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25 April 2022

After pestilence and war comes famine

Conquest, war, famine and plague are known as the horsemen of the apocalypse. After the pandemic and the Ukraine war comes the 2023 famine, an event that is not just a speculative possibility but a foreseeable occurrence, given the one-to-one relationship between the use of fertilisers and crop yields. Russia’s military campaign is going badly, even now that the Russian army is focusing on the east and the south. Russia’s biggest strength is that the world is dependent on it. One of the downstream products from Russian commodities are fertilisers. Germany’s farmers have warned of mass crop failures in 2023 as a result of fertiliser shortages, and are calling on the government to build fertiliser reserves. Unfortunately, this is something for the future. It won’t save the world next year.

Russia, Ukraine and Belarus together are absolutely critical for the global food supply chains. The focus so far has been on wheat exports. In 2020, Russia was the world’s largest wheat exporter. Ukraine was the fifth largest. But wheat is the not the catastrophic bit. It is fertilisers. 

The price of nitrogen-based fertilisers has gone up from $200-300 per tonne to $1700. They constitute the largest product group. Their production is based on mixing nitrogen from the air with hydrogen from natural gas to create ammonia. The next stages are the production of nitric acid and ammonium nitrate: the fertiliser.

Belarus and Russia are the world’s second and third largest exporters, respectively, of potash, or potassium chloride, which constitute another group of fertiliser. Potassium-based fertilisers have risen in price from a previous $300 to $1000.

Russia is the world’s fourth largest producer of phosphate, the raw material of the third group of fertilisers, behind China, Morocco and the US.

The massive price explosion of fertilisers means that many farmers cannot afford them, and will cease to farm certain crops. The consequence will be a significant fall in crop yields, and a massive increase in food prices. It will also be the next price shock. Central bank economists who believe that the current price shocks will fall out of the index are delusional. De-globalisation is a structural shift. 

Die Welt cites a former German consumer affairs minister as saying that Russia accounts for a third of the global production of synthetic fertilisers. He estimates that 3.2bn people are dependent on their nutrition from the use of synthetic fertilisers. He is warning that the world will see the biggest famine in history. But unlike the war and pandemic, this shortage of fertilisers will not hit us with a bang. It constitutes a creeping catastrophe. Existing reserves are sufficient for this year’s crops.

We conclude from this information that a long war in Ukraine will have catastrophic implications for the world's food supply. We should therefore not focus only on the immediate military campaign, but on what happens if this war goes on for a year or longer. As we keep saying, we are not sure that western governments have thought this through. Hyper-globalisation has made us so interdependent that we have become limited in our ability to slap sanctions on any country that forms a critical part of global supply chains.

The blind macro-economists who only see the dollar-equivalent of Russia’s GDP may well conclude that Russia is a small country. But what they do not see is that the world food supply is dependent on it.

22 April 2022

A pyramid scheme, too clever by half

The news this morning is that the CDU is likely to press the Bundestag for a vote on weapons deliveries, unless Olaf Scholz agrees to deliver heavy weapons. The criticism of his duplicitous manoeuvre, making promises of arms supplies in public and then frustrating them through back channels, is getting much louder.

What we expect to see, and started to see yesterday, is the attempt to deflect from the problem with pseudo-schemes that look impressive but will have little impact on the ground. Yesterday, Christine Lambrecht, the German defence minister, announced a scheme of musical chairs whereby Slovenia is to deliver tanks to Ukraine while supplying Germany with other hardware. Scholz still intends to not deliver any weapons to Ukraine directly, and prefers to dump this problem on other EU member states. Anton Hofreiter, the Green Party’s most prominent critic of the government’s position on arms deliveries, said that such ring schemes could be useful but they won’t do the job.

There are benign and not-so-benign explanations for what is happening. It is possible that the German government believes that Russia might revert to nuclear weapons if it suffers a military defeat in Ukraine, and that it seeks not to become a primary target of such a strike.

We also keep hearing that Vladimir Putin may have some kompromat on Scholz: blackmail material. We wrote before the German elections that Scholz had been implicated in two financial affairs, one regarding his role as mayor of Hamburg in a financial scandal. This related to Warburg bank, which secured a tax rebate from the Hamburg government through a scheme that was later declared fraudulent by Germany’s highest court. Scholz also failed to take action in the Wirecard financial scandal when he was finance minister. In their habitual deference, the German media have not followed up on these stories after the German elections. But we would not be surprised if Putin had more information on Scholz than the media through his many friends in the SPD and German industry.

