Are Trump and Brexit voters trying to solve the wrong problem?

Over the last few months, political commentators and the so-called establishment have been shocked by the results of the electoral processes in the UK, voting for Brexit, and the US election, electing an unproven, unpredictable Donald Trump to the presidency.

How could this happen? A lot of analysis has gone on trying to explain it, most of it, in my opinion, misguided. Most analysts are focusing on how these results are the wrong solution to the problem. However, I think that the fact is that voters are addressing the wrong problem.

Both the UK and US electorates have voted in protest to what they perceive as being a worsening of their living conditions. Jobs are being lost to global competition and immigrants, life is highly pressured and unaffordable, there is lack of opportunity in our societies, etc. The problem, from voters’ perspective, is a lack of success in the UK and US economy. The economy is doing badly, this is impacting standards of living, and therefore the solution is to vote for political programs which promise (and sadly, that is all they do) success.

Common wisdom, and the narrative of the winning sides in both elections, goes something like this:

In the US, the Obama administration has failed at leading the recovery of the economy from the 2008 recession. Things are bad, and third party countries and foreigners are taking what is rightfully American. Trump is coming to the rescue, promising to make America great again.

In the UK, the EU has acted as a brake to the UK economy, preventing it from growing and succeeding as it otherwise might. The EU is slowing the UK down, with unwieldly red tape, curtailing the UK’s freedom to trade and flooding the country with uncontrolled immigration. The obvious solution is Brexit, which will make the UK great again.

I will look at whether Trump and Brexit are the right solutions to these problems in another post (in fact, they aren’t, but I don’t want too much of a spoiler here). But even before I do that, the first thing we should be looking at is whether these problems are real. And here is where facts come in. Facts used to be the way that reality was evaluated prior to decision making. Although they seem to have lost importance and to have been replaced by the loudest noise, I still believe they are the only logical basis to the decisions we take.

A few facts about the American economy you may or may not know:

The starting point is the financial crisis of 2008 and 2009, which coincides with the beginning of the Obama administration (although its causes are to be found, at least in good part, in the financial sector de-regulation presided over by the Bush and, to a lesser extent, Clinton administrations). In 2009, when Obama took the presidency, the US economy in real GDP terms fell a massive 5.4%, with unemployment at its highest level in 70 years, around 10%.

What has happened since?

• In the third quarter of 2016, the US economy, in nominal GDP terms, has grown 3.5% (this is above the average growth in the US economy since 1940, no mean feat http://www.tradingeconomics.com/united-states/gdp-growth).  
• The growth for 2016 is estimated at 3.1%. This is the highest in any ‘first World’ sizeable economy, with most other around the 1.5% GDP growth rate (https://www.gfmag.com/global-data/economic-data/countries-highest-gdp-growth).  
• 12 million jobs have been created since 2009, with unemployment at an all time low of 4.7% (https://www.bls.gov/news.release/empsit.nr0.htm). In fact, unemployment levels of below 5% are considered full employment, as this accounts for the percentage of people between jobs or willingly out of work at any given time in an economy.
• Budget deficit has been reduced by 60% since the trauma of 2009 (http://www.usgovernmentspending.com/federal_deficit_chart.html).
• 20 million Americans have health insurance for the first time, as a result of Obamacare.
• On the downside, public debt has increased by 90% since 2008, so that is the big issue for the US economy (the average debt per capita is still looking good compared to many developed countries such as the UK for example, see https://en.wikipedia.org/wiki/List_of_countries_by_external_debt).

This is, in anyone’s terms, an incredible recovery in a short period of time. The US economy is succeeding. Big time. So how can it be that Americans think they are doing so badly that they are choosing a candidate whose main promise is to take down the system? There are several reasons for this. I cannot enumerate them all here, but these are some of my favourite explanations:

• Negative news. The fact is, bad news sells better than good news. Fear sells better than hope. Human nature aims to protect what it has before aspiring to grow. Fear of loss is a much more powerful motivator than hope of improvement. This was discovered by psychologists in the 70s and has been the basis of sales and marketing theory ever since. As a result, the media, financed by advertising, publish majorly bad news. The growth in national debt in the US, and anecdotal stories about illegal immigration, get a lot more airtime than the economic recovery.
• Inequality. The distribution of wealth in the US has deteriorated in the last 8 years, worsening the prospects of those at the bottom of the economy. This is not by design of a socially progressive (at least by US standards) Obama administration, it is a global consequence of the dynamics of capitalism. By definition, it fosters inequality by ‘redistributing’ wealth (this is an euphemism for concentrating wealth in the hands of the owners of the means of production). This is classical economic theory, well studied by Adam Smith, Karl Marx, Milton Keynes et al.
• Envy and comparison with others. This was pointed out to me by a friend the other day. When humans compare themselves to others, that influences their perception of how they are doing. Success and failure, wealth and poverty, are relative terms, at least once you get over a basic line. There may be some truth in this. I don’t have any facts to back this up, only anecdotal evidence, which can be hugely misleading. If there is some truth in it, though, that would make some sense. Nowadays, we are bombarded by a culture of celebrity. The people we see in TV and in the media are wildly successful, earn unprecedented amounts of money and accumulate wealth and plaudits. If we compare ourselves with them, we may feel we are doing a lot worse than we really are.

And here comes the really interesting part. If we leave aside the rejection of immigrants, racism, and a few other, unedifying feelings which may have caused some pro-Trump votes but which Trump supporters are at pains to tell us are only a minority, we are left, when trying to explain the vote for Trump, and considering that he practically run with no program or plan, with two main explanations:

• A reaction against an establishment that is failing the American public, ignoring it and presiding over a significant deterioration of its standard of living,
• and the concept that Trump’s success in private life may equip him to show America the way to economic success.

Those arguments may stand in a situation where the economy is failing and the government is forgetting the working people. But, as we saw at the beginning of the article, the facts tell us that this is not the case. All the opposite.

And now comes the big question: In a reality in which the economy is succeeding, the recovery is well underway and Americans are getting access to universal services they never enjoyed before, but where they still have the problems of national debt and inequality, is the solution a president:

• who is a multibillionaire (multibillionaire status is typically a result of lack of equality, since most people are not multibillionaires),
• whose most clear policy is undoing most of what the previous administration has based the very successful recovery on,
• who is running on a ticket of greatly increased public spending and reduced taxation, hardly the recipes to reduce public debt.

That seems a real stretch. It seems that Americans may be voting to solve the wrong problem. 

Unfortunately, that has consequences and, in this case, some of them may be very serious, and contribute to very significantly aggravating the real problems, whilst undoing the real successes. I promised to blog on the Chinese and US relationship, but this post has got very long, so I will have to leave that for one of the next posts.

Before that, we should look at the vote for Brexit in the light of the real UK situation. My next post will be looking at some quite incredible facts about the misconceptions and fallacies that led to the Brexit vote.

Is Donald Trump a mermaid?

This title may be a bit disturbing at first, but you should be ok as long as you don’t conjure up any mental images which mess with your sleeping patterns.

Let me explain what I mean with that question.

Many people, when hearing the word mermaid, will think about Daryl Hannah in Splash, or about the 1989 Disney movie about a Little Mermaid. You could, in fact, probably gather something about people’s age just by which of those two images first comes to their mind. In both cases, mermaids were pretty cool (I have to say I go more for Daryl Hannah).

However, mermaids did not start out that way. Odysseus’ sailors, on their tortuous return voyage to Ithaca after the surrender of Troy (The Odyssey, by Homer, 8^th Century BC), were exposed to the dangers of Bronze Age mermaids, then called sirens. The deal was that the mermaids attracted sailors with their enchanting songs, the sailors followed the songs and they shipwrecked on the rocks of the mermaid island (the location of this island has not been clearly identified, although I now think it may be in Manhattan, soon to move to Washington DC).

Donald Trump has stated in an interview in the last couple of days that a trade deal with the UK would be a priority for him. This has been received with glee (or maybe just relief) by Brexiters, who I imagine cannot help to be a bit concerned by the UK’s impending abandonment of the EU. I guess people find comfort in thinking that you can get to be a multibillionaire by doing what you like to do, not what is in your best interest. However, my experience is that, if you want to accumulate billions, you need to have your interest at heart in any process you are involved in. So, if we are to accept, which I think most reasonable people would, that whatever Trump is saying is because he sees it to be in his best interest, then we should ask ourselves, why is Trump saying that at this point?

