Tuesday, 19 September 2017

Das Kapital, Finance & Imperialism

Below are copies of slides from my presentation today to the conference in London on the 150th anniversary of Marx's Capital.

Use them as you wish, but do the decent thing and credit your source if you republish this information elsewhere. The telegrammatic points below are more fully elaborated in other articles on this blog, especially in those on Apple, Amazon and Facebook.

Tony Norfield, 19 September 2017

Friday, 1 September 2017

Facebook’s Advertising Machine

When Mark Zuckerberg is interviewed, the founder of Facebook can barely put a sentence together without using the word ‘connect’. This looks like a case of Tourette’s syndrome that spouts business buzz words not curses. But it is based on his understanding of the source of his company’s revenues and almost all of these come from advertisers. They pay to put their offerings to Facebook’s two billion users, since it claims to know about these people and what they like. This is Facebook’s business model: to monetise connections to its platform.
In this way, Facebook has made it into the top 10 of corporations on global stock markets. Its business throws light on the way the imperialist economy works.

The advertising game

It is not much good making a product or service for sale if people do not know about it and buy it. Hence, advertising. From TV commercials and sponsorships, to pages in newspapers, to the ubiquitous logos on sportspeople, on billboards, on the clothing people buy and on images online, this is no small business. Global advertising expenditure in 2016 was estimated at $493bn.[1] A huge sum of money is available for the right destination.
Advertising is key feature of the capitalist market, especially when that market is global and not just down the road. Major corporations use advertising to put their brands in the public eye and fight for their market share. Spending millions or billions on advertising is a necessary part of becoming, and staying, a monopolist, since economic power is about market domination.[2]
But the right destination for advertising spending can still be difficult to determine. In general, the bigger the audience for advertisers, the better, although it still might be the wrong audience for what is being sold. As the business cliché puts it: ‘half of our spending on advertising is useless, but we don’t know which half’. This is where the growth of online media has become more important in the past decade or so: it can claim to provide a better answer to that question.
Television, with the largest audience coverage, still dominates ‘offline’ sales of adverts, totalling $186bn in 2016. A long way behind television advertising revenues are those for print media and radio. Offline advertising also accounts for the bulk of total revenues, with last year’s share estimated at 64%, or $315bn. But offline advertising growth has been stagnant in recent years, and is being rapidly caught up by the newer digital media.
From a small starting point, spending on digital media has been growing quickly. Digital advertising now accounts for 36% of the total spending, at $178bn, and its share will grow further, especially on mobiles and especially via search, such as Google, and on social applications, such as Facebook.
The economics of those media companies relying on the offline advertising market is being slowly undermined by digital communications, especially in the case of newspapers. In the digital advertising world, Google and Facebook are the dominant forces, together having more than half the digital advertising revenues. Google has a much bigger share than Facebook, and also has a stock market capitalisation of around $650bn compared to Facebook’s at just below $500bn, helped by the fact that its system accounts for 90% of all Internet searches. But Facebook is a sizeable member of this giant duopoly.[3]
Facebook has two big advantages over offline media. It can just provide a platform, and rely upon other people to produce the content that is shared on its system, rather than having to produce that content itself. It also has a more detailed view of the profile, likes and inclinations of its users than is possible for television companies or newspapers. This is the core value it offers to potential advertisers: not just a big and growing audience, but one differentiated by age, gender, location and likes.

The big connector

Facebook differs in a number of respects from the other major corporations covered on this blog in recent months – Apple, Alibaba and Amazon. It has far less investment in financial securities and derivatives than Apple, and I will not cover these aspects here.[4] It also has a more geographically diverse client base than either Alibaba or Amazon. However, one feature of its business that is critical, as for Apple and Amazon, is that it was founded in the large and rich US market.
In mid-2017, Facebook’s average revenue per user in the US and Canada was $19.38, nine times that for Asia, which was just $2.13. But Facebook’s audience in Asia is growing fastest, and accounted for 34% of the average daily number of users by mid-2017, compared to 14% for the US and Canada and 20% for Europe.
The US market evidently has a powerful influence on social trends elsewhere in the world. It has been shown not only by the popularity among youth of wearing low-hanging trousers and baseball caps backwards – although, thankfully, these trends have, like, faded – but also by how a system designed for an elite US university, Harvard, could end up becoming the world’s largest social media site. The Bullingdon boys of Oxford University in the UK have not come anywhere close to this, although they have distinguished themselves on a much smaller scale by providing politicians who help fill the UK news media.
With 97% or so of Facebook’s revenues derived from advertising, and with the bulk of those advertising contracts being subject to cancellation within one month, one would think that financial markets would look upon this business model as very shaky indeed. That impression would be endorsed by the fact that Facebook has not paid any dividends on its shares since these were issued to investors in 2012. But the share price has nevertheless risen dramatically and an early investor would have made a stupendous capital gain from holding them. When they were first sold publicly in May 2012, the initial share price was around $18; it rose to more than $50 by early 2013 and was over $160 in the past week or so.

