Rabo: Faulty Ivory Towers

By Michael Every of Rabobank

Faulty Towers

With G7 finance ministers ensconced at a British sea-side hotel over the weekend, I thought of two things: a classic 1970’s sitcom, and impractical intellectual isolation – or ‘Faulty Towers’.

I imagine the hotel owner –as cloying as in S01E01 of said sitcom (“A Touch of Class”)– apologizing for the food and service; but post Brexit, and with the current pinch in finding service-sector workers, far less likely to be saying “I’m so sorry. He’s from Barcelona.” There was also no sign of recognition from US Treasury Secretary Yellen that the again-disappointing US payrolls report (559K, vs. 675K estimates and the 1,000K needed to get us back to where we were pre-Covid) was in any way related to the unemployment benefits that pay 80% of wages in many cases – and which will be around until September in most cases. Enjoy the summer, everyone, including the US Treasury market, as 10-year yields dipped to 1.55% – the labor market recovery may only really begin in the fall/autumn, when the tourists have all gone home. (Although one also has to laugh at the Wall Street voices decrying extra unemployment benefits when they benefit from $120bn in QE every month.)  

Overshadowing this was the announcement of a G7 agreement on a 15% minimum global tax rate for the largest firms – where we get to the faulty ivory towers:

• Does the G7 set fiscal policy for the other 186 states and territories? In the US, Congress needs to approve it, and in the EU the process is going to be even trickier when one thinks of Ireland, as just one example of a low-tax economy. At this stage, it seems only declaratory;

• Large firms (not defined) with a profit margin of more than 10% (over an undefined period) will now pay 20% tax on anything above that margin where they operate. But 10% profit margins exclude Amazon, who in 2020 saw 6.3%, and so naturally backs this decision as a “welcome step forward”. Indeed, a low-margin-to-build-a-global-monopolist-or-monopsonist-position-and-then-get-real-power approach slips under the G7’s radar, despite there being an awful lot of this about; and

• This doesn’t provide anywhere near enough tax revenue to fund the activity of S01E02 (“The Builders”) – or in this case “The Builders Back Better”.

While focusing on tax, one could almost hear the assembled financial ministers urging “Don’t mention the war!”, as in S01E06 (“The Germans”), which was harder given yesterday was the anniversary of D-Day. (Eliciting a yawn from a young generation ironically addicted to first-person-shooter video games.) Also, because there is a bit of a Cold War on, if you hadn’t noticed.

Russian President Putin answered “I won’t say” when asked if he would use military jets to force an airliner flying over Russian airspace to land if the passenger-list contained someone he wished to arrest. The Russian journalist who asked the question later gave his own interpretation of that ambiguity on TV: “This is a signal. Not to me, it shouldn’t tell me anything. This is the signal to those residents of London, which reads ‘worry’. Do worry, guys. Do fly, but fly with sweaty hands.” Many in the travel and logistics industries should have sweaty hands at the thought that flying over certain airspace is going to be politically difficult, making journeys far slower and more expensive. Will this come up at the looming Biden-Putin summit; or Ukraine, which has been geostrategically weakened by White House approval of the Nord Stream 2 pipeline? (Though Germany gets cheap gas, which is nice for it.)

On China, the Wall Street Journal has an op-ed stating: “The Science Suggests a Wuhan Lab Leak”, and asks “’Do We Need to Be in Hong Kong?’ Global Companies Are Eying the Exits”, while saying this doesn’t apply to banks (“Because markets”); US Secretary of State Blinken stated the White House is determined to “get to the bottom” of COVID-19’s origins, and that the US will hold China accountable; three US Senators just visited Taiwan; and the US is supplying it with Covid-19 vaccines. All of this will do marvels for US-China relations, even if the White House is saying “I mentioned the Cold War once, but I think I got away with it.”

And on China and matters fiscal/financial, Bloomberg has an op-ed about the digital Renminbi (e-CNY) that suggests it might be soft launched with the 2022 Winter Olympics; and that it may operate more like the Hong Kong Dollar than a Central Bank Digital Coin, in that the liability may sit on the commercial issuer’s balance sheet, fully backed by CNY reserves. This obviously won’t make it very attractive to banks, businesses, or consumers happy with current e-payment systems. As the op-ed notes, one would then have to *compel* them to use it via “the state’s coercive power.” For example, paying civil servants in e-CNY; or, more importantly, demanding tax payment in e-CNY to force people to earn them, so creating a natural demand.

This echoes a long-held, oft-repeated realpolitik view here of how money actually works outside faulty ivory tower economic (and crypto) thinking. One therefore wonders if this currency/tech element is also going to be involved in the G7 tax structure – or rather, how long until it has to be. In that light, consider that if e-CNY is used as above in Hong Kong too, the role of the Hong Kong Dollar would surely come into question as domestic demand for it falls away sharply – even as Hong Kong’s international gateway role for capital to enter a closed-capital-account China remains the same. How does this all work out? Only one of two ways. Like anything digital, it’s binary.

On a related front, Elon Musk has a new series of crypto-related tweets so not-safe-for-work the media decided not to cover them. (And there’s an awful lot of that about as well.) Suffice to say, crypto remains under pressure – despite the president of El Salvador, a poverty-stricken country where the vast majority of the population don’t have a bank account, proposing his country officially embrace Bitcoin. The G7 tax people will be watching (again) if so.

Nigeria has meanwhile banned Twitter entirely, which is a different way to go on Big Tech: and Twitter responds that this is a denial of Nigerians’ human rights…which doesn’t apply to those whom Twitter decides to ban.

For now, we can see that the Fed will be staying where it is now for longer, yet the real world pressures outside their Faulty Towers continue to build. If one thinks this has an end-point with no serious volatility on any front, I am tempted to repeat what hotel owner Basil Fawlty does to a rude guest in S02E01 (“Communication Problems”): pick some fluff up from the floor, and ask “Is this a piece of your brain?”