fighting for bankers rights to bonus payments seems to rank ever so slightly ahead of child molesting or mass-murder as respectable occupations go. Taxpayers have been forced to bail out many of these institutions and now the prospect of paying out performance based bonuses to the not-so-star pupils at these institutions is understandably riling. The case against these sorts of payouts is potentially quite strong, based on write-downs, share-prices, client performance or any other backward looking measurement you might use. Take for example - in its last three years Bear Stearns paid $11.3bn in employee compensation and benefits. Lehman Brothers paid out $21.6bn in the period 2004-2007, while Merrill Lynch and Citigroup paid out $45bn and $34.4bn respectively in the same three years.

In return, the various other stakeholders have received, well, almost nil. Lehman's shareholders, have received precisely nil. It's creditors/ bondholders, who don't see the upside that shareholders do in the good times as they are theoretically taking less risk, are likely to receive only fractions of their invested amounts from the bankruptcy process. Investors in Bear Stearns received around $1.4bn of JPMorgan Chase stock, now worth just under $700mm. Merrill Lynch's shareholders got shares in Bank of America which are now worth $9.6bn, less than a fifth of the original offer value. Citigroup now has an entire market capitalisation of around $17bn; just under half what it paid out to employees in the 2004-7 period.

Looking at things on an individual-by-individual basis, potentially paints an even starker picture. For example, Jay Levine, who ran the US investment banking subsidiary of RBS (Greenwich Capital), was paid close to £40mm in the 2004-7 period. This is roughly four times the amount the heavily vilified former RBS CEO Fred Goodwin received during the same period, but the sum wasn't disclosed so openly because Levine wasn't on the board of directors. Levine was responsible for ramping up the US based exposures to sub-prime mortgages, asset-backed securities and CDOs. Since he left RBS Greenwich Capital in December 2007, RBS has unveiled £12bn of write-downs, almost half of which are attributable to the US based arm. As an institution RBS are poised to unveil full-year losses of up to £28bn - the biggest loss in UK corporate history. In the US, there are now six class-action lawsuits that have been filed against RBS, in the Southern District Court of NY, alleging that RBS misled investors on the true state of its accounts in a series of filings with the US Securities and Exchange Commission (SEC).

With this sort of context the public outcry, particularly in the case of part-nationalised institutions, is understandable. Politicians have already started to react to this public disaffection, with the government in the UK imposing restraints on executive pay packages at RBS and Lloyds, and likewise Barack Obama has curbed executive pay structures for the part government owned US banks.

Personally though, I think a lot of the outcry is misdirected, and a cover for a whole raft of mistakes that governments, regulators and investors made when analysing these institutions. The personal incentive schemes operated by each of the vilified institutions received the backing of each of these parties during the "good times". Effectively these stakeholders should look at why they stood by and effectively allowed these banks to receive a free call option on the markets - i.e. the banks and their employees could bet these stakeholders' investments and retain the majority of the upside, with none of the downside. The various pension funds and insurance companies that manage money on individuals behalf should look at why they allowed themselves to invest in such one-sided bets.

This is not an attempt to deny the incorrectness of the managements of these banks for setting up faulty incentive schemes, or to pardon those who wilfully participated in those schemes, but more to clarify that there is, as always, a bigger picture. Culpability is always easier to place with one group, that way the blame can be more focused, and the world is kept simple.

As a UK taxpayer, and consequently a fractional owner of both Lloyds and RBS, I want those employees to be incentivised to make a solid return on the money we have all invested. I would be generally against pay caps or restrictions on management methods for compensating the best performers. I'm glad that the UK government wants to play the role of "activist investor", that many private investors failed to do "on the way up". What I would like to see though, is a better alignment of my interests with those of the employees. From my experience, the incentive of an employee was very much based on the short term. A common theme when structuring trades (like the ones that Jay Levine was involved with) was figuring out how to "upfront" the cashflows the bank would take from a particular trade - i.e. you would be much more concerned about risk that might affect you in the next year, than risks that might occur in later periods. People used to ask, "how is your year going", never anything longer than that. As a shareholder, typically the time horizon is considerably longer, and if it isn't then you probably should count yourself as a gambler. I'm not going to propose an exact solution as to how, as a shareholder, I am going to be properly aligned with the employees. All I would say is that, given that my financial stake is what is at risk, I should get my share of the profits ahead of the employee, or at the very least at the same time.

