Anaemia in Laywoman Terms - Last Post for 2013

2013 is coming to a close.  You would probably know that my writings mostly touch on matters that do not impact the immediate.  A complementation is therefore in order as I look forward to 2014.

Anaemia is age-biased - the highest incidence rate is in the little kids population segment.  It is gender-biased - women are at a much greater risk than men.  About 25% of the global population is anaemic.  Therefore there is a high chance that someone we know or care about is anaemic.  Non-life threatening direct effects of anaemia include fatigue, shortness of breath, headache, difficulty in concentration, mood swings and brittle nails.  In acute cases the impact can be a lot worse.  I think therefore a write-up on anaemia would be a perfect way to close 2013 and wish you and the world a healthier 2014.

I have tried to keep medical terminology to the minimal, used a 'matter-of-fact' language.  My idea was to explain anaemia in simple terms in the hope that it helps you enhance your two-way communication with your doctor if you or people you care about are anaemic.

The article is in three parts.  The first part explains metabolism - the cycle of life.  The second addresses the question about where anaemia (mis)fits in within the cycle of life.  The third covers risk factors that cause or increase susceptibility to anaemia.

1. Metabolism - the Cycle of Life

A living organism must breathe.  It must be able to regenerate cells to aid body growth and to replace worn out cells.  The first activity is called catabolism.  The second is anabolism.  Taken together the two are referred to with the far more familiar term - metabolism.

Metabolism is a cell-level activity.  Every living cell in the body participates.  It requires two external inputs:

(i) Food: Digestion starts at food ingestion and ends at absorption of nutrients into the blood stream.  Blood transports nutrients to cells where they are broken down into simpler substances.  The process of breaking down leads to two useful outcomes: A. Energy is released and made available for the body for uses as diverse as blinking to running away from a hungry bear.  B. Some of the simpler substances are critical building blocks needed for cell formation.  The breaking down of food particles that takes place inside the cells is colloquially called burning.

(ii) Oxygen: Burning is an oxidative process, i.e., it requires oxygen.  Carbons dioxide and other wastes are released during burning.  The blood carries the wastes from the cells to the lungs.  The lungs clean the blood and replenish its depleted oxygen content.  The re-oxygenated blood is transported back to the cells.  The metabolic cycle continues.  The cycle of life continues.

2. The Cycle of Life - Where Anaemia (mis)fits in

As we saw in the last section, for cycle of life to function at all, the digestive system must convert ingested food into simple nutrients that can be readily absorbed into the blood stream.  The respiratory system must oxygenate, detoxify and then re-oxygenate the blood.  The circulatory system must carry nutrients and oxygen to each cell in the body and carry waste out of cells and deliver it at the excretory organs.

Amongst these several functions, anaemia concerns the situation wherein body cells do not receive adequate supply of oxygen.  As we saw no oxygen means no burning; no burning means no metabolism; no metabolism means no life.

So far so good?  We are now ready to investigate what can cause problems in the oxygen delivery pathway.  Once we understand this we can enhance the second leg of the two-way conversation we ought to have with our doctors. 

3. Anaemia - the Risk Factors

We have heard of red blood cells (RBCs) and white blood cells.  If you remove these from blood you are effectively left with blood plasma - the fluid that gives blood its mobility.  Oxygen's solubility in plasma is rather poor.  Therefore it needs something to hitch a ride on to its way to the cells.  It needs a carrier.  This carrier goes by the familiar name haemoglobin.  Haemoglobin is a good carrier.  But oxygen is unable to directly latch on to haemoglobin.  It needs a latching agent.  The agent must have three properties:

(i) Oxygen must be able to latch on to it;

(ii) The agent itself must be able to bind to haemoglobin;

(iii) Once oxygen-laden haemoglobin is delivered to a cell then the latching agent must unbind and release the oxygen molecule to the cell.

This latching agent is iron.  Iron deficiency means inadequate supply of latching agents; which in turn means that enough oxygen cannot be transported to the cells; which in turn means inadequate metabolism; which in turn means insufficient energy generation and inadequate replacement of worn out cells.  In short, this means anaemia.  Eureka!

Thus, the 1st risk factor is iron deficiency.  Let us move on to the second.

