KH: Well, this has been a big week for relations between Britain and the Gulf states. I see that Gordon Brown, self-appointed saviour of the world economy, has made a lightning visit to Riyadh to persuade you lot to bail out the IMF. He calls it a “Global crisis fund”, sounds like the begging bowl to me.
AA: Yes, having a lot of spare cash in the Great Deflation is terrific for PR. We’ve been putting it around that we can help the Brits go green, some of our neighbours have bought a chunk of Barclays. It’s all go.
KH: Just run that thing about deflation past me again.
AA: In an inflation cash loses its value, but in a deflation, there’s not much money around, so prices fall and anyone who has cash can pick up stuff cheap. The people with cash right now are the exporters to the US, in particular Japan, China and countries like Korea. In order to keep the market for manufactures going, they paid for the US current account deficit by transferring their surpluses into T-bills, US Treasury paper, even though the fall of the dollar made that look unprofitable for a time. The oil exporters made huge windfall gains from the price rise this year and a lot of the money went the same way. Of course we have been looking for other outlets, like the euro, and we even floated the idea of an Islamic gold dinar. But, after the collapse of real estate and then the stock market, everyone rushed into dollars and US bonds. With all titles to property going South (houses, shares and now commodity futures too), this puts us and the other net exporters in pole position to call the shots in the next stage.
KH: So what do you think will be the response to Brown’s initiative?
AA: All the Gulf states have a long-term policy of trying to replace dependence on oil over the next 20 or 30 years. This means buying into blue-chip companies that we hope are going to last. Now the Europeans are worried that the West just doesn’t have the cash reserves to cope with the collapse of Eastern Europe and some of the other ’emerging markets’ to which they are overexposed. The IMF has $250 billions in the kitty, which is peanuts compared with all that worthless paper out there, trillions of CDOs and CDSs. Brown has basically said that we and the Chinese have to come to the rescue. But that is a bit rich when the Americans and the Europeans have stitched up control of the Bretton Woods institutions between them. If they want our money, we will demand a new deal when it comes to voting rights on the IMF, World Bank and the rest. The Chinese are going to play harder ball than us because they have a real economy and we just have the western oil companies and a lot of sand. So we are going to talk nice, say we want to save the planet from global warming and all that.
KH: Barclays got a lot of stick for taking that Gulf money instead of the British government’s. Vince Cable said it was a rip-off (like the bonus payouts from the nationalized banks): they got a better deal than the existing shareholders and certainly better than what the British taxpayers would have. Why do you think they went that route?
AA: Because they still think they can come out of this mess as a fancy investment bank, rather than a semi-nationalized company with the newspapers making a fuss about bonuses and high salaries. That’s why they took a look at Lehman Bros and picked up some of the fire sale afterwards. Of course, with the shirt off their backs, they had to make some concessions.
KH: Did you see that one of the consortium that bought into Barclays was the guy from Abu Dhabi who bought Manchester City? Surely that can’t be represented as investment? The English premier league is massively indebted and footballers salaries have been one of the main beneficiaries of the credit bubble. Maybe he thinks he will soon be able to pick up some cut-price stars. But it still looks more like consumption to me.
AA: It’s all part of the same strategy: buying banks, football clubs, going green. We are moving in on the British economy at several levels. We need to get people used to the idea that New Labour turned it into a glorified hedge fund and, now that the hedge fund is broke, new owners are knocking on the door. It’s a mistake to distinguish too sharply between hard profits and soft symbolism.
KH: It’s curious how Brown has become a hero in New York and Washington, when he supervised the demise of the British economy. The Guardian’s Larry Elliott had a superb swipe at the whole pretension in an article on the economy as mutton dressed as lamb. I can’t resist quoting the opening paragraph: “Repossessions up 71%. Activity in the high street down for the seventh month in a row. Short-term working at Honda’s Swindon plant. An estimate by the Bank of England that losses from the financial turmoil now stand at $2.8 trillion. Just another normal day in the economy.” It takes some chutzpah for Gordon Brown to swan around the world as a saviour, when he didn’t see any of this coming.
AA: Did you see that interview with the FT’s Gillian Tett? They are talking her up as a prophet because she predicted a crash two years ago.
KH: I predicted one four years ago, but it didn’t do me much good. When the boom kept roaring ahead, I lost my nerve and put half my cash from selling two houses into mutual funds. It’s all about timing or, as the man said, “In the long run we are all dead”. I taught Gillian a bit at Cambridge. She did a PhD in social anthropology. Smart woman.
AA: Yes, there’s a lot of that in the interview. She claims she beat the City boys to the draw because they were all stuck in their little groove and she had been taught to put it all together. Nice plug for your discipline, eh?