Valuing people

Facebook had less than 500m monthly active users of its system in 2010; by mid-2017 it had hit two billion users. Even if one allows for duplicate/fake profiles and for company accounts, that is almost a quarter of the world’s population and the number is still growing rapidly. Those figures do not include many users of other Facebook-purchased companies, WhatsApp and Instagram, although there will be some overlap. While the popularity of social media websites can be short-lived, especially among young people, there is no sign yet that this is happening to Facebook.
Strong customer growth and potential market domination have been features of several big, US-based, tech-related companies. Since the 2007-08 financial crisis, low interest rates have helped boost all equity prices, because low yields on government bonds and low interest rates from bank deposits look less attractive to investors by comparison. But these companies’ valuations have also jumped more than the market average. The returns from the equities of established blue-chip companies – from their dividends and share price growth – cannot compete with the prospect of buying into a relatively new global market winner. That applies even for one that pays no dividend at all, as has also been true for Amazon.
Facebook has a similar value on the stock market to Amazon. Amazon is favoured for its potential to be the market in which goods and services are bought and sold, setting the price and taking a cut from suppliers – although it also has a key revenue source from its web services operation. Facebook, like Amazon, has to expand its clientele, and this is an even bigger imperative since almost all its revenue comes from selling advertising based upon this audience, one investigated and filtered by its algorithms. Hence Zuckerberg’s focus on how everyone should ‘connect’ via Facebook, which is Facebook’s attempt to maximise market coverage.

Business growth and WhatsApp

Facebook’s business growth shows the success of the company’s strategy so far. Revenue jumped from $7.9bn in 2013 to $27.6bn in 2016. Net income after various costs and taxes grew more than sixfold, from $1.5bn to $10.2bn over the same period. The background to this growth reveals some interesting points.
As one might expect, Facebook has invested a lot in research and development, committing more than 20% of its total revenues to this, amounting to nearly $6bn in 2016. Like other large corporations, Facebook has also tried to secure its market position through takeovers of companies that could complement its business, or ones that might in future be troublesome competitors in areas that it needs for further growth. Since 2005, Facebook has taken control of more than 60 companies in 10 countries – including India, Israel, Canada, the UK and Ireland, although most were from the US. These company acquisitions cost anything from a few hundred thousand to many billions of dollars.
Facebook’s biggest acquisition by far was in October 2014, of WhatsApp, the smartphone messaging, voicecall and video service. This underlined Facebook’s aim to get into this rapidly growing form of social connection – and of potential advertising revenue.
There have been conflicting media reports of the total price paid for WhatsApp, but it spent ‘only’ $4.6bn in cash. A much larger amount was also paid for the takeover in terms of Facebook shares, probably worth close to $15bn, giving a total of around $19-20bn. This shows how a key ‘social media’ company was well versed in using the financial system to establish its market power. That might surprise those who are critical of capitalist financiers, but who pay little attention to how the capitalist system actually works.
The WhatsApp acquisition was striking in another way. Facebook’s extravagant price for WhatsApp was despite that company having made losses in previous years. At the end of 2014, the ‘acquired users’ of the WhatsApp system were valued at $2bn, ‘trade names’ were valued at close to $450m and ‘acquired technology’ was nearly $300m, but there were tax liabilities of around $900m that made the net assets acquired equal a mere $1.9bn. The remaining $15bn or so that Facebook paid was accounted for as ‘Goodwill’.
Goodwill is a feature of company accounts that reflects the value of something that cannot be pinned down in terms of the business assets acquired. It is defined not as a physical asset, eg buildings and equipment, or even technology and existing customer business. It boils down instead to the ‘business reputation’ or ‘brand value’ of the company, and basically to its ability to generate revenues as a trusted enterprise. More precisely, it represents the capitalist market’s valuation of a company’s market presence and potential power, one that is especially highly valued as a takeover target by a budding monopolist with access to funds, like Facebook! The term Goodwill sounds like a transient favourable opinion; it reflects the monetary assessment of contemporary imperialist markets.