Assume one takes adequate quantity of iron in food.  However one's diet patterns may include co-consumption of generous servings of calcium-rich foods such as yoghurt or cheese.  Furthermore many of us like soft drinks with meals or wrapping up the meal with a cup of strong coffee.  These foods inhibit the uptake of iron by the body.  It is not the amount of ingested iron that is important but how much actually gets absorbed, especially if one's iron uptake system is under-performing.  If one already has iron deficiency then one may want to space the consumption of the other foods so that iron does not have to compete with those for being absorbed.  For example coffee is absorbed within about an hour.  But depending upon your source of iron, iron absorption could take several hours.  Thus one may drink coffee up to an hour before having iron-rich food or wait for 3-5 hours after a meal before refilling one's cup or reaching out to a soda can.

Co-consumption of calcium or caffeine rich foods is the 2nd risk factor.

The most commonly occurring haemoglobin complex in our bodies holds four iron atoms, i.e., has four latching sites.  Thus four oxygen units can latch on to a single haemoglobin molecule.  Haemoglobin however does not float freely in blood.  Haemoglobin is contained in red blood cells (RBCs) - everything is packaged!  Thus if the RBC count in blood is low then the amount of haemoglobin in blood will also be low.  In that case we would have fewer latching agents (iron atoms) and thus fewer oxygen molecules can be carried per unit volume of blood.

Thus low RBC count is 3rd risk factor.

Let us say one's intake of iron is adequate, one's absorption of iron is adequate and one has a normal RBC count.  Essentially, one has jumped through the first three hoops.  What then?

Well, oxygen must bind to haemoglobin at the iron site.  However the iron site within haemoglobin does not have an affinity for oxygen alone.  It can also bind to carbon monoxide, nitrous oxide or hydrogen sulphide.  In fact iron sites have 250 times the affinity for carbon monoxide than it has for oxygen.  Once haemoglobin binds to one of the other gases it is unavailable for carrying oxygen.  One may be exposed to these gases due to pollution or smoking.

Thus the 4th and 5th risk factors are pollution and smoking.

Let us say one manages to jump through the fifth hoop as well, and land on one's feet!  In that event an adequate number of oxygen molecules have hitch-hiked and are on the move.  Just as traffic slows us down leading to an upset partner or impatient kids, RBCs can be slowed down as well, especially at bends in narrow capillaries.  Promises to pick up groceries or ice-cream topped with crunchy nuts on the way do not work :-).  If oxygen cannot be delivered at an adequate rate then metabolism will slowdown.  To avoid slowing down in the bends and narrow alleys the RBCs must be elastic.  Haemoglobin forms 95% of an RBC's dry content.  Thus for an RBC to be elastic the haemoglobin must be elastic.

A genetic disorder called sickle cell disease causes haemoglobin to lose elasticity and distort from its usual round shape to a crescent shape.  This causes two problems - the 'last cells' are perpetually starved for oxygen and the wear and tear of RBCs increases.  In worst cases of sickle cell disease, mean life of an RBC falls to just 10% of a normal RBC.

Thus sickle cell disease is the 6th risk factor. 

RBCs may also lose their elasticity if the body is frequently exposed to altitudes greater than 3000 meters without adequate acclimatization.  Thus inducing an affliction similar to sickle cell disease.

Thus frequent exposure to high altitudes without adequate acclimatization is the 7th risk factor.   

Thalassemia, a genetic disorder, can cause severe anaemia.  It induces RBCs to shrink in size.  As a result haemoglobin production is reduced.  The cell pressure increases causing RBCs to rupture.  Chronic iron deficiency, especially during childhood years can also cause RBCs to shrink and lead to their easy rupture.  If that happens blood's capacity to carry oxygen is reduced.

Thus Thalassemia and chronic iron deficiency during childhood are 8th and 9th risk factors. 

Most of us would easily beat the seventh hoop though it takes some work and also gene-luck to beat the other eight.  Let us say one is able to do that.  So now oxygen in adequate quantities is reaching the last cells.  Can we now uncork the champagne?  No.  Not yet!  Remember the oxygen was carried to its destination precisely because it remained latched on to iron which in turn remained bound to haemoglobin.  The time has come now for the haemoglobin complex to unbind and release the oxygen to the cell.  High blood sugar levels inhibit this release.  Blood sugar levels may remain elevated for a considerable time if excessive amounts of sugar is consumed.  Diabetic patients tend to have chronic, high levels of sugar in the blood.  Alternatively excessive alcohol consumption substantially lowers effectiveness of insulin to regulate sugar levels leading to elevated sugar levels.  With high sugar levels oxygen will merely make a round trip - lungs to blood stream - and then back to lungs without being released in the cells.

