Wednesday, April 26, 2006

End of a$$

Aside from playing a few (OK, quite a few) rounds of golf the past 2 weeks I've been doing some reading and thinking about the Middle East. The reading included a few books by British or American authors about recent (150 years) history, with a focus on oil concessions and the related political developments. The thinking included quite a few moments wondering just what the current US administration and oil industry execs think they are doing in Iraq. Have they so quickly forgotten how the US found itself in the driver's seat in the region following WWII?

For those to whom the universe of their senses, of the here and now, overwhelms the thought that the present is but one small part of a story still unfolding, it might be difficult to imagine that but a few decades previously the British were in almost complete control of Middle Eastern oil following the collapse of the Ottoman Empire. But they were.

The various rulers of the region had sold concessions to explore for and extract oil to quite a few individuals and companies on terms that demonstrated the rulers' ignorance of western business and the potential for oil. For instance, William D'Arcy in 1900-01 bought an oil exploration and export concession from Persia with a term of 60 years covering most of Iraq except a few northern provinces, for
£20,000 cash, £20,000 in shares in the company and 16% of annual net profits. These payments covered all tax and customs duties. This concession was the basis for the Anglo-Persian Oil Company.

I won't bore you with further examples but suffice it to write that the British government, as preeminent power in the region was able to drive a hard bargain. Despite this, the regional rulers would intermittently agitate for and receive improved deals over time. Barring genocide, the people in the region were and as Iraq demonstrates, are still capable of shutting down oil exports, admittedly at the risk of losing those revenues.

The trend, since those first concessions led to oil exports in the early 20th century has been for the regional governments to get a greater and greater share of the profits and control of the resource. This trend was accelerated when the US made it big move in the region, modifying its deal with the former Emir of Nejd, then King of Arabia, ibn Saud, to split profits of Aramco 50-50.

Think about this for a moment. While the British were involved in an acrimonious dispute with Iran that eventually led to Mossadeq's nationalization of the Anglo Iranian Oil Company and cessation of Iran's oil exports for a few years, the United States' oil execs agree to a 50-50 split with Saudi Arabia that leap frogged them into the driver's seat in the region.

Stepping back from the history for a moment, I'm a big believer in win-win deals. If you give the person with whom you are negotiating more than he expects, and more than the norm, that person is likely to work hard to hold up his end of the deal. If, on the other hand, you try to screw the person with whom you are negotiating, perhaps because you are a big guy or have a powerful military machine behind you, you may get the deal done, but the other guy just isn't going to work as hard.

So, my question is, why are US oil execs and the Bush administration trying to unwind the clock of these oil deals by getting Iraq to take much less than the norm? Do they really believe this "end of history" flatulence, as if history began with the Cold War between Capitalism and Communism?

Before the Bolsheviks rose in Russia, the Tsars were interested in oil and as is clear, Putin's non-communist Russia is also interested in oil. The same forces (locals wanting more control and profit, other powers out of the loop wanting in, regional leaders looking to expand territory) which were at work in the region for a century are still in operation today. End of a chapter in history, yes, end of history....nonsense. The great game continues.

Only now there is a new player on the field, China. Wouldn't it be funny, in a tragic sense, if, while the US was trying to roll back the clock a century and get these backward people to accept much less for their oil, first in Iraq and then, as the Neo-Cons put it, the rest of the Middle East, China puts its hundreds of billions of dollars and ever growing thirst for oil to work in the region on the regional rulers' terms. At that point, why not resist occupation, the payday will be huge? Why not overthrow governments that signed bad deals? Yes, the great game continues.

Pop quiz: Where did Chinese President Hu go after having China's national anthem introduced as that of the Republic of China (Taiwan) and being heckled by a Falun Gong member at the White House? Saudi Arabia, where he was actually treated to a state dinner, instead of a lunch.

This war in Iraq, it seems to me, can be ended quite quickly, by agreeing to a reasonable deal. Unless, that is, we have put a cloud on the US' name in the reqion, much as Britain found it had a few decades ago.

Monday, April 10, 2006

See you tomorrow

I've got to visit my lawyer today so I won't be posting until tomorrow.

Friday, April 07, 2006

Another Bank of the United States?