We also heard suggestions that the Bundeswehr is in such a decrepit state that it only has very few functioning machinery left. Germany might simply be too embarrassed to deliver faulty gear. Heavy weapons deliveries to Ukraine would expose the country’s own failed defence policies, and may make it impossible for Germany to make good on its commitments to Nato.

One can never be sure whether the motives behind a puzzling action are based on superior information, cover-ups, misjudgements, panic, or in this case personal blackmail. But Scholz's duplicity on weapons deliveries is astonishing, especially considering that he is now at risk of losing his majority. If this were to go on, we would not be surprised if Friedrich Merz ends up making an offer to the Greens and the FDP that they can’t refuse. Merz has the unique advantage of not having been in Angela Merkel’s government, meaning that he is not implicated in either its foreign or defence policies. He can make that U-turn much faster than Scholz. A mid-term coalition switch would be his safest power option.

21 April 2022

Macron vs Madame Le Pen

Last night Emmanuel Macron and Marine Le Pen had a feisty exchange in their TV debate. A missed opportunity for Le Pen against a combative Macron, sums up Le Monde. First polls suggests that Macron is seen as the winner of this debate, even if he is still considered to be arrogant and intolerable. Le Pen did not get him on his record as president, and it was Macron who pushed her into the defensive over her record of voting against policies in the assembly that she is now proposing herself.

Le Pen, the candidate who claims to speak for the poor, held up well against his attacks, accusing him of being brutal and dividing the French, but she did not convince on substance. She did not have the chance either to expand on her social agenda, which would have given her some advantages over Macron with the left. Instead, Macron hammered her over her relationship to Vladimir Putin, who helped to finance her 2017 campaign with a €9m loan; over her idea of a Europe of Nations; over her proposal to abolish wind turbines on the grounds that they aesthetically unpleasant; and over her proposed ban on head scarves in public spaces.

The head scarf ban and her position on renewable energy may tilt the vote of the left towards Macron. The debate also comes after Russian opposition leader Alexei Navalny had raised the issue of the loan in a Twitter thread, urging voters to back Macron. Most of Jean-Luc Mélenchon’s voters may still prefer to abstain, but green and left supporters may back Macron especially after he promised to nominate a prime minister that will deliver the ecological transition agenda. Mélenchon called for a third round without waiting for the results of the second round. He is already mobilising his troops to win the legislative elections in June as a way to become prime minister. He is the one candidate explicitly against nuclear power, which is part of Macron’s plan. The idea of cohabitation, of a president without parliamentary majority, has some legs and boosts the morale of his supporters.

But Macron also sometimes struggled to hold himself back, sounding patronising at times when raising his eyebrows, crossing his arms, and repeating Madame Le Pen, Madame Le Pen. He often showed off his superiority by saying that she should stop mixing things up, to which Le Pen responded that he should stop giving lectures. Her struggles with the figures may be seen as weakness by some, or as a sign that she is human too. As a champion of the poor's struggle to make ends meet, she may have made her case, but she did not succeed in extending much beyond her existing far-right constituency.

20 April 2022

Crypto is not binary

The world as we see it is divided fairly neatly into two camps: the crypto evangelists and the crypto-deniers.

We think they are both wrong. It is possible, indeed likely, that the crypto bubble bursts, and that the bitcoin and ethereum blockchains will nevertheless revolutionise our financial system. Bitcoin was not designed as a speculative asset, but as a transaction currency that is not under the control of governments or central banks. The opposition movement in Russia has been relying on it for its funding. Crypto’s biggest promise is not that it replaces existing currencies, but that it replaces parts of our financial sector. To put it crudely: crypto is not so much a threat to central banks as it is to banks. The ethereum network has the ether as its transaction currency. You can, of course, speculate with it. But the point of it is to provide a medium of exchange in a crypto-based financial market.

The Wall Street Journal reported that the latest crypto hype is currently deflating: the market for non-fungible tokens. NFT’s are crypto assets attached to digital assets, like digital art. You can slap an NFT on pretty much any digital content. The NFT of the first tweet ever written, by Jack Dorsey, the founder of Twitter, was sold for $2.9m. It’s value is now $14,000. We recall that some insanely primitive drawings, random sticks and circles, went for unbelievable sums. That bubble, too, has mercifully deflated.

The social benefit of NFTs is not to make naive investors very rich, but to provide a marketplace for digital assets. That did not exist before because digital assets, like paintings, can be copied at will. The NFT identifies the owner.