Thus we have our 10th, 11th and 12th risk factors - excessive consumption of sweets, diabetes and excessive consumption of alcohol.

A dozen is a good place to stop - one for each month of the year.  Have a fulfilling 2014.

Amit

Moose Safari in Sweden

For once, I turned into a wildlife traveller in Europe.  I visited Sweden to see moose - the largest deer on planet Earth.  Here is my trip report.  But first, a short note on tapering of quantitative easing (QE) in the US.

The US Feds have dropped hints that they might decrease the quantum of QE.

The QE Santa Claus has visited many homes - commodity markets, bank balance sheets, mortgage markets, auto industry and the treasury in the US, the European Central Bank (via euro-dollar swap lines), emerging market corporate and sovereign bond markets, global equity markets, groups that spearhead human rights around the world - the list is long.

The ECB remains in need of the swap lines.  The US mortgage markets remain afloat mainly due to continuing QE.  Increasingly, the US fiscal and trade deficits are  being financed by the QE as China is seeking more and more real assets as a payback for its exports and petroleum-rich Arab countries continue to diversify away from US-based assets following the twin geopolitical shocks of 9/11 and the Arab Spring.

The QE quantum stands at $85bn a month.  I think in the immediate term (about 1y) a tapering of the order of $15-25bn a month is possible, mainly as the rise of shale gas has induced a fall in trade deficit and the US banking sector has regained a fair bit of stability.  For a materially larger taper I would watch out for the following; without one or more of these significantly greater and sustained tapering is not possible.

 

- material increase in taxes,

- sharp fall in trade deficit,

- sustained weakness in the Dollar vs other currencies,

- high consumer price inflation

- willingness on part of the ruling elites to accept material deflation in asset prices

- tapering of currency swap lines with the ECB

 

Yours, Traveling Ec0n0mist,

 

Amit

 

One night?  Sure.  You can slip into a sleeping bag in a 7 x 9 ft wooden lodge or spend the night in (again) a sleeping bag in a 6 x 7 ft observation tent.  That will be £160.  How would you like to pay?

 

I bet this would make people drop the idea, hang up the phone or reach out for their delete button.  Well don't.  Here is why.

 

Jan and Marcus run Wild Sweden tours.  Jan brings with him intimate knowledge of local wildlife, their habitat, their movement patterns and what an enthusiast must avoid in order increase her chances of spotting the animals.

 

A moose can hear you zip (or unzip) from a kilometer.  Those with large antlers have even better hearing.  It can smell you from about the same distance.  You can spot a moose in darkness by shining floodlights into its eyes as they reflect rather bright.  Shining light into their eyes does not startle them.  Those who like alcohol while they wait for the moose to turn up, Jan will include some.  Having told  the Do's and Don'ts, he will leave you in an observation tent with a sleeping bag, a chair, a pair of binoculars, boots and a basket of food and drinks.  To my delight he made sure the food included local flavors.  After about 3 hours of waiting I saw a moose calf and then, a moose bull. To see them in the wild is thrilling. You also feel an immense sense of achievement in that your presence went unnoticed by the moose's sharp senses.  Once a moose is there it could easily spend 2-3 hours grazing in the same area.  This will give you enough time to photograph and observe Moose behavior.  I clicked a few hundred photographs of which about 10 turned out to be decent.  This speaks more about my fledging skills at wildlife photography than about the real difficulty in photographing moose.  Time permitting I will make another post about tips on Moose photography.  I wish I could pick those up before I got into the tent!  

 

After it got too dark to photograph, Jan drove back to the tent to pick me up for a drive by the forest and nearby fields to see even more Moose.  Armed with a floodlight we spotted eight more of them.  I was rather pleased with his patience as late at night as I frequently struggled to mount my camera on my new tripod in the darkness.  Finally we drove back to Kolarbyn Ecolodge.

 

Andreas runs Kolarbyn Ecolodge.  In the right season the place is abound with blueberries, wild mushrooms and croaking frogs.  He has fashioned it to be so eco-friendly that apart from a layer of plastic sheets to keep the rainwater away from dripping into the lodge, there is little else about the lodge that would leave a mark on the environment. He prepares the charcoal needed for fire, uses untreated wood to build the lodge in order to prevent chemical leakage and sources eco-friendly food from local suppliers.  Building lodges with untreated wood means that he has to build them afresh every 2-3 years.  Buying from local suppliers is rather expensive as the decade long move towards integrating European agro-markets has driven Swedish farmers out of business.  Those who remained in business became substantially more expensive as farm support systems have weakened considerably and consumer profile has changed from an average Swede to those who choose local produce to ensure what they eat meets the highest standards of eco-friendliness.