Rarely, if ever, did I see bonuses paid for poor performance. People like Jay Levine, during the good times, would have made many, many multiples of the amounts that they were paid for their banks, and consequently their stakeholders. What was at issue was that these performance measurements were short-sighted, and didn't consider the longer term risks that were being taken. I don't blame Jay Levine for that so much as I blame the other stakeholders for paying insufficient attention. It's wishful thinking to hope that somebody is put into an incentive scheme like the average investment banker has been put, and hope that they will act in a way that is counter to that incentive set-up. Nevermind the fact that they wouldn't get paid a bonus, they would probably be removed from their position pretty quickly. The incentives were wrong, but the individuals didn't set out the incentives. It doesn't remove them from culpability but they weren't acting alone and they weren't acting in secret.

Anyway, I'm certainly pleased to have identified Ann Bevitt's case for "worst job ever". I think she wins, just, from the pig-disimboweller. Any other contenders, please let me know.

Protect me at my peril

As the great and the good descended on Davos for the annual movers and shakers moving and shaking fest last week, one of the hot topics on the agenda was the rise of "protectionism". As nation states have felt the pain of rising unemployment, diminished tax revenues and growing budget deficits, the paternal inclination has started to move towards "protecting your own". Ironically, given the inter-dependent world we are in, steps towards "protecting your own" could have the opposite effect relatively quickly. Most of the folks in Davos may believe this to be true, but many political leaders will be inclined in the protectionist direction to avoid domestic flair ups, as job losses mount.

Collectively we should be looking to historical parallels to understand the importance of avoiding a protectionist route. Over the last 30 years the world has seen globalization of a kind many believe to be unprecedented, but the truth is that the world has been here before. In the three decades prior to the outbreak of WWI in 1914, trade in goods reached almost as large a proportion of global output as in the past 30 years. Several historians have made the argument that the outbreak of WWI should be understood as a kind of backlash against globalization, heralded by rising tariffs and immigration restrictions in the decade before 1914, and welcomed strongly by Europe's land-owning elite. This ruling, land-owning elite had been undermined for decades by the decline in agricultural prices and emigration of surplus rural labour to the New World.

After the end of the war, economic progress shifted forward and trade restrictions diminished once again, but international trade did not approach its pre war level. A further setback for the rebound in international trade occurred in 1929, after stock markets crashed in the US. Two Republican senators (Willis Hawley and Reed Smoot) sponsored a bill to raise tariffs to the highest levels America had ever seen. In the midst of the economic stress the protectionists won. The result was a reciprocal, tit-for-tat, round of hikes elsewhere, which led to a disastrous collapse in international trade, leading to huge job losses globally. In turn this hastened the demise of the Weimar government in Germany, who were already struggling with a mass of reparation payments left over from the end of the First World War. The government collapsed amidst hyperinflation in the early 1930s, and paved the way for Hitler's rise to power. The rest as they say is history, but the concept of globalization only started to be perceived a positive force again in the 1960s and 70s.

At Davos, I hope that these historical contexts were understood, as participants tried to grasp the consequences of a breakdown in the global trade structures that so many people around the world rely upon. At a simplistic level, international trade creates the opportunity for poorer nations to pull themselves out of poverty, through export led growth and richer countries to benefit from cheaper access to goods and services than could be domestically produced. Chinese growth rates over the past 10 years are testament to this concept, as are the cost of flat screen televisions for the consumer in the UK or the US. I suspect many of the participants at Davos are aware of the context, but the inclination towards protectionism may be too strong for some political leaders to bear. Gordon Brown, notably, has been particularly forthright in his eagerness to counter this inclination. Speaking on Friday, the Prime Minister insisted that "international co-operation is absolutely necessary" to ensure money and bank lending flow to emerging markets. "If we don't do that, then there'll be deleveraging equivalent to deglobalization where the loss of capacity will restrict the growth of the world economy".

These words, to an international audience, completely contradict the shock he has recently expressed at home over the bad, virtually all "foreign", loans made by the now almost nationalised RBS. The Treasury has specifically ordered RBS to increase its lending to British households and companies by £6bn in return for the right to convert £5bn of preference shares into common equity. Bank of England figures out on Friday showed that British financial institutions have responded to government pressures to maintain lending to UK companies and households by reducing foreign currency lending to non-residents by a greater amount in the fourth quarter than at any time since records began in 1990.

