Wednesday, 18 July 2018

The Good Old Days

With the British ruling elites tearing themselves apart over foreign policy these days (regarding the European Union), I thought I would take a brief look back into happier times. Here are some choice quotations from major politicians and newspapers that stressed how much Britain’s position in the world produced such big benefits.
First, Winston Churchill in April 1929. He is talking in Parliament about the City’s revenues, and its role as a global broker, as well as the big returns on British foreign investments:
“The income which we derive each year from commissions and services rendered to foreign countries is over £65,000,000, and, in addition, we have a steady revenue from foreign investments of close on £300,000,000 a year, 90 per cent of which is expressed in sterling. Upon this great influx there is levied, as a rule, the highest rates of taxation. In this way we are helped to maintain our social services at a level incomparably higher than that of any European country, or indeed of any country.”
Note that both kinds of revenue do not all come from the colonies, at least not directly, and most will have derived from transactions with and investments in other major countries. Nevertheless, such revenues were important for social services even before the post-1945 ‘welfare state’. I give an updated, contemporary assessment of these in my book, The City.
After 1945, the British Empire was somewhat diminished, as was its investment and dealing revenues. However, these remained important. As Ernest Bevin, the Labour Foreign Secretary, put it to the House of Commons in February 1946, stressing the importance of imperial stability as well as the revenues coming from the Empire:
“When I say I am not prepared to sacrifice the British Empire, what do I mean? I know that if the British Empire fell, the greatest collection of free nations would go into the limbo of the past, and it would be a disaster. I know, further, it would mean that the standard of life of our constituents would fall considerably.”
This concern about the ‘standard of life’ of British constituents was a key point for Labour’s social imperialism, and tallied with the views of the arch imperialist Churchill.
The importance of the Empire was also stressed in major UK newspapers at the time, for example in noting how US dollar-based earnings from the exports of commodities from Malaya (later Malaysia) were important for keeping Britain’s Sterling Area financial system in place:
“It is Malaya’s dollar earnings which keep the sterling area afloat.” (Manchester Guardian, 13 December 1950)
“Malaya is Britain’s biggest source of American dollars.” (The Times, 9 June 1950)
Malaya, of course, did not have access to these dollars, which were deposited in London, and from which, in general, only the UK and the ‘white’ dominions could draw. Malaya saw its funds translated into (depreciating) sterling and had to use this sterling to buy British goods.
Professor W Arthur Lewis summed it up in a Financial Times article, ‘The Colonies and Sterling’ in 1952:
“Many Colonies must sell their produce to Britain at prices below the world price, and, through exchange control, must buy from Britain at prices above the world price, or pay an ever-increasing sum into the Bank of England, because Britain will not deliver goods in return for what she receives.
“Britain talks of colonial development, but on the contrary, it is African and Malayan peasants who are putting capital into Britain. … The British colonial system has become a major means of economic exploitation. …
“The Colonies are exporting far more than they import, and are building up large balances. They cannot get all the imports they need, especially of capital goods, and their development programmes are in consequence retarded. They are in effect paying Britain for goods which she does not deliver.”[1]
His only error in this was to say that the colonial system ‘has become’ a major means of exploitation, whereas it had always been one. Other examples of Britain’s colonial exploitation post-1945 are given in my articles on Labour’s colonial policy and on how the welfare state was funded in 1945.

Tony Norfield, 18 July 2018

[1] Cited in R Palme Dutt, The Crisis of Britain and the British Empire, Lawrence & Wishart, 1953. The Manchester Guardian and Times quotations are also from Dutt. The remainder are from Hansard.

Wednesday, 20 June 2018

Debt Troubles

McKinsey Global Institute's latest report indicates how total global debt levels were still rising in 2017 (although they have been stable compared to GDP since 2014). There is a much worse trend for countries with FX debt and whose exchange rates have dropped, since the burden of every $1m borrowed will have increased. Interest rates on this debt are no longer at the extremely low levels where they had been held for years by central bank policies.
The US Federal reserve has been tightening policy, raising interest rates modestly, and some other major central banks are following suit, based on their view that some kind of economic recovery is under way. But the persistent high levels of debt show the fragility of that recovery.

Global Debt Outstanding by Economic Sector

Source: McKinsey Global Institute, June 2018
After the rapid accumulation of debt in the early 2000s, little of that debt was written off in the acute phase of the crisis from 2008 as central banks stepped in to salvage not just the financial system but the economy in general. So there remains a chronic and high debt burden, held by governments, households and corporations. In recent years, debt has risen most in ‘developing’ countries, whereas it has tended to be reduced somewhat or stabilise in richer countries (see here for a review I did in September 2016).
The key equation remains:
Higher interest rates + Higher debt = Repayment trouble!
There are lots of visible problems in the imperialist world economy, from Trump’s trade war, to the rivalries in the Middle East and elsewhere. This debt problem is one less evident, but one that is more pervasive.

Tony Norfield, 20 June 2018

Wednesday, 9 May 2018

Iran Sanctions, Imperial problems

Trump's anti-Iran move on Tuesday was deeply worrying for allies of the US. It is a blow for those countries, especially in