I joined Jan for a Moose tour though he does regular wolf, bear and beaver tours as well.  He mentioned it is often difficult to spot a wolf though his visitors often get a chance to hear wolf howls as they howl back at his imitation of the howling sound!

 

The place is 2.5 hours from Stockholm Central station by train + a bus ride.  In order to arrive at the starting point take a train to Köping (pronounced as 'sherping') and then a connection bus to Skinnskatteberg (pronounced as 'hvin-skatt-bare'). If you tell him your arrival time in advance, he will likely be able to arrange a pick-up.

 

For the service you get, the rather unique eco-friendly living experience, local food and the (near) guarantee of spotting Moose, the largest deer on planet Earth - I think you should pay Andreas and Jan a visit the next time you are in Sweden. 

 

All pictures were taken with a Nikon D7100 and a Nikkor 18-300 lens  mounted on Velbon ultrek ut-53d with QHD-53d head.  The moose was about 100 meters from the observation tent.

 

A mouthful: Just like a cow, a moose's stomach has four parts.  It can eat about 30 kg of vegetation a day.

Grazing posture: A moose spreads or bends its forelegs while grazing .  This moose is rising back to its normal posture just after taking a mouthful.  

Moving one ear: A Moose can move its ears independently.  I had set the camera to slow shutter speed as natural light was dim.  Therefore I fortuitously captured the motion blur of its right ear flapping.  

Looking straight at the observation tent: Its not the look that will get you but your odor or the sound you make.  A moose's eyesight is not only poor but it has a huge blind spot right in its front view.

Night shot: This looks like a relatively young moose as its coat is still light in color.  

Moose Shine: A moose's eyes reflect light particularly strongly in the yellow wavelength.  Human eyes reflect the red wavelength.  Therefore cameras are equipped with red eye reduction feature. 

Moon light: The moon barely rose above 40 degrees.  Conifers look stunning with a full moon in the background. 

Kolarbyn Ecolodge: I am told that the ecolodge concept draws heavily on how miners and loggers lived for centuries when they would camp out in the woods. 

Blueberries: They are all over the lodge.  They are ready to be plucked in August.

Impact of an Interest Rate Hike on Bank Profitability: a Global Round-up

Pigeons, doves and flamingoes are some *species in which both the male and the female produce milk.

Yours, ever-amused by nature's diversity analyst,

AA

*clearly these are not species and it is even more clear that I am taxonomically challenged; can someone help me out with the correct word please?

________________________________________________________________________

Those who are familiar with banking basics might want to skip the first three paragraphs.

One of the key differences between a bank and a non-banking financial institution (NBFI) is that banks are largely deposit funded.  Deposits are guaranteed by governments.  Other sources of funding do not carry a priori government guarantees.  Therefore the regulatory landscape for banks differs from that for NBFIs.  Differences in regulatory landscape account in large part for the difference in capital structure and competitive positioning between the two.

An interest must be paid on deposits.  This interest rate (IR) is floored at zero.  The deposits are lent out to clients that need credit.  The lending rate minus the deposit rate (henceforth, referred to as IR spread) is positive except in extraordinary circumstances wherein lending to sovereigns and central banks may carry negative spreads.  For the purpose of our discussion we ignore such circumstances.

We are living in rather extraordinary times.  Since the dawn of central banking, when viewed globally as opposed to looking at specific cases, IRs have never been as low and for as long a time.  And, for bringing these rather extraordinary times upon the world, thank you Bear Stearns, thank you Lehman, but before all that, thank you to the system that elevated home ownership in the US of A to the pedestal of a fundamental right.  Since IRs are at historical lows while deposit rates cannot fall below zero, the IR spread earned by banks are at historically low levels.  This is one of the (many) causes of depressed bank profitability since 2009.  The low IR environment has however prevented default rates from spiking while the world ploughs through the worst economic downturn since World War II.

A key question vis-à-vis future bank profitability projection is whether bank profitability will increase or decrease when IRs subsequently (say, by 2Q2013) rises.  [1]

I give my view below.  I cover all major regions except Africa, South America and West Asia.

Australia.  In case of an isolated rise in IRs, bank profitability will increase.  However, if the IR hike occurs during unexpected slowdown in China’s GDP growth rate then profitability will fall at banks with portfolio concentrations in mortgage and household lending sector but rise at those with concentration to the corporate sector.