One explanation, probably widely spread amongst Brexiters, is that Trump can clearly see that trading with the UK is greatly advantageous to US, and he sees this as being highly significant. Throw in a bit of special relationship, this locker room (a Trump speciality) concept which is supposed to make US presidents put UK interest in front of their own, and you have your justification. Trump is keen to get to a trade deal with UK because trading with the UK is the key to US’s success in the New World order.

Is this true? What are the facts we need to know to evaluate this?

• US annual trade with UK (2015 figures) is $56Bn exports, $58Bn imports. (https://www.census.gov/foreign-trade/balance/c4120.html)
• US annual trade with EU (2015 figures) is $272Bn exports, $427Bn imports. (https://www.census.gov/foreign-trade/balance/c0003.html)
• US annual trade with China (2015 figures) is $116Bn exports, $483Bn imports (https://www.census.gov/foreign-trade/balance/c5700.html)
• US total annual international trade is $1,505Bn exports, $2,241Bn imports (https://www.statista.com/statistics/218255/total-value-of-us-trade-in-goods-worldwide-since-2004/)

I actually cannot resist the temptation to plot this for effect. You can see the figures below.

So, no wonder Trump thinks it cannot be without a trade deal with the UK. 3.7% of US exports and 2.6% of US imports are to UK. A trade deal with UK has to be his first priority! Keep telling yourself that, but, as I already wrote in previous posts, the repetition of clearly unfounded arguments does not make them true. Real causes are based on real facts.

I am now introducing a new saying. If it does not make sense, it is probably not true.

So, what could be an alternative explanation to what Trump is doing and the timing of it? I am now going to attempt an incredibly dangerous stunt: put myself in the head of Donald Trump. Exercise extreme caution if trying this at home.

Trump is promising to make the US great again. In American minds, that means leading the World economy. Being the World’s biggest economy. How are they doing on this? If you take a look at the United Nations 2015 list of countries by Nominal GDP (https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)), the ranking is:

• 1^st: EU, $18,518,430 Mn
• 2^nd US, $18,036,648 Mn
• 3^rd China, $11,158,457 Mn

There is a caveat here, which is that nominal GDP is affected by exchange rates. Since China are artificially holding down the value of their currency, the RMB, if we were to use the more ‘truthful’ measure of GDP by Purchasing Power Parity (adjusting exchange rate anomalies) the US would be third, as China already overtook both US and EU in either 2015 or 2016 depending on who you listen to (see https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)). But this is for another post, another day. In any case, US is, at best, second.

So, to make America great again, Number One, Man!, Trump can do 2 things:

OPTION A: Grow the US economy significantly (not that easy, especially at a time when many more countries are joining global competition, which is, by the way, a good thing in my book, as it spreads wealth to places which have had none until now, and to people who are prepared to work hard for a reward, as we are in the West, countries, for example, like Laos, Vietnam, Indonesia, etc.)

Or…

OPTION B: Make the EU smaller! Let’s do some Trump magic and take the UK figures away from the EU’s. Look at the ranking above again now:

• 1^st US, $18,036,648 Mn
• 2^nd EU, $15,660,427 Mn
• 3^rd China, $11,158,457 Mn (with the same caveat)

So, as if by magic, all Trump has to do to deliver on his promise is encourage the UK to abandon the EU, changing course and sailing to a potential shipwreck. Julius Caesar already coined this strategy with his famous ‘divide et impera’, or ‘Divide and conquer’, although Sun Tzu would probably claim he wrote it first in ‘The Art of War’, nearly 3,000 years ago.

The metaphor is completed by the fact that (and I have not checked this, so I am going from memory, don’t hold me to it) the mermaids in Homer’s poem (if you have not read it, you really should, essential reading in my view) wanted the ships to shipwreck as they would then eat the sailors. Now, just imagine Donald Trump, not exactly the first person that would come to your mind when hearing the word Win-Win, negotiating a trade deal with the UK at a time when the UK are desperate to strike trade deals quickly and are trying to replace 50% of their international trade, talking to someone who only has 3% of their international trade on the table, and 4 to 8 years to do the deal. I think many in the UK trade mission may find being eaten by traditional, better looking (á la Daryl Hannah) mermaids preferable.

Worryingly, if you look at the more relevant PPP table, once Trump overtakes the EU by helping the UK separate and fall into its jaws, the next thing he needs to do is slow down the Chinese economy. That would explain what is starting to go on in the South China Sea, what may happen with the Strait of Malacca and why the Thucydides Trap, another ancient idea, may still stand. I will blog on that next if I don’t get distracted, but, if you cannot wait and you really have the time, you should read ‘Easternisation’, by Gideon Rachman, and ‘Prisoners of Geography’, by Tim Marshall. Two outstanding analyses of current geopolitics.