There are parallels to the dotcom bubble. It was based on a correct assessment of the impact of the internet on the economy. Where the naive dotcom evangelists of those days got it wrong was the belief that the laws of economics were suspended. Same here.

19 April 2022

The neither nor youth

Neither nor was the slogan that Emmanuel Macron used in his 2017 campaign to describe that he is right in the centre, neither right nor left. In 2022, this neither nor slogan is coming back to haunt him.

A large number of young people believe that Macron and Marine Le Pen are practically the same. They opt for neither of them, neither populist nor centrist. Or they switch between the two as if their programmes are similar, which they are not. In many questions the two have opposite views, for example on renewable energy, French border controls, retirement age, preventative health care, the primacy of national over EU law, housing priority, wealth tax, and police defence. But either the young do not care to read the programmes any more or they form their views on social media, following trends rather than convictions.

The hashtag #niMacronniLePen, meanwhile, is trending in social media and is sprayed on the walls at the Sorbonne university in Paris.

What is behind this neither nor? Jean Marc Vittori in Les Echos gives two reasons. One is ignorance or the inability to choose or to eliminate. They make up their minds by surfing through their social media groups or by listening to friends. This bubble is disconnected from the reality that could help them to chose between the candidates.

The other reason is strategic. Not showing up to vote on Sunday increases the chance of a Le Pen victory. This would send a seismic shift throughout the system. It would change the game for the upcoming legislative elections, lead to street protests, and have implications for the next presidential elections. Those who prefer radical change may welcome this. And history has shown that in politics, people often vote out the one candidate they are closest to. In 2016, US Democrats preferred to abstain than to vote for Hillary Clinton. In 1932, the German communist party fought the Social Democrats, which enabled Adolf Hitler’s rise to power.

We agree with Vittori that this neither nor vote is not only curious but also dangerous for democracies.

14 April 2022

Offshoring asylum seekers

Boris Johnson found another way to deflect from his political problems. Later today he will announce plans to sending irregular immigrants further on to be settled in Rwanda. This is part of the UK’s government’s longer term plan to take back control on illegal immigration. The numbers of immigrants are rising. Official numbers suggest that here were over 28,000 arriving on British shores last year, up from 8400 in 2020. The prime minister will also announce plans to hand operational control in the Channel over to the Royal navy, to break the business model of people-smuggling gangs, and deter people from risking the crossing.

The UK government reached a deal with Rwanda on a migration and economic development partnership that is to be signed by Priti Patel later today. According to the BBC, Rwanda will be given an initial £120m as part of a trial, but annual costs of the full scheme could be far higher, according to the critics. The deal could mean that those arriving through the Channel could be forcefully transported to Rwanda.

Whether this initiative will be implemented is another matter. Resistance is likely after a series of defeats to the Government's Nationality and Borders Bill, which is currently in a tussle between the two houses in parliament.

13 April 2022

Worry about etherium, not the renminbi

This is a story that appears at first as outside of our reservation, but we think it has a deep significance for a debate that is well inside. A young American programmer has been jailed by a New York court for 63 months. The reason is that he accepted an invitation to go to North Korea, where he gave a presentation to the Pyongyang blockchain and cryptocurrency conference. The US accused him of teaching the North Koreans to use the Etherium blockchain to circumvent US sanctions against the country.

The interesting bit about this story is the implicit recognition that you can use the Etherium blockchain to evade sanctions. But trying to keep that information secret seems rather pointless to us. Not everybody understands this stuff, but the information is all out in the open. Unlike the North Koreans, the Russians are tech-savvy. If the North Koreans can evade sanctions through blockchain, so can the Russians. If the attempt to explain how it works carries a long prison sentence, we should probably assume that there this is a real threat.

At this point, let's cut to what appears to be an unrelated debate: on the impact of the current Russia sanctions on the future role of the US dollar as the world leading currency. We have heard a number of US commentators argue that it won't have an impact at all. We believe that this is also the view of the US Treasury. The argument is most cogently formulated by Michael Pettis who cites three reasons: there is no available alternative now; no other country/region of the world is willing to incur large current account deficits to absorb the associated costs that come with that; and the global economy would otherwise go through a very disruptive restructuring shock.

Each of his arguments is right. But now see how the two stories are coming together. Blockchain constitutes a disruptive technology. We are not talking about bitcoin, the grandfather version of a cryptocurrency. This is about another blockchain-based system, Etherium. It, too, has a currency, the ether, but the main point of Etherium is not the currency, but the possibility that it allows the re-creation of an entire financial market. And yes, it does carry the promise that it allows you to evade sanctions. It is a truly disruptive technology.

