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Whose Responsibility is it? #17

As soon as the furor of the US Elections are over, and although there still are protests across the country, the complication of a number of issues have emerged that may have been hidden by the din of the USA’s electoral mud-slinging. Donald Trump is on his way to the White House against the odds, and domestic matters will perhaps be the least of his challenges.

The sounds of Brexit along with the accompanying dissent of Scotland and Northern Ireland are returning to the world stage. The legal arguments are underway in the Supreme Court in Britain and the major issue to be resolved is whether Parliament has to approve the initiation of the withdrawal from the EU, or whether there are some other actions to be taken. A decision is promised for early in 2017.

In the interim, Prime Minister Theresa May does not have a clear mandate, and the economy may be stalled pending the decision. Scotland still has concerns over the ownership of the North Sea oil, and oil is a vital commodity that is contentious in Britain but one that can derail the US economy. In this regard, international issues must be addressed by the President-elect Donald Trump. The impact can be more serious than the parochial interests of the domestic market that formed the basis of the electoral campaign.

Oil is the most traded commodity in the world, and since the end of the Gold Standard, the United States dollar has become the “petrodollar” indicating that a part of its value is tied to the rest of the world having to hold a large part of their reserves in that currency. Oil was an underlying factor that ostracized Iran, Libya, and Iraq from the USA, and may have created the tension with America. Suppose that was to change?

Loud whispers of efforts to end the monopoly of the US dollar in the petroleum trade are again surfacing. Russia, China, Iran, Venezuela, India, and Iraq could probably be thinking of accepting payments in other currencies, and there is speculation of payment in gold. This return to a type of Gold Standard would impact the significance and value of the “petrodollar”, and would in turn have negative effects on the US economy.

In the group of countries listed in the previous paragraph the USA has no real friends and the reasons for this go the full gamut of resentment of embargoes, direct threats of force, restoration of previous superpower status, financial world dominance changes in the case of China, and domestic growth for India.

The second factor that is being spoken about is the ownership of US debt. The rumours suggest that China owns most of the debt, and that needs to be debunked in order to get to the truth. The USA owns most of its debt and held by individual States and cities, pension funds, mutual funds, insurance companies, and the Federal Reserve totaling approximately 12.9 trillion or 67.5% of the total.

China owns approximately 1.3 trillion or 7%, and Japan owns 1.1 trillion. Total other foreign ownership is around 3.8 trillion. However, China, although a significant holder, is not any significant ally of Japan, and so we should know who holds the other 3.8 trillion and what their global alliances are.

Some of these are Ireland, The Cayman Islands, Britain, Brazil, Luxembourg, Switzerland, Taiwan, India, as the major other players. These seem to be benign players except that Switzerland, Luxembourg, and the Cayman Islands may be fronting for others.

Therefore for us in Jamaica, what are our options for storing wealth and reserves outside of the traditional “safety” of the US dollar? International reserves, calculations of value of international trade, relative rates of exchange, and valuation of assets in a commonly accepted currency may have to be other than the traditional US.

The settlement mechanism within CARICOM is in US dollars and with other countries as well. The current discussions of Jamaica, Cuba and the Dominican Republic working together has no basis other than US dollars. Our banks have not really facilitated payments to Japan in Yen, or to Europe in the Euro, and our currency is not in demand internationally, so that a new methodology would be unsettling, or at least unprecedented.

For most of us living here is a new possibility of multiple currencies traded through non-US banks. We no longer remember the essentials of barter trade and that would be worse in trying to cope with the speed of international business based on the current fungible nature of a single accepted currency.

Barter trade seems almost surreal for modern Jamaica. How many kilos of alumina for a kilo of flour or cornmeal; how many oranges for a tin of corned beef, how many ounces of gold for a BMW? Production of valuable goods and services would be a reality (as it should always have been), and the rapid advancement of international currency earnings a necessity (as it should always have been).

The conditions are setting up in classical conformity with the signs of an empire reaching its end, and the USA seems to be showing those despite the sometimes desperate attempts to avoid their demise as the only world power. Whether my inference is in fact correct, it seems that to other seekers of power that this situation presents a clear and present opportunity for their ambitions.

Every dominant power dating from before Phoenicians, Greeks, Roman, British, have had to contend with the symptoms of their demise that ranged from deficient governance, social and moral decay, and economic imprudence (debt) that made them vulnerable to failure.

The election of Donald Trump and the very bruising campaign that deteriorated to personality flaws, unfounded accusations, and sheer nastiness, have pandered to the exposure of some very base ambitions. The coalition of such disparate and disgruntled elements cannot be easily achieved in time to present a strong resistance to other nations seeking to free themselves from the self-proclaimed “superpower”.

In fact it is unlikely that the voters that felt neglected or desirous of change can put away their underlying narrow or sometimes bigoted perspectives in order to have shared goals. It may be a sad time for the United States and their satellites (Jamaica included) and some impact must be anticipated.

The possibility of a shock to the international financial system is a risk that needs to be anticipated and alternative plans considered. That international system will have some effects of differing proportion in different economies. Highly indebted nations such as Jamaica could face the dire consequences of decades of mendicancy in this changing environment. The need for scenario planning is an essential extending from no change to radical change and all possibilities in between those extremes.

Academia, Government, and Business have no time for their usual respective study for years and write a book; take no action and beg funds for a consultant; or pursue the status quo hoping that nothing will happen or we will die before it hits the fan. This is not a description of proactive thinking, and we must summon the resolve to consider these possible challenges.

The time dictates a think tank behind the scenes so as not to create panic in the public, but capable of the vision and acumen needed to get out of the box and contemplate the seemingly impossible. It is an approach well known in the Ivy Leagues, and Oxford and Cambridge, and other places that we like to talk about, but not act on.

Whose responsibility is it?

Executive Insights
From the Desk of James Moss- Solomon
Executive in Residence, MSBM
November 21, 2016
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