The truth about the UK trade deals argument from Brexiters

There are many Leave arguments that one could dismantle at ease. One of the most infuriating and damaging for the prospects of the British nation is the statement that Brexit will finally enable the UK to negotiate trade deals with third parties. The Prime Minister is again reminding us this week of the great benefit that UK will derive from this ability to finally negotiate trade deals with other economies. The lunatic asylum that parts of the Conservative party and the whole of UKIP have become are calling for a hard Brexit, and for the UK to start on these trade deals immediately, so that the outlook of British people’s lives can be changed for the better with immediate effect.

This is, at best, disingenuous. It ignores the fact that the UK, as a EU member, already has trade deals with most trading blocks and third party countries in the World. These deals have been negotiated, over long periods of time, by large international teams which include a significant contribution from the UK.

One must therefore surmise from that continuously repeated Leave mantra, one of the following conclusions:

• Leave are just lying, because that is what they do, and because informing the public is of no concern to them, or because they are so scared about what the future will bring after Brexit that their brains have jumped into full defence mode and are making them ignore the impending reality.
• Leave are so arrogant, that they really think that a British team will be able to extract much better deals from third parties than a European team.

So, what are the facts critical to this issue?

The first one is that negotiation outcomes between well prepared, professional teams depend on the negotiation tools each party has. For trade deals, your negotiating position is the strength, health and potential of your economy.

Some facts about the EU, which you can find at http://ec.europa.eu/trade/policy/eu-position-in-world-trade/:

• The EU is the largest economy in the World, exporting and importing more than any other economy, and it is the World’s largest trading block.
• The EU is the top trading partner for 80 countries or trading blocks (compared to the US, who is top trading partner for 20 countries)
• The EU ranks first in inbound and outbound investment
• In nominal GDP terms the EU is the largest global economy, with over $18 trillion annually.
• Demographically, the EU is the 3^rd largest market, with 500 Mn plus consumers, after China and India
• The EU exports are 31% of global exports in 2015, compared to China (11.6%) and US (10.8%) (http://www.imf.org/external/pubs/ft/weo/2016/02/pdf/statapp.pdf)

Now, some facts about the UK economy:

• The UK is the top trading partner for no countries or trading blocks.
• In GDP terms, the UK is the 6^th global economy by size if we exclude trading blocks, with $2.8 trillion annually.
• Demographically, the UK is the 22^nd largest market, with 65 Mn consumers.
• UK exports are 3.7% of global exports.

You can clearly see that the EU enters any negotiation from a position of strength, boasting the largest economy and the largest import, export and investment markets. The UK will enter negotiations with major trading partners (the top 5 global economies, EU, US, China, Japan, India) as the junior trading party, with an economy which is 3-6 times smaller than the other party’s.

So, what exactly will the ability of the UK negotiators to extract better deals than the ones currently available be based on? There are 2 possible answers in light of the facts above, I guess, although I am already really struggling with even trying to work out what Brexiters are thinking on trade deals:

The first answer, if you are to believe Brexiters, must the supreme talent and charm of the British when it comes to negotiating, compared to the idiocy and incompetence of their EU counterparts, and the fact that the British people are globally loved. The Brits will clearly walk into any room and get a better deal, just because they are British. You can choose to believe that. If you really want to think that this is the case, and that the best negotiators in EU civil service are distinctly inferior beings to the best negotiators in UK civil service, inferior enough to waste such a much better negotiating position to extract a worse deal, then you may find the Brexit argument on trade deals believable. But wait. Not even then… It turns out that over 25% of EU trade mission personnel are British, and that 25% of EU Trade Commissioners have been British (Christopher Soames, Peter Mandelson, Leon Brittan, Catherine Ashton). So, you have to believe that the British are not only superior, but that contact with their EU colleagues destroys that superiority and turns them into village idiots, sorry, Europeans.

The second answer would be that the other parties have become less adept at negotiating. Therefore, although EU teams are ok, they had the misfortune of negotiating with other economies at a time when these other economies had tough, strong and professional negotiating teams. These teams have now left countries like China, india and the US, who have gone backwards, and they have been replaced by a bunch of incompetent negotiators who will roll out the red carpet and give the UK what it wants. The fact that the negotiating position of those other economies has improved (China was twice the size of the UK economy 10 years ago, it is now 4 times the size) will be compensated by the brain drain in the other parties negotiating teams.