Staying on top of the sugar mountain

Business books have long discussed how managers might control a company although they do not own it, or perhaps have only a small stake in its equity. Marx raised this point in Capital and it was popularised in James Burnham’s 1941 book, The Managerial Revolution. Mark Zuckerberg offers an interesting take on this phenomenon.
Zuckerberg has managed to overcome the usual capitalist norms, where the money invested in a company’s shares determines how much power the owner has in company decisions. Such capitalist rules still mean that a small group of larger shareholders can determine the outcome if they can get more than 50% or more of the total. This is not difficult when there is often a very large group of very small shareholders who have negligible voting power. But Zuckerberg has gone much further, as shown by Facebook’s issuance of different kinds of shares with very different votes, something also done by other capitalists in the technology sector and elsewhere. [5]
Zuckerberg owns mainly Class B shares, with 10 votes each. The bulk of Facebook’s marketed shares, the ones listed for trading on Nasdaq, are Class A shares. These might sound better, since everyone prefers A to B. However, the A shares have just one vote each. The outcome is that Zuckerberg controls 60% of the voting power of Facebook shares although he owns ‘only’ 28% of the company. Facebook’s 2016 annual report is at least honest enough to spell out that he is
“able to exercise voting rights with respect to a majority of the voting power of our outstanding capital stock and therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets.”
So, the owner with 28% of the shares has complete control of all company decisions! If this were not enough of a challenge to the capitalist market’s supposed ideology of equal status before money, Facebook/Zuckerberg managed to top this in 2016. Helped by Zuckerberg’s own voting power, Facebook took the decision to issue a new class of shares with no voting rights at all. These were Class C shares, ones that, this time, should give investors a clue that they will now be sitting in the bad seats.
Zuckerberg’s plan is to issue these new Class C shares in exchange for Class A and B ones, including ones that he holds. This would allow him slowly to sell his shares and thus, piece by small piece, to donate funds to his Chan-Zuckerberg charity, so chipping away at his $100bn-plus mountain of wealth, but still retaining control of decisions at Facebook. The latter charity is his family’s philanthropic initiative; based upon him having more money than any sane person could ever possibly spend.
Zuckerberg’s charity scheme is one of many examples where a few of the ultra-rich ‘give something back’, from John D Rockefeller, to Howard Hughes, to Bill Gates, George Soros and Warren Buffett. The donations go to what the plutocrat happens to like, not according to what society needs.

Adverts, just for you!

The personal details of its two billion users are the raw material from which Facebook creates an attractive platform for advertisers. Filtered further by Facebook tracking ‘likes’ and clicks into other Internet sites, it can offer a defined audience far better than news media and TV companies, so it can claim to focus more than others on the relevant age group and inclinations of consumers.
The traditional media has not managed to keep up, even when it has gone online, as shown in the problems newspapers have had deciding whether to set up paywalls for their content, or whether to try and maximise viewers and boost advertising revenues by giving free access to that content. Even though Facebook’s ‘click through rate’ from the advertisements it shows is very low, with younger people better at ad blocking, so far that has not been a problem for the growth of its advertising revenues.
Nevertheless, Facebook does worry about future revenues. Has the core site now reached ‘saturation point’ for advertising? Will new ventures into virtual reality products, via its acquisition of Oculus for $2bn in 2014, help out? Can the WhatsApp acquisition generate enough money when it starts charging users?


Facebook’s core area of business has been the US and Canada, from which roughly half its global revenues are generated. The availability of wealthy US investors to fund Facebook’s early investments and growth has also been critical for the company.[6] As in the case of Amazon, this highlights how the global success of a commercial enterprise is boosted by it starting up from a big, rich country, with the US having the pre-eminent position.
Facebook's growth has absorbed some of the advertising revenues of other businesses and helped undermine them. But it is a better example of capitalism’s conflict between the forces and relations of production. The forces – the development of an easy global transmission for all kinds of data, ideas and information – are channelled by a system that accumulates the personal and social information of billions of people for private profit. Facebook is basically an advertising platform, and advertising is intimately related to the rise of mass production and the generation of monopolies, even in areas of new technology.

