Conversations with Abdul Aziz 1

These reports are edited versions of exchanges held via Skype, email and face-to-face, taken from a conversation that began in early 2007. Abdul Aziz (not his real name) is a minor Saudi royal with a degree in economics from a Midwestern university who now lives in London where he manages some of his immediate family’s wealth. Keith Hart is a retired British academic (not an economist, but with a lifelong interest in the economy) who lives in Paris and first encountered AA in Knightsbridge while visiting his bank. They meet occasionally for tea at Harrods.

The deepening financial crisis of late September 2008 persuaded KH to publish extracts from this conversation as a blog.

KH: George Soros called the present crisis the end of a 60 year cycle of credit expansion. So is this the end of the American empire? The implosion of Wall Street comes on top of giant fiscal and trade deficits, two wars running with no end in sight and a deep neglect of public infrastructure. Now, by taking on massive amounts of debt, the federal government will further reduce the resources which it could use to get things on track. Furthermore, the international institutions which embodied the values of the US — the UN, the Worldbank/IMF — have been severely weakened.

AA: Well, it is certainly the end of Bush’s attempt to control the world by military force and of him, of course. But I think the US economy is better placed to come out of this crisis strongly than its competitors. I recall reading about the replacement of the USA by Germany and Japan in the 80s (Paul Kennedy’s blockbuster, remember him?). There are other perspectives on our moment in history than the one about America’s inevitable and precipitous decline.

KH: Such as?

AA: The restructuring of the financial institutions there is more radical than could be contemplated anywhere else and so far its impact on the real economy has been less than expected. The prospects for the latter have been greatly improved by the dollar’s devaluation; and exports, particularly of internet-related products, where the US is still world leader, are rising strongly. The US took a big hit on housing and finance earlier than elsewhere and might already have absorbed the worst of it. My bet is that the US economy has the best chance of recovering strongly from this crisis. The OECD said so only last week when they revised their growth forecast for the US. The dollar will improve dramatically against the euro.

KH: Yes, in Europe, Britain, Ireland and Spain have been going the same way as the US but with a time lag; and the Eurozone in general has not yet felt the full brunt of the crisis. The euro has not had to survive a massive downturn before and, when it does, the institutional rigidity of the single currency and the political paralysis of the EU will be severe handicaps. Yesterday several financial institutions went to the wall there and this is only the beginning. I can’t imagine the French government abiding by European monetary rules if its large state industries (aerospace, nuclear, trains) need protection.

AA: What may save the euro is a massive devaluation like the dollar’s. When the dust settles after the current drama, I imagine the dollar/euro exchange rate will go down to $1.20 or less. But it will soon become apparent that the EU has no administrative or political basis to manage this crisis and the pressure to do something about the single currency will grow.

KH: I always liked that old Tory idea of the ‘hard ecu’, that Europe should have an inflation-resistant central currency modeled on the Bundesbank and each country could retain its own politically managed currency. Maastricht was a mistake. There is no way you can manage the economy of two dozen countries and even more regions with one currency.

AA: Blair and Brown stumbled into that recipe for Britain by failing to join the euro. British businesses and tourists have the benefit of both the euro and sterling; and this has given the UK a temporary edge in the current economic crisis. The pound’s devaluation has already begun to show up as improved exports. But New Labour colluded in a catastrophic shift in the economy to London and financial services. The FT said three years ago that Britain’s economy had become nothing more than a glorified hedge fund. So the UK’s chances of economic recovery are less than America’s, both in terms of the underlying strength of the US’s real economy and the democratic vitality of its political institutions.

KH: So do you think Obama is going to win?

AA: I made a large bet on him winning by a landslide a year ago, but what has happened this week makes it even more certain. It is not just that Obama and McCain are in a war between the forces for change and the forces of reaction, but that their political methods are similarly placed between the old and the new society: one trying to manipulate the TV news, the other trying to mobilise from the ground up. The announcement that Obama raised $66 millions in August, as opposed to the $84 millions McCain got from the Fed for the whole campaign shows the stakes of this war between methods and social visions.

KH: What interests me is how many of my liberal friends in America (I was in California recently) are still afraid that the Republicans will get in. 80% of Americans say they want something better than they have had and they have already lost a lot in the way of houses, jobs, income equality, education, health and the costs of war. People who think they would vote in a doddering curmudgeon and an untried icon of the religious right prefer their Americans to be stupid and bellicose.

AA: It’s the American people’s intrinsic sense of democracy that prevented Bush and Paulson rolling over Congress with a a proposal out of the Mussolini playbook. I stayed up for the debate last Friday. I thought Obama was so much more impressive than McCain, but the liberal press called it as a tie. Later the polls showed that the audience had a different opinion. It doesn’t pay to underestimate the American people, whatever Mencken said.

KH: Yes, three cheers for Tocqueville! I noticed that the hot money is now going into gold and short-term bonds, while the oil price took a bite yesterday. Where do you think the oil price is going?

AA: Down. To $70 or less. People don’t realise how big a deflation the world economy is entering. When credit dries up after thirty years of unlimited credit expansion, the money to buy commodities becomes scarce. That is why we (the Saudis) will not reduce production in order to keep the oil price up. If the world economy collapses, the demand for oil collapses too. Of course, it is good for us if much lower prices reduce talk about alternative sources of energy.

(To be continued)

Comments |2|

  • Thanks for this Keith and Abdul.

    It would be nice to keep up a kind of asynchronous dialogue.

    I concur with Abdul and this points out how a streamlined industry such as Oil can not only handle deflationary pressure but is better off working with it.

    I would not underestimate the deflationary pressure of the tremendous production that has been unleashed worldwide, i.e. Asia.

    The deflationary pressure on housing in the U.S. is also an opportunity, and not just the bane to the inefficient and thinly capitalized banking entities.
    In detroit as we see a house is now the price of a car, and that is not a bad thing.

    Bank credit deflation could be seen as an opportunity.

  • Perhaps I sound too blithe and even cheerful. A drop in housing price is good for buyers and problematic for mortgages. However, the crisis in financialization that has ensued is due to many factors, not the least of which is the “chasing of the global surplus value pot” and very thin capitalization along with concomitant leverage. Add to that the “correlation” created ironically enough by the spreading of risk and you have quite a phenomenon.

    Not one that should have hypnotized congress into authorizing the purchase of occult paper in the hopes of locking in housing and bank credit inflation.

    I’ve found Donald Mackenzie’s work on the credit markets to be a very interesting mix of economese and sociology. His last piece on the LIBOR was fascinating.

    The LIBOR is now less relevant than anecdote as one hears that interbank lending is on hold.

Category: Abdul Aziz