Canada.  Profitability will rise with rise in IR except at banks with a high concentration in mortgages.

China.  Banks with concentrations in direct residential mortgages (I do not know any such major banks in China) will see a boost in profitability as even with a 40% fall in property prices default rates will remain modest.  Corporations in China, especially those coupled with the international supply chain, operate on rather thin margins.  Thus banks with a concentration in trade financing or lending to such corporations will have their margins eaten up by a spike in default rates.  In any case this analysis does not apply to major Chinese banks as PBoC will be ready to clean the slate for them when the time comes for that.  In an IR hike scenario, derivatives trading volumes will plummet causing (mainly foreign) banks to lose a a large chunk of their fee-based income.

Europe.  I guess I am stating the obvious here but for completeness let me state it anyways.  An IR spike will spell the death knell for most banks in Europe either directly or through contagion.  Low IR environment coupled with long-term repo operations is responsible for massive misallocation of capital in Europe. That is however necessary as Europe is standing at a point where it the choice is between low return on capital and no return of capital.  I expect this situation to last through at least 2Q2013.

Indonesia.  Irrespective of whether the IR hike is idiosyncratic or happens concurrently with an unexpected slowdown in China’s GDP growth rate, bank profitability will rise.  This is because the adverse effect of credit quality degradation accompanying the IR hike would be mitigated by low levels of leverage, strong domestic market and considerable room for further boosting capital expenditure.

India.  The conclusions for Indonesia apply to India as well.

Japan: While Japan’s GDP may have stagnated as a consequence of the 1987 Plaza Accord, its GNP has continued to track the growth rates in developing East Asia and more recently, that of India.  A hike in IR in Japan will be structurally fatal as it will force Japanese banks to recognize impairments on a large amount of assets and drive yen-denominated capital back into Japan where further capital investments are value-destroying and private consumption is expected to remain, at the best, stagnant.

Malaysia.  In case of an isolated rise in IRs, bank profitability will increase.  However, if the IR hike occurs during unexpected slowdown in China’s GDP growth rate then profitability will fall at banks with portfolio concentrations in mortgage lending sector but rise at those with concentration in the non-mortgage retail lending or the corporate sector.

Pakistan.  For Pakistan, looking at IR levels to obtain estimates of future profitability is like tarot reading.  Geopolitical risk dominates the profitability landscape in Pakistan.

Russia: Since the past 5 years, one principal component – the price of Brent crude oil – has practically dominated all other factors in setting IR levels.  IR levels are high when oil price is high has been concurrent with higher economic growth in Russia.  I expect this relationship to hold true in the foreseeable future.  Changes in IR levels are pro-cyclical with changes in credit quality, i.e., IR levels are high when credit quality is high and vice-versa.  Therefore IR hike will cause increase profitability as impairments will be minimal.

Turkey: In general, banks in Turkey are primed for increased profitability in an IR hike scenario.  It could however induce macroeconomic instability leading to a fall in bank profitability via second order effect.

UK: The analysis and conclusions presented for Europe hold true for the UK as well.

USA: There has been much whispering amongst the BRICS countries to shift to bilateral trade to bilateral currencies. I believe this will happen in the course of a decade or so but not now.  While the US was slowly losing its lipstick gloss, the Eurozone decided to get ugly in a hurry and whispers about Japan’s high gross sovereign debt/GDP ratio have already grown into murmurs in the international press.  This has put brakes on plans of several countries to diversify away from the use of Dollar in 3^rd party transactions.  Therefore I do not think external forces can corner the Feds into an IR hike [2].  Having discounted external causes of an IR hike, let us now look at potential internal causes.  An IR hike will lead to a significant inflow of capital causing a sharp appreciation of the Dollar, and of far greater concern given the fragility of international credit markets; it will cause a severe liquidity crunch in the dollar funding market.  As I have just pointed out, the world has NOT moved away from using the dollar in 3^rd party transactions.  I conjecture that on account of the Eurozone crisis, rather the opposite is true.  Therefore the Feds will have to organize a covert bailout of the world’s major central banks via additional dollar-local currency swap lines [3].  Thus I think that the Feds will maintain a low IR policy through at least 2Q2013.  Having discounted sharp rise in interest rates now let us take a quick look at what might happen if the IR rise is modest (say < 100 bps).  In this scenario deterioration of credit quality will dominate increased profits due to rise in IR spread.

---

[1] on one hand, in a rising IR environment net interest margin (NIM) will rise but also, credit quality will worsen

[2] I am discounting the possibility of a China hard-landing scenario – it will force the Communist Party to liquidate a substantial portion of its external holdings sending Fed rates high, causing massive defaults in the US.

[3]  without a covert bailout, the world will be dis-incentivized from the use of Dollar in 3^rd party transactions; I do not think the US is prepared to yield Dollar’s status to a gold-holdings backed system or a system comprising several reserve currencies..

Münchner Sicherheitskonferenz 2012: eine Zusammenfassung von vier Reden

TILL DEBT DO US APART



Germany's POV


Same stuff, different days  1.1
You gambled and fumbled in a million ways  1.2
A decade of cheats, a decade of lies  1.3
No longer will work, your alibis  1.4
The banks are furious, the debt is due  1.5
The time has come to ring-fence you  1.6
It is too late to tell I told you so  1.7
Out you go, out you go ...  1.8


Greece's POV


The rise of Prussia, the fall of the Third Reich  2.1
We watched it all, with fear with fright  2.2
Across the pond, lies the American dream  2.3
Let us build it here, with Germany and team       2.4
First amongst equals, not a solo lead  2.5
A European Germany, not a Germanic retreat  2.6


Free trade, single currency  3.1
Many nations, still Europe's destiny  3.2
With barriers down, with Germanic productivity  3.3
Credit boom, became Southern reality  3.4


Bankers and a new vision for Europe  4.1
1999 and structured credit products  4.2
Bye-bye to 19% interest rates  4.3
Happy days in a happy place  4.4


2.2 - we refers to European nations
2.3 - pond refers to Atlantic Ocean
2.5 - paraphasing Chancellor Helmut Kohl who was the key architect of the fall of the Berlin Wall and the Maastricht Treaty which essentially created the new Europe
2.6 - here retreat refers to a place that is a secure resting place for troops
3.2 - destiny refers to geopgrahpic and cultural factors that make the presence of several nations in Europe unavoidable in the current age
3.4 - Southern refers to Southern Europe
4.2 - Euro was first introduced on Jan 1, 1999

With adaptation from the works of real poets,


AA
_____________________________________________________________



The Munich Security Conference concluded on Feb 05.  It hosts a fairly open exchange of views amongst global policy, business and sovereign leads.

I summarize few of the speeches below.

Yours, enjoying London blanketed in snow analyst,

AA

Dr. JosefAckermann, Chairman, Deutsche Bank AG

My Summary: In Spain over 45% of the population under 25 is unemployed. Similar numbers for Italy and Greece. People in Europe are increasingly questioning whether they are part of a system that benefits them as well or are merely units to be used and profited from. The financial crisis is a crisis of trust. If actions fall short of restoring the trust then Europe would fall into disunity. With disunity Europe will lose the ability to shape international policy and instead each European nation would have to submit to externally recommended policy handouts. The young in Europe have not seen war and we must keep it that way. Political risks overwhelm risks of collective sovereign defaults. Europe needs both austerity and growth – an impossible combination so a fine balance is needed. The good thing about the European crisis is that balance in Europe can be restored endogenously. To restore the balance, Europe needs greater fiscal and political union.

My comment: Dr. Ackermann conspicuously does not mention a move towards a greater benefits or wealth transfer union as part of the solution.

Michael Diekmann,Chairman , Allianz SE

My Summary: Allianz provides catastrophe insurance globally. Over the past few decades catastrophes have both increased in frequency and intensity. This has increased the cost of damage insurance and the cost of insuring global supply chains. In the future, Allianz would find it increasingly difficult to provide the value it has delivered unless Europe tunes in one voice on Climate Change Policy. Another risk to Allianz is regulatory drive towards unbundling energy production, transmission and distribution. This will reduce investor flexibility, create new regulatory barriers and decrease liquidity. This drive in the energy sector parallels financial sector regulators’ drive towards unbundling banking services.

My comment ref insurance of global supply chains: Today, Allianz and the preponderance of US naval fleet are fulcrums on which the seamlessness of global trade rests. Without these fulcrums consumers cannot squeeze value out of continentally spaced economic endeavors. Without these fuclrums, the law of comparative economic advantages is a mere myth. We take the existence of fulcrums for granted, don’t we? Stability and global cooperation is more fragile than what people who are not responsible for ensuring these believe.