Tony Norfield, 1 September 2017

[1] See the MAGNA Global Advertising Forecast report, December 2016.
[2] Even the advertising sector, paid to publicise the goods and services of industry, commerce and finance, has become monopolised. Just five big players run it. In order of size by revenues, they are: WPP (UK), Publicis (France), Interpublic Group (US), Omnicom (US) and Dentsu (Japan). Each of them has tens of thousands of employees and lots of subsidiaries in many countries.
[3] In the text here I use the better known company name ‘Google’, although the company was reorganised in 2015 and its holding company is now called Alphabet. Google takes more than half of the digital advertising revenues in the US in 2016. Facebook is the junior partner in this game, with just 20% or so of US revenue, but it has been growing at least as fast as Google.
[4] Nor will I discuss the question of ‘fake news’ on Facebook, its abuse of privacy or its filtering of news. These issues have been covered in many reports, ones that often miss the more important points about what Facebook represents.
[5] Facebook is far from being the only company that has sold shares with different voting rights. News Corp, for example, runs a similar scheme so that Rupert Murdoch’s family has a higher percentage of votes on decisions than its share ownership would indicate. The Facebook/Zuckerberg ploy seems to follow the 10-1 scheme of Google/Alphabet’s founders.
[6] See the 2012 report, http://whoownsfacebook.com/

Sunday, 27 August 2017

The Military Transport Network of Azerbaijan

If you are a jihadist or a rebel needing some military hardware, then you have two problems. Countries that would be very happy to buy the equipment for you, such as the US, Saudi Arabia and the UAE, do not want to be identified. It can also be trouble to get the supplies through, unless the mechanism can be hidden. Is there a solution? Step forward Silk Way Airlines, a state-run cargo airline based in Baku, Azerbaijan!

A fascinating report from a Bulgarian journalist, Dilyana Gaytandzhieva, documents how Silk Way did more than 350 flights delivering hundreds of tons of weapons. The weapons were mainly from East European states, including Bulgaria and Slovakia, and also from Israel. The destinations were mainly into Iraq and Syria. Flights were given diplomatic status, so that the 'luggage' would not be checked or stopped, and the financiers of these operations were principally the US and Saudi Arabia, but also included the UAE (and, I would guess, other Gulf states too). A key country in which the weapons were unloaded for later shipment on to Syrian and Iraqi rebels was Turkey.

US military-related companies were often involved in the transport deals, but they were facilitating the delivery of non-US origin weapons - an advantage to cover up the US role. Bulgarian weapons were found by the journalist to have turned up in an Al Nusra Front (the Al Qaeda affiliate) arms cache in Aleppo, Syria, and the Iraqi army also uncovered an ISIS warehouse of these weapons in Mosul, Iraq.

Tracking such a supply network is difficult, but the observations are supported by documents and also by other corresponding sources. This was just one network, based mainly from Bulgaria and Azerbaijan; others will also be used by the various powers involved in this deadly game, including those from Libya.

Gaytandzhieva's report was filed on a Bulgarian newspaper site in early July. This led to protests from Azerbaijan and to her questioning by Bulgaria's security services. She was dismissed from her job a few days ago, according to her interview on Al Jazeera news network today, a report from which is here.*

Tony Norfield, 27 August 2017

Note: * Al Jazeera was happy to make a lot of this report since its focus directly implicated Saudi Arabia and the UAE in financing terror networks but had no mention of Qatar's role in such things.

Monday, 14 August 2017

Partition of India

The partition of India took place seventy years ago today. British media coverage of the event focuses on the bloodshed that followed and, not surprisingly, ignores the role of the British in fomenting divisions between Muslims and Hindus. Narendra Singh Sarila's book, In the Shadow of the Great Game: the Untold Story of India’s Partition (Harper Collin, 2005 and 2009), fills this gap.