This comes against the backdrop of a series of unofficial strikes across Britain over plans by oil companies to give jobs to construction workers from Portugal and Italy. Workers at refineries and power stations in various parts of the UK staged walk outs, some holding placards quoting the words of the Prime Minister; "British jobs for British workers". In heated exchanges, some protesters called on their colleagues to march on Downing Street to protest at the situation. One of these protesters, a shop steward called Kenny Ward, addressed the crowd and told them they had to stand together and take on the "greedy employer". He said: "This is what it's about, it's about collective strength. I'm a victim, you are a victim, there are thousands in this country that are victims to this discrimination, this victimisation of the British worker." Ironically, the oil company at the centre of this dispute, Total SA, is financed by a global syndicate of banks, pension funds, insurance companies and other interested parties, the majority of whom will not be British at all. Kenny Ward and his placard wavers may be victims of the global market for labour, but they were also beneficiaries of the global market for capital that allowed Total SA to finance its British operations, and consequently create the jobs in the first place.

Issues over protectionism are appearing all around the world, perhaps most significantly in relation to US trade negotiations with China. House Democrats want to require that all iron and steel used in stimulus-funded infrastructure projects should be made in the United States. America's steel producers are happy, especially since they saw their share of the world steel market fall from 7.9% to 7.2% in 2008. This policy is being loosely directed at China, whose trade relations with the US have been souring gradually for the last couple of years, but have deteriorated faster in recent exchanges. American policy-makers have long pushed Beijing to accelerate the appreciation of the yuan, arguing that China's exchange rate policy played a big role in creating global imbalances and that, for the sake both of China's economy and the world economy, the yuan needs to strengthen. With global demand for its products diminishing, the Chinese inclination may be increasingly in the opposite direction - to make the yuan weaker, to sustain its export markets, which really would wind up relations with the US.

Interestingly, every six months the US Treasury is obliged by government order to publish a list of countries which it deems to be "currency manipulators". Once a country appears on the list, formal negotiations to end the manipulation are required to begin. Hank Paulson as Treasury Secretary had rigorously avoided accusing Beijing of being a "currency manipulator" (a term that carries legal implications), yet Tim Geithner has done it in his first week of office. Domestic politics are surely playing a big role in this change of tack. China's bilateral trade surplus with the US has long been an contentious issue in Congress, particularly with Democrats, and with unemployment up, the desire to take a more aggressive tone is increasing. The $800bn stimulus package making its way through Congress already has such dubious "buy American" measures like the one aimed at supporting the US steel market above.

The basic economic analysis - that a stronger yuan is necessary to rebalance China's economy away from exports - is probably right. The world's immediate problem, however, is a dramatic shortfall in demand that will not be magically corrected by exchange rate shifts. The US willfully encouraged the export orientated Chinese economy during the "good times" by buying the flat-screen TVs and refrigerators (etc.) that China was producing en masse, so there is a touch of sour grapes about this dispute now that the US is struggling domestically. The truth is that currency movements will only shift demand between countries, but it will not create it. In the short-term therefore the outlook for the world economy depends on whether governments stimulus packages are successful, not on whether China is "manipulating" its currency. Taking on this aggressive tone, though, has dangerous implications. Domestically Geithners comments may simply encourage anti-Chinese action - Lindsey Graham, a senator who first pushed for a 27.5% standard import tariff against China in 2005, called Geithner's comments "music to my ears". On the Chinese side, officials strongly dispute the idea that their savings surplus had anything to do with the current global mess. An official at China's central bank recently called the idea "ridiculous" and an example of "gangster logic". If trade relations did break into more concrete rounds of tit-for-tat tariffs and subsidies the implications could be substantial, both economically and politically. China's participation in funding the US budget deficits remains key to the US, and it could become an extremely politic weapon if the US continues to wind them up, which wouldn't be good for anybody.

With the global economy in its most dangerous circumstances since the 1930s, the group of leaders at Davos hopefully understand the potentially serious implications of tit-for-tat protectionism. In the globalized world prior to the First World War, the international reliance on free trade in labour, capital and manufacturing created an interdependence between nations that when broken sowed the seeds for global conflict. At the very least the Smoot-Hawley response and similar policies in 1929 turned a stock market crash into the Great Depression. For the oil workers in England, whose jobs are being 'taken' by immigrants, their story while unfortunate is a small subtext in the pros and cons of a globalized world. In the long run, the pros most certainly outweigh the cons, as history has shown.