During the transformation from economic worry wart to gold bug a person almost invariably reads about the English "South Sea Bubble" and the French "Mississippi Bubble." Those of us who felt the Nasdaq was something of a bubble were quick to point out the similarities between the United States of 1999 and France and England of the early 18th Century. After a few years of reading I now believe the comparison was far less strong than I previously thought. While each instance was an example of excess liquidity fueled equity market madness, there were significant differences.

The South Sea Bubble had its South Sea Company. The MIssissippi Bubble had its Mississippi Company (La Compagnie d'Occident). But the Nasdaq bubble did not have a company or corporation that played the same role.

In both France and England of the early 18th Century, the two respective companies ended up taking ownership of the national public debt in exchange for shares of stock. In that regard, the Mississippi Company and the South Sea Company share similarities with the First Bank of the United States, admittedly with different endings.

In early 18th Century France and England, as in late 18th Century America the need to repay war debts loomed large over the respective governments. In the case of early 18th Century Europe the War of the Spanish Succession had depleted French and English Treasuries while the American Revolution left the new nation deep in debt.

Hamilton's controversial Bank of the United States, like the South Sea and Mississippi Companies assumed the national debt. Unlike the European examples, Hamilton's Bank stayed on the path of what relative to today would be very sound money.

When I read the executive summary of the Hamilton Project yesterday and its evocation of the nation's first Treasury Secretary as a genius
with Larry Summers' idea of a "hedge fund" to manage excess foreign reserves in mind, I couldn't help but wonder if the new plan to deal with a war increased national debt would be a rehash of the old, but successful plan.

To the extent the Federal Government of the United States proves as incapable of repaying the debt as the French Monarchy and English Parliament of the early 18th Century, perhaps the next step is ceding control of the debt to a private institution, like another Bank of the United States, although I imagine it would be easier to use, as per Mr. Summers, the IMF or perhaps, the Federal Reserve Bank of NY after modifying its charter.

When I wrote of an approaching end game yesterday it was with this view in mind. At some point, either the US will admit it will repudiate its debt, foreign holders of that debt will decide for themselves that the US won't repay or a political decision needs to be made to return to fiscal solvency. Given the scope of the problem, in my view, cosmetic changes to the budget or debt process, like the now silly "debt ceiling" legislation will not be enough.

But, you might be thinking, the US public sector debt problem is not so big. I disagree. While the US debt to GDP ratio as currently calculated is not at the levels of, say, Iceland, it is much higher than the Treasury numbers suggest if expected entitlement payments are to be paid over the next few decades.

More importantly, the US Treasury Bond market is the focal point of all other US debt markets. An out of control Treasury Bond market will lend itself to greater volatility in all debt markets and vice versa. I have previously noted that the biggest single contributor to the widening current account deficit is the federal government. Bringing that corporation back in the fold of fiscal solvency would likely go a long way to weaning the nation off its abuse of the dollar as world reserve currency.

While I'm not an advocate of financial consolidation, I can see the virtues of the approach. Big problems often require big solutions. But big solutions sometimes create even bigger problems as France and England discovered.

In the end the ultimate outcome will depend upon the ethics and integrity of the people put in charge, the legal foundation upon which the new or modified institution stands and the willingness of the nation states involved to stay the course. To use a sports term, it's crunch time from a financial sense. I can't say I am hopeful but I do think it better to start throwing solutions out rather than burying our heads in the sand. There is, I believe, a cancer in the monetary system. The sooner it is dealt with the better.

Thursday, April 06, 2006

Andrew Jackson on the Bank of the United States

It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth can not be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society the farmers, mechanics, and laborers who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government. There are no necessary evils in government. Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.

President Jackson on his veto of the Charter of the Second Bank of the United States

Been thinkin'

I took a few days off from blogging to think a bit.

The more I thought about Larry Summers' suggestion that emerging market nations should hand over their excess reserves to the IMF or other institution to manage to possibly insulate their politicians from the ultimate result of their acquisition of reserves the more I came to the view that the end game is near. The financial problems are too big to ignore for much longer.

It is one thing to forecast the end of a financial era and quite another to live through the process. I feel as if we sit on the edge of an intellectual event horizon, about to be pulled into a new universe, or more precisely a new understanding of the same universe-a revolution in thought.

I'll be spending the next few weeks taking a fresh look at the US, its relations with the world, and at the new proposals for running it, like Rubin's Hamilton Project.

In practical terms, that means that I should begin posting again tomorrow. The topic, financial centralization and Bob Rubin's Hamilton Project.

Is a Third Bank of the United States in the cards?