This is the only book I have found that explains what was in it for the British when India was partitioned in 1947. It shows how the British backed Muhammad Ali Jinnah in his opposition to the Indian National Congress, and how they encouraged the formation of Pakistan as a dependent state that they could better rely upon to be anti-Russian than an independent India. Historians usually avoid this and instead explain partition by claiming that there were deep-rooted ethnic/religious differences that demanded a Muslim Pakistan separate from a Hindu India.
A highly recommended book that highlights another crime of British imperialism, and one that has had repercussions long after the formal end of colonial power.
Tony Norfield, 14 August 2017

Wednesday, 9 August 2017

Lenin in London #2

I first wrote about Lenin’s stay in London in May. By chance, I have just come across a book first published in 2000 that gives some interesting details of Lenin’s visits to London from 1902.[1] My previous article provided the solution to that author’s question about what happened to the bust of Lenin, first put up in 1942. Here I note some of the points she makes about Lenin’s visits. I am not usually one to dwell on such details, but it is a nice irony of history that the UK, a centre of anti-communism in the 20th century, and still today, was also a minor aid to the success of the Russian Revolution in 1917.
Lenin’s visits to London were more by necessity than choice, with political restrictions on operating in Russia under the Tsar or in some other, closer European countries, such as Germany and Belgium. London housed a number of radical Russian émigrés, but also a small group of UK radicals with a printing press. So Lenin wrote to Harry Quelch of the Social Democratic Federation, asking if he could print Iskra (The Spark, the revolutionary journal) from their offices in Clerkenwell.
In April 1902, Lenin moved to 30 Holford Square in Islington, renting two rooms with his wife Nadezhda Krupskaya. Pamela Shields notes that they breakfasted on bacon and eggs, washed down with beer because the poor water quality was a health risk. Lenin worked on Iskra in the Twentieth Century Press offices at 37a Clerkenwell Green, the building which is now the Marx Memorial Library, and which was not far to walk from Holford Square. He sat at a desk in a tiny office close to Harry Quelch, while Krupskaya was busy at Holford Square, deciphering cryptograms and sending coded messages to agents in Russia.
From April 1902 to May 1903, the Clerkenwell printers were responsible for Iskra numbers 22 to 38. During this period, a certain Lev Bronstein, later known as Leon Trotsky, arrived at Lenin’s home and told him that Iskra, for various reasons, was not getting through to Russia. The decision was taken to smuggle in the four-page Iskra into Russia on thin paper wrapped inside the knee-high boots of supporters!
In 1902-03, with his comrades, Lenin organised meetings of the Russian Social Democratic Labour Party (RSDLP), usually in pub rooms and with them pretending to be trade unionists. One room was also booked in the name of the ‘Foreign Barbers of London Association’, which was just as well since they were speaking Russian. On several occasions, the London Metropolitan Police attempted to eavesdrop or find out what was going on, but they had little luck, not least because their fluency in Russian left much to be desired. Lenin made further visits to London, including in 1907 and, the last one I believe, in 1911.

It is not known what Lenin liked to drink in the various London pubs he frequented, including the Crown and Woolpack, which closed some years ago, and the Old Red Lion, both in St John Street EC1. This was before his work on imperialism, so it is possible that he sampled India Pale Ale. However, one suspects that he would have rejected light and bitter as a typical Menshevik compromise.

Tony Norfield, 9 August 2017

[1] Pamela Shields, Essential Islington, Sutton Publishing. It is not clear that there were as many as six separate visits to London as she claims. Her book is available on Amazon.

Tuesday, 1 August 2017

Brexit & the City of London

Brexit is a big economic and political mess for British imperialism. It also undermines some of the previous plans to boost the City of London’s operations, especially in deals with China. The City will not collapse. But it will lose business as other European Union countries are already aiming to divide up the soon to-be-deceased member’s estate while the body is still stumbling around.
A large proportion of City financial dealing is with the rest of Europe, although London has been pre-eminent because of its worldwide links – including with offshore financial centres, many of which sing God Save the Queen as their national anthem. These European ties formerly helped underpin the City’s growth, but have since been a factor in decline, even before the Brexit vote in June 2016. So problems for British-based finance due to Brexit now add to those resulting from a drop in European economic strength.