Zhang Zhijun, ViceMinister of Foreign Affairs, China

My Summary: Asia’s history is different from that of Europe. Asia has been a victim of colonialism. The West should recognize that Asians have the right to adapt development and peace initiatives to local conditions and the principle of gradual change in China’s context must be appreciated and understood by all. There is talk of power shifting from the West to the East. This is good for all, including the West as it occurs at a time when Western economies have been declining. Asia’s increasing wealth is the result of ingenuity and entrepreneurship of Asians. Asia’s wealth will help sustain employment in the West. China has been a partner in peace and stability in Asia. China has peacefully resolved border disputes with 12 nations. China continues to be an important partner in peace in the Korean Peninsula through a pivotal role in six-party talks. China will not take lightly reinterpretation in certain quarters of its own peaceful economic rise as the rise of a militaristic hegemon. Also, China is against the emergence of multilateral security architectures in Asia. China does not seek to impose its development model on anyone and expects the same in return.

My comment: I have long believed that if you owe your banker thousand dollars then it is your problem but if you owe him a million dollars then it is his problem. Upon appropriate scale transformation, the same should hold true where the banker and debtor are nation states. As America’s largest creditor, Zhijun does not appear concerned about debt that America continues to pile; debt that America neither has the ability nor the intention of repaying. What gives in?

My comment: Zhijun used the collective pronouns “we” or “us” when presenting his views except when he is talking about what China has done for the good of the rest of the world. For him, it is axiomatic that China’s view is Asia’s view.

Radoslaw Sikorski,Foreign Minister, Poland

My Summary: Sikorski echoes former German Chancellor Kohl’s view that ‘Germany is too big to be the first amongst equals but too small to dominate Europe’. In doing so, he quotes Kissinger who he less agrees with – ‘Germany is too big for Europe but too small to dominate the world’. Therefore Germany should not have hegemonistic intentions and should instead value its, still, very privileged place in Europe, that of Europe’s largest shareholder. Should Germany continue to work towards European solutions rather than be driven by hegemonistic intentions then it will, in Poland, find a very willing partner that will help Germany achieve its goals. Warning Germany to not even attempt to be a hegemon Sikorski quotes a WWII Polish Marshall who when asked why Russia is always a bigger security challenge than Germany said that whenever Germany gets too big for its own boots, Poland automatically has allies – powerful words indeed from a Polish minister spoken on German soil. He backs those up with theory and numbers as follows. The numbers are stacked against Germany and Germany fails the test of theory:

(i) The hegemon must have a preponderance of economic power: In 1949, the year of foundation NATO, the US economy was $1.3T, larger than the economies of Britain, Germany, France, Italy and Spain put together. This should be noted since today even though Germany is very rich, its GDP is $3.1T which is merely 25% more than that of France. Secondly, Germany's enormous trade balance is regional rather than of global signifiance; 9 out of its 10 largest trading partners are within Europe. Thirdly, a hegemon should command a large share of resources (which Germany lacks).

(ii) The hegemon must have a preponderance of military power: It should be a net provider of security to support the conduction of global trade. As of date the US spends $680 billion on defense which is larger than the rest of the world combined whereas Germany spends a mere $43 billion on defense. Therefore, there is no chance for Germany to become any meaningful net provider for security.

(iii) The hegemon must be perceived as benign (which is not so for Germany).

(iv) The hegemon must be perceived as capable of building and maintaining a liberal political and economic order (which needs to be yet demonstrated by Germany).

(v) The hegemon must be capable of providing public goods to a wider community (which Germany appears unwilling to and, even lacks the economic and institutional capacity for).

Europe at Crossroads: Part I

King Abdullah bin Abdul-Aziz Al Saud first gets tautological and then philosophical about women's right to drive (Oct 2005).

Barbara Walters: "Would you support allowing women to drive?"

His Excellency King Abdullah: "I believe strongly in the rights of women.  My mother is a woman.  My sister is a woman.  My daughter is a woman.  My wife is a woman.  I believe the day will come when women will drive.  In fact if you look at the areas of Saudi Arabia, the desert, and in the rural areas, you will find that women do drive.  The issue will require patience.  In time I believe that it will be possible.  I believe that patience is a virtue."

Yours, thinking about the European experiment analyst,

AA

Fig. 1: Night Map of the European Peninsula

The last time when Europe was at crossroads it was the late 19^th century.  At that time Europe was grappling with unstable power balances in South-Central Europe and the Balkan Peninsula brought about by the simultaneous decline of the Sick Man of Europe and the overflow of creative energies, ethno-linguistic political aspirations and military capabilities of the German speaking peoples under the leadership of Prussia.  It took Europe three wars (the Balkan War and the two world wars) before it could finally decide which turn it must take.

