Dollar-Bans, Dismal ‘Downunder’ & The Democratic National Unconvention

By Michael Every of Rabobank

More national, more unconventional

As I type, in the US the Democratic National Convention (DNC) is playing out over the internet, reminding us all that we are only 76 days to the US election. Or should it be called the National Unconvention? After all, it’s only on the internet due to Covid-19, and it is featuring a speaker who ran for president as a Republican as recently as 2016, who is not the only Republican present. Unconventional, indeed. As the press state, on day one of four the message is “Trump, Trump, and Trump,” clearly attempting to make the 2020 vote all about Trump himself, which is seen by pundits as the most effective Democrat electoral strategy, rather than Trump vs. Biden. That’s as a CNN poll yesterday placed Trump only 4 points behind Biden nationally, closing the gap by 10 points in two months, and only by 1 in key battleground states; this was also the poll which had led the others in showing a huge swing to Biden in June. However, other polls still show a larger gap: the CNN poll of polls has Biden plus 9 nationally.

Trump himself is doing his own attacks, of course, not just with digital advertising placed around the DNC, which in contrast to a physical convention is now possible, but with his latest actions against Huawei, which Bloomberg describe as a “nuclear option”. From now on China’s flagship tech firm can’t access US technology directly or indirectly, an action which leaves it in extremely difficult circumstances: how do you have a tech product without the tech? It’s a good job that the US-China phase one trade deal review didn’t happen, isn’t it? We now await the Twitter response from the pugnacious editor of the Global Times, who stars in a clip shared on the same medium yesterday giving a speech where he exults “I have to say that China can force the US to an agricultural country,” which gets a round of applause from the audience.

Speaking of agricultural countries, China just hit Australian wine imports with an anti-dumping investigation. This could last up to 18 months and clearly has nothing (nothing!) to do with the deteriorating geopolitical backdrop. That’s now Aussie beef, barley, and wine all subject to various Chinese actions, while Chinese students and tourists can’t arrive at present and are potentially not going to come back at all. Thank goodness for iron ore…but that’s one last big egg in a basket with a handle that’s fraying fast.

And on fraying baskets and nuclear options, Bloomberg Intelligence today says “Hong Kong Banks May Face Fines, Not Dollar Ban” for dealing with individuals sanctioned by the US, noting that this is what happened to two European banks when they violated sanctions on Iran, and that Chinese banks are large enough to be able to afford such fines. So all is well! Perhaps. Then again, European banks are not seen in the same way as Chinese banks by the US, and it would presumably impose a fine specifically large enough to hurt them.

Far more importantly, however, Bloomberg Intelligence don’t seem to have bothered to read the actual Hong Kong Autonomy Act (HKAA). I know, I know, it’s dull to actually go to the source rather than whipping up a precedent that says all ends well. However, let’s be dull. The HKAA specifically states that no later than a year from the imposition of sanctions on HK individuals (which happened on 8 August) then FIVE of the following list of sanctions must be imposed, and a year later ALL of them:

No loans from US financial institutions; Prohibition on designation as US primary dealer; Prohibition on service as a repository of government funds; FX transactions; Banking transactions; Property transactions; Restrictions on exports, re-exports, and transfers; Ban on investment in equity or debt; Exclusion of corporate officers; Sanctions on principal executive officers.

I don’t see “or a large but manageable fine” on that list, which means the most bullish case one can make is that less than a year from now, any bank dealing with individuals sanctioned under the HKAA would be unable to get a loan from a US bank, or be a primary dealer and repository of US government funds, or buy US property, and its executives would be excluded from the US. That would certainly be manageable for a year: but then, on 8 August 2022, it’s the USD and SWIFT.

Meanwhile, in Canada Finance Minister Moreau has had to step down due to his actions over a charity; and in the UK the education secretary is holding on by his fingernails after almost seeing his own government flunk its handling of exam results. He has now decided UK schoolkids can have their results set by their teacher (who has NO self-interest in pushing grades higher in an education system where schools have to compete based on exam results) rather than an algorithm trying to fit outcomes to a bell-curve: which is going to mean everyone gets higher grades rather than lower, of course. Just another area where we don’t have any inflation to add to the list of: private education; health insurance; house prices, and stock prices, etc. The top bureaucrat who had decided an algorithmic bell curve was best apparently used to work for the Financial Times: you’d have thought he would have realized how regulators are supposed to oversee such markets.

Down in Australia, the RBA’s minutes from August show they are worried that cheap funding is not flowing through to growth in borrowing: “…the flow of new commitments has remained well below its peak and was likely to remain subdued…” What? You mean lowering the cost of borrowing does NOT lead to a rise in productive investment? Really?! The mountain of evidence that this is precisely the case, even when rates go negative –as predicted by Kalecki as far back as 1943– has apparently not filtered through to the RBA yet. Then again, should we be surprised given on Friday Governor Lowe stated to parliament “If a bank never makes a loan that goes bad it means it’s not extending enough credit.” Question: what does the RBA have left to throw on the barbie when Kalecki is again shown to be right?

As everywhere: policies that are more “national” and more unconventional.