Shift in economic power from Europe to Asia

IMF data show that the European Union’s share of world GDP fell from 25 per cent to 22 per cent from 2011 to 2016, a sharp fall in just five years. This was offset by a higher share for the US, and especially so for China, based on their faster growth. Weak economies, massive debts and bad loans also undermined Europe’s banks and led to a cut in their dealing operations – most of which are in London.
A good example of the impact is seen from the global foreign exchange market, which reflects the cross-border deals in the currencies used for investment in bonds, equities and real estate, and the buying and selling of goods and services. From 2013 to 2016, the size of the foreign exchange market had declined for the first time in more than a decade, based on low world growth and problems in banks. The UK’s share of the foreign exchange market fell from 41 per cent in 2013 to 37 per cent in 2016. Although the City still remained by far the world’s biggest FX dealing centre, and the US in second place had a much lower 19 per cent, the US share rose a bit, helped by the better position of its banks.
By contrast, Asian financial trading centres were the clear winners. Singapore’s share of trading rose from 5.7 per cent to 7.9 per cent from 2013 to 2016. Taken together, China’s and Hong Kong’s rose from 4.8 per cent to 7.8 per cent. Though still a small share, this is an astonishing result for China, one backed by the near-doubling in the use of the renminbi in global FX dealing to 4 per cent. This made the renminbi the eighth largest trading currency in 2016, just behind the far more established Canadian dollar and the Swiss franc. Meanwhile, the euro, now the currency of nineteen countries, saw its share slip to the lowest since its inception.

UK politicians: dumber than you might think

The City had a falling share of a falling market even before Brexit,[1] but now faces the prospect of Brexit. A key problem it faces is how far will UK-based financial companies be able to conduct business with the European Union once the UK leaves. Implausible as it may seem, despite UK governments having promoted the financial sector for more than three decades, there is no sign that the current UK government has given this much attention.
Under the Labour governments from 1997-2010, there was also a clear pro-finance policy. This was seen as one of the few competitive UK ‘industries’, one that also provided lots of tax revenues to fund public spending, from income taxes on the high paying jobs and the various duties imposed. Finance supported millions of jobs related to trading in foreign exchange and all kinds of financial securities and insurance services. It also provided international revenues that covered nearly half of the UK’s record-breaking trade deficit in goods that in 2016 amounted to 7% of GDP. Even non-financial UK business services, from accountancy to information technology, are very closely tied into the financial sector, and offset another chunk of the trade deficit. Basically, without the City’s financial business, UK living standards would be lower.
In more recent years, the UK political class has had trouble maintaining support from a disgruntled electorate. Voters worried about pressure on living standards focused on immigration from the EU, so this has led the two main parties, Conservative and Labour, to accept the referendum vote and reject EU membership. They obviously want free access for all UK business to the EU market, but this is not possible under EU treaties for a non-member, unless, at a minimum, that country also accepts the free movement of labour, ie no restrictions on migration from the EU. UK politicians can grandstand as much as they like, declaring what they want from a deal, but the end result will come from a negotiation
With the UK a member of the EU, City-based financial firms can freely do business across the rest of the EU single market, due to so-called ‘passporting’. This means that banks or other financial institutions in the UK can sell their services in all other EU countries, as these are considered part of the same market. Without the ‘passport’, or something very similar when the UK leaves the EU, that ability will either cease or become much more restricted.
More than 5,000 UK-based firms rely on these passport agreements, and some 8,000 European companies also need them to offer services in the UK. So there may be some compromise. But it is in the interests of the remaining EU-27 countries not to make this a favourable one for the UK, or else the longstanding European Union project would risk being unravelled as others considered the exit too.

How to get a piece of the financial action?