Frankly, both arguments are so preposterous and clearly false that, if you are going to believe either, you might as well believe both at the same time and feel even happier in the certainty that, if you are British, your future is about to take a distinct turn for the better.

In the light of all the above, things don't look that great. But it is worse. There is one final nail in the coffin. The average duration of the negotiations for major multilateral trade deals over the last 30 years has been a bit over 8 years. For single country deals, if we take the US as an example, the average for their last 20 trade deals, from kick off to implementation, is 63 months.

UK negotiators, therefore, will not only have to get all other parties to roll over and concede on everything the UK wants, but they will have to get them to do so 3-5 times faster than any other negotiating process has taken. It sounds as a tall order. Particularly if you think the UK would be entering these processes from a junior position, as explained above, but also from the position of a party that needs a quick deal to survive, whilst the deal is fairly irrelevant to the other party. The Leave argument, I guess, is that now that UK will be small and desperate it will finally achieve from negotiations what it could not get when it was part of something strong, big and powerful.

So, look at the facts and make your own mind up. But look at the facts. The repetition of unrealistic, clearly false, arguments does not make them true. Reality is based on fact, and real outcomes are based on real situations.

Finally, if you are getting worried, you may be heartened by the noises from Whitehall about the planned visit by Liam Fox to New Zealand. Some positive noises from over there. There may be a deal to be done, and then it will all be OK. The UK will be able to trade with the 54^th economy in the World, 12 times smaller than the British economy, and less than 12,000 miles away! Life is good. 

On discussing this with a Brexiter friend the other day (yes, I do have some of those), he said to me: 'But it seems that the US are keen to negotiate with UK! That surely means they respect us and will be a good trading partner'. You may be thinking the same thing. My answer is obvious, but I will write it anyway: 'Do you think the US would rather negotiate with a united trading block bigger than itself, or with a series of smaller economies desperate to reach a deal? It is obvious why the US and any other third party which have to negotiate trade deals with the EU would encourage the UK, and any other members, to exit. EU scissions are highly beneficial to the negotiating position of any EU counterpart.'

Introduction

Thank you for reading my blog. I feel that I should start by, in the very first post, explaining the background to my starting this blog, and what my aims are with it.

In the last few months, a number of things have happened in the global political landscape which have surprised and shocked many. Although most commentators did not expect the result of the Brexit referendum, or the election of Donald Trump, for example, these events can be explained, when giving it some thought, by analysing the root causes behind them. During this period, I have read a lot of things that have angered and frustrated me. There is a lot of disinformation being spread both by mainstream media and, even worse, by many unofficial online resources. I am finding the depth and quality of analysis disappointing at best, and quite often infuriating.

I have therefore decided to offer my view here, for anyone that may be interested in reading it. It will be opinionated, as I do have opinions that I do hold strongly. But it will be respectful of facts and real information, and in the main will seek to unravel false arguments, common fallacies and widespread dellusions. It will also be positive, as I think humanity is standing at a very exciting moment in history. At a moment when, with the unparalleled development in technology we are experiencing, we have the capacity to take a significant evolutionary step. But this moment is also dangerous. The World is changing very fast, and how we react to that change will define what our future World looks like. If we fail to see the possibilities, we are likely to go backwards, and truth, freedom and many other positive human values will suffer at the hands of fear, intolerance and hatred. I will therefore try to contribute, very modestly, to steer towards a positive outcome at this critical time, by sharing positive views and important information which may inform very important political, economical and social decisions.

My blog will most likely have a UK and EU bias, as I am a Spanish citizen living in the UK, and I run companies based in Spain, UK and Germany, which give me a front row seat to the effects and consequences of the decisions we are taking.

I will aim to blog once per week, since I don't have the time to do so more often. I will blog mainly on politics and economics, but will change subject depending on what I feel most needs addressing at that particular time.

I of course would very much welcome any feedback and look forward to hear from readers, if at any point I have any. Conversation develops and improves arguments, and therefore anyone reading this has a huge contribution to make. I will also be very interested to write, and research, on any subject that readers want to know more about, so feel free to make any requests.

Santi