Unlike the North Koreans, the Russians have demonstrated in the last few weeks that they are already experts at evading sanctions. When economists talk about the dollar as a global currency, they stay within the framework they normally use: that of monopolistic fiat currencies issued by central banks. There is no threat to the dollar from another currency, like China's renminbi. Pettis is an expert on China and knows that the country is not willing to run large and sustained current account deficits, and liberalise capital flows to boost the role of the renminbi.

The bigger threat comes from disruptive technologies like blockchain, which allows people to engage in financial transactions without interfacing our current global financial markets, over which the US exerts significant control. For as long as you don't try to convert your bitcoin or ether into dollars, and remain inside a crypto-based economic system, there is nothing the US can do on the financial side to stop you. We are not now at the point where the infrastructure is sufficiently developed. But the speed with which the Etherium blockchain is being developed is breathtaking.

Cryptocurrencies have one characteristics of gold: limited growth in supply. But unlike gold, they can be used in complex cross-border transactions directly. It is the first financial system in human history not backed or controlled by a central authority. The dollar will remain the largest global currency. Nobody will challenge the dollar in our analogue metaverse. But it will become progressively harder for the US to use the role of the dollar to force the world to comply with its will. You can't jail all the programmers.

12 April 2022

The new old divide

On day one after the French elections, parties are issuing their recommendations for the second round. Les Républicains call for a front against Marine Le Pen, leaving voters to decide whether to vote for Emmanuel Macron, cast an invalid or blank ballot, or not vote at all. Same for Jean-Luc Mélenchon, whose voters will play a crucial role in this second round. The CFGT trade union recommended a vote for Macron. Others merely want to block Le Pen. Medef, the employers' organisation, warns about the risks of Le Pen’s economic programme. It is like a wake-up call for a campaign where content did not matter much, up until now.

Both candidates have hit the campaign trail. Le Pen promises to slash VAT on gas, oil and fuel from 20% to 5.5%. Emmanuel Macron has softened his stance on retirement at 65, and promised to complement his programme.

This battle will be between those who want regime change and those who seek continuity. Le Pen is the candidate for the gilets jaunes, those earning less than €2000 and who do not want just a band-aid, which is what they accused Macron’s government of having offered them in response to the current energy crisis. They want the system to change.

The irony is that in 2017, Macron came to power on the promise to change the system. After five years in office, his constituency is the older generation, the bourgeoisie on the left and on the right. The revolution Macron and his En Marche movement promised with verve and youthful dynamism in 2017 was a trojan horse for status quo continuity. The young, eager for change, voted Mélenchon or Le Pen this time. Then there are those who live in the periphery, in villages and worn-down towns. They work in low-paid jobs in cities like Montpellier, Rennes, Nantes, and Marseille. They voted for Mélenchon or Le Pen too.

This is a battle between indignants versus the preservers. Macron seems to understand this. His first visit was to a working class city in the north, mingling in the crowds. Can he be both empathetic and competent, a candidate who speaks to the people on the streets, and to the country as whole? This will be what it takes to bridge the divide.

11 April 2022

Why does Scholz act the way he does?

We know that Germany is opposing an oil and gas embargo, the only economic sanctions that would have any chance of making a dent in Russia's ability to finance a war. We also know that the office of Olaf Scholz has intervened to stop a supply of tanks that Germany had promised to deliver to Ukraine. So is this Germany surreptitiously fighting on the side of Russia, as it would outwardly appear?

We don't think so. The German political elite really is shocked not only at what Vladimir Putin did, but by how they were fooled by him. We noted a revealing comment by Wolfgang Kubicki, the FDP's deputy leader, who said that Putin had destroyed 50 years of his own political work overnight. Kubicki said he always believe in change through trade, and objected to economic sanctions, until now.

Frank-Walter Steinmeier, the German president, was one of the architects of the German-Russian relationship, starting from the days of Gerhard Schröder, who he served as chancellory minister. When Steinmeier became foreign minister, he developed a friendship with Sergei Lavrov. He famously accused Nato of sabre-rattling when it conducted exercises in Poland and Germany a few years ago. Steinmeier also apologised for his role in German-Russian relations, and is now calling for Lavrov, among others, to be brought in front of a war crimes trial. The German media are now honing in on Manuela Schwesig, a senior SPD politician, who helped set up a foundation with the explicit goal of circumventing US sanctions against Nord Stream 2. It's all pouring out now. The German elites are really decoupling from Russia.

Not everybody is quite there: the corporate sector is still dependent for its competitiveness on Russian gas; and Putin has sympathisers in the military and among German ambassadors. We keep hearing from commentators who say that it should be the goal of German politics to get Ukraine to capitulate. Only in Germany would such views still be aired in the media. That is, however, not the position of Scholz.

So why are Scholz and his government acting the way they do? All politics is local. They fear that a gas embargo would kill the German economic model. We think it would, and it should. But the SPD is clinging on to this model, because most of its voters are in the industrial heartlands, the bit that is threatened the most by a gas embargo.

Robert Habeck, the Green economics minister, also rejects a sudden gas stop because that would reawaken de-commissioned nuclear power stations and postpone the exit from coal. So you are left with a coalition whose agenda is very much based on the Russian gas continuing to flow, albeit for different reasons. We do believe that Scholz and Habeck are serious about their commitment to stop, or at least reduce, Russian gas supplies eventually. We are, however, not sure that they know how.

The German industrial model was unsustainable before, and it is unsustainable now. This lack of sustainability expresses itself right now in the form of stagnating profits and stagnating wages. That situation can go on for a while, but not forever. A gas embargo would have constituted an ideal catalyst for forcing change. The German government is missing that moment. When Scholz is hesitating and prevaricating, there is no hidden agenda. It is that he simply is not a very good leader. When he says that he never opens his mouth, it is not because he acts behind the scene. It is because he has nothing to say.

When Boris Johnson visited Kiev over the weekend, the German media were overawed by the courage of the British premier. Many realised at that moment that their own chancellor would not have the guts to do anything like this.

8 April 2022

Fall and decline of Rishi Sunak

We recall those confident predictions from British hacks that Boris Johnson was on his way out and that Rishi Sunak was his most likely successor. Now, it is Sunak who is fighting for his political survival after a leak that his wife has claimed non-domiciled tax status for herself. This is a more serious allegation than meets the eye.

Sunak's wife, Akshata Murthy is a citizen of India and, as a shareholder of Infosys, is also one of the wealthiest people in the UK. Non-dom financial status allows people to claim the so-called remittance basis of taxation. This means they don't pay taxes on foreign earnings in the UK. It is a very common, and legal, practice. We recall it was a political issue in the 2015 elections, when Labour threatened to abolish it. To be eligible for non-dom status, the applicants needs to state that they eventually plan to leave the UK and spend the rest of their lives abroad. This is where it gets tricky for Sunak. The only honourable explanation that would justify Ms Murthy's non-dom status is that she, and presumably her husband, plan to leave the country.

Sir Keir Starmer, the opposition leader, focused on the sheer hypocrisy of a chancellor's wife claiming non-dom status, living in Downing Street, while her husband's tax policies have left many lower income earners worse off.

UK newspapers are speculating that the source of the news might have been Johnson. This is based on the usual stuff of one hack quoting another about what might have happened. Sunak's own people says the source might have been the Labour Party, as the story was leaked on the day the increase in National Insurance took place. Too many people benefit from this: Johnson naturally. Sir Keir. As well as Liz Truss, the foreign secretary, who is another potential future leadership contender.

Johnson's own political survival is not really dependent on the the next door neighbour. The moment of greatest danger has passed. We noted an article in Die Welt, which contrasted the sure-footed statesman-like stature of Johnson with that of Scholz. The German chancellor is pulling levers behind the scenes to block arms shipments to Ukraine. Johnson is having a good war. Scholz and Emmanuel Macron perhaps not so much. So did Churchill, Johnson's hero, 80 years ago. Like Churchill, Johnson too, might end up losing the post-war election. But at least he won't be defeated by his own neighbour in Downing Street.

The partygate scandals will briefly flare up again if, or when, Johnson receives an official fine from the police. There are an awful lot of This Won't be Forgotten admonitions in newspapers like the Guardian. But this is hacks licking their wounds after yet another failed forecast. Of course, the Downing Street parties will be forgotten. We think Johnson is vulnerable for other reasons, the biggest of all being his failure to develop a coherent vision for post-Brexit Britain, combined with truly toxic tax policies. That failure is Sunak's as much as Johnson's.

Johnson's recovery in the opinion polls is slow but steady. The Tories now trail Labour 35% to 40% according to the latest the poll tracker. This is far from a hopeless position for a government mid-term. But we are long away from the days of poll ratings in the high 40s.

This also means we are back to a more normal situation in politics, where the opposition leader, not another internal party rival, is the presumptive next prime minister.