Whatever the wider economic and political issues for the UK and the rest of Europe, the UK’s financial business is an area coveted by some of the major EU players. Already, many UK and international banks and other financial institutions have said that they plan to relocate some business into the EU-27. So far it is only on a small scale, and as a precaution so as not to be left high and dry if there are barriers to their UK-based operations doing business in the EU. If it becomes clear that full access to EU financial markets will be difficult, more will follow.
The likely outcome is a piecemeal lopping off of some parts of City business into several other EU locations rather than into one new rival centre. Frankfurt, home of the European Central Bank, is one of the favoured alternatives, but there is also Dublin, Paris, Amsterdam, Luxembourg and others, depending upon where a financial company might already have some existing business.
Ironically, Frankfurt, the main financial centre for Europe’s largest economy, Germany, is a rather provincial town, not particularly attractive to financiers, and is based in country whose politicians have shown little orientation to finance. They have instead been able to benefit from the prowess of German engineering business and have had other ways of promoting German capitalists on their minds.
I do not think that the Brexit effect by itself is likely to add up to a dramatic reduction in the City’s operations. London has built up a series of reinforcing advantages that are difficult to replicate elsewhere, as shown by the several directions in which alternatives are sought. For now, at least, London has very many more international connections than rival financial centres, plus a broad range of financial services and personnel skills that other centres lack. English is the main business language and English commercial law is the foundation for many financial contracts, for example interest rate swaps, the largest traded financial derivatives contract.
The commercial law issue is more important than one might think. Lawyers based in other countries, or sent from the UK, might be trained in the relevant aspects of English commercial law, but legal judgements are based on court decisions. Being part of the relevant legal network is important. It would also take a long time before contracts are changed into another legal system, and that system may not have the specific aspects necessary that have been developed over decades within the UK legal set up.
Furthermore, most other possible centres have also had governments that have been advocates of a financial transactions tax. This will not help them make a convincing case for expanding their role as a financial business centre. Nevertheless, the incompetence of the present British government could make them question favouring London.

What next for the City?

Despite the impact of Brexit and the recent decline in the growth of financial dealing, it will not be easy to dislodge the City of London from its pre-eminent position. London will almost certainly lose business to other financial centres, but it is costly for banks to move even some operations from London to the rest of Europe, estimated at anything from $30-$50bn.[2]
As these decisions play themselves out, British financial elites are planning to secure for the London Stock Exchange the flotation of Saudi Aramco’s shares. This state-owned Saudi Arabian oil company is the world’s largest and the deal would produce big revenues for the exchange and banks handling it. Around five percent of the company might be on sale, but even this is expected to raise some $100bn.
Only a major stock exchange could handle such a large deal. But although New York is the biggest, and Trump’s pro-Saudi politics are supportive, US financial regulations could be a barrier since the Saudis do not like giving much information. London is more lax on that score and has also changed its rules to help its bid for the deal. Furthermore, there could be US legal claims against the Saudis regarding the 9/11 attacks that would impact Saudi Aramco, and this kind of trouble looks more likely to occur in a US court than any such thing in British courts.
One deal, no matter how big, would not point to sunlit uplands ahead for British finance. But the outcome for Saudi Aramco’s deal will be an interesting signal of how far a Brexit-hobbled City can have a future outside the European club. It would also indicate how far Britain’s status as a key player in world politics has been damaged, since the Saudi decision will certainly have that in mind.

Tony Norfield, 1 August 2017

A fuller discussion of City finances in relation to British imperialism, plus Brexit and Trump is available in the paperback edition of my book, The City, available from these sources.
For a brief article on this blog covering the background to the City’s business relating to British imperialism, see here.

[1] The Bank for International Settlements surveys from which this information is taken are conducted in April of the relevant years, so in 2016 it was before the June Brexit vote. Similarly, the UK’s share of the trade in financial derivatives fell back between 2013 and 2016, based largely upon a drop in the volume of dealing in euros.
[2] See this Bloomberg story: https://www.bloomberg.com/news/articles/2017-07-31/banks-may-be-hit-with-50-billion-capital-needs-after-brexit

Monday, 31 July 2017

Facebook, etc

For reasons I have only recently, if belatedly, begun to fathom, quite a lot of people like Facebook. Being reasonably open minded about such things, I have also just set up an account in my name on Mr Zuckerberg's domain, with a Group page 'Imperialism Today'.* No surprise there, anyway. The link (I hope) is here. Work on this is in progress. (If the link does not work, let me know!)

In practice, my own Facebook entries will likely deliver more than the material available on this blog, although these extra items will be much the same as what I might put on my Twitter account, StubbornFacts, located here. The main articles will appear on this blog, nevertheless, this being my favoured method of presenting an explanation of what is going on.

Tony Norfield 31 July 2017
Note: * The name of the Facebook Group page was changed from 'Economics of Imperialism' to 'Imperialism Today' on 1 August, but should have the same link.