In my view Europe is at crossroads again.  Much has changed since the 19^th century.  However just as it was back then, Germany continues to remain too small to allow for the complete expression of capital and creative surpluses of the German speaking peoples.  The European debt crisis is right in the fore.  But lurking behind the façade of a debt crisis are the same 150 year old risks to the natural and complete expression of the surpluses of the German speaking peoples – potential loss of cost effective and free access to raw materials, and to markets in Europe.  I will skirt the Q of war as a means of dispute resolution mechanism and instead focus on financial and geoeconomic solutions to the debt crisis.  The good thing about the crisis is that it is solvable.  By solvable I mean it is within Europe's ability to solve the problem on its own.  There are five principal, non-mutually exclusive solutions to the problem, some European, some that rely on external help:

1. ECB Bond Purchase: ECB significantly expands the purchase of bonds of troubled sovereigns and systematically important European FIs.

2. Austerity and Deflation in the Periphery: In the short-run, strong austerity measures, public sector pay cut and sharp reduction in capital spending in the short run.  In the medium-run, facilitating ECB oversight of the budgetary process, denationalization or Europeanization of national assets, significant improvement in tax collections and linking of public sector wage hikes and credit availability to productivity gain as determined by some central institution.

3. The Indian Way: Since 1947 India worked towards achieving a political union.  The goal was achieved at a significant economic cost.  The center instituted mechanisms for perpetual transfer of wealth from productive regions and productive peoples to those that were perennially inefficient.  Europe over a similar period instead walked the road of economic integration while leaving significant political differenced unresolved.  The Indian way is European core permanently subsidizing the periphery.

4. An IMF-led bailout

5. A China-led bailout

In this five-part note we look at each of these options, understand their implications, and examine the difficulties in their being exercised.  Here is the first part.  In Part II we look at austerity and deflation in the periphery.

Option 1: ECB Bond Purchase (aka, ECB provides liquidity)

a. Who does it cheer in the short run?  The equity markets, CDS purchasers, private bond holders, Belgium, Portugal, Italy, Greece, Spain, France, the UK and the US

   

b. Who does it offend?  Ireland, the Nordic countries and Germany

c. Who are neutral?  China, Russia, India

d. Likelihood of exercise in a meaningful quantum: nearly 0.

e. Why is the exercise of ‘Option 1’ unlikely? – Because Germany wouldn't have it that way.  The reason for that lies in why Germany started the EU project in the first place.  Germany brought the EU project to the forefront, again, after the Berlin Wall was brought down [1].  To the Germans, this made perfect sense.  If Germany were to succeed (i) trade barriers would fall allowing her cost efficient and secure access to raw materials [2]; (ii) barrier-free access to a large market would make Germany’s continual investment in high technology affordable, allowing her to continue to maintain its high-tech edge; (iii) Germany would deploy its surplus capital in productive endeavors in nation states in the geographic and cultural vicinity as opposed to, say, in China, India or South America; (iv) nationalism in Europe  would wane with the rise of the notion of a common economic destiny (in the late 19^th and early 20^th centuries raucous expressions of the idea of nationalism caused internecine wars that culminated into the demise of European colonialism); (v) with the wane of nationalism, Germany could take a serious stab at reconstructing the European states from their current religio-linguistic basis into a law-based society – a change as transformational as the metamorphosis of a caterpillar into a butterfly.

f. What happens if ECB significantly expands its bond purchase program?

Ø  inflation in the EMU

Ø  moral hazard – the ones with  irresponsible credit behavior are left off hook and those that behaved responsibly are left to pick the tab 

Ø  Having barrier-free access to a large market benefits Germany only if such a market becomes self-sustaining.  No one wants to have access to a large market which one must also fund in perpetuity.

Ø  German nationalism is stoked. 

Ø  The fire of German nationalism will reduce the goal of German elites’ to transform Europe into a law-based society to cinders.

Ø  It will beget nationalistic feelings elsewhere in Europe, leading to resurrection of unions inspired by nationalism causing a reversal of intra-European free trade.

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[1] The European dream is the manifestation of release of latent energies of the Germanic peoples following the collapse of the Holy Roman Empire in the early 19^th century.

[2] secure from the vagaries of nationalistic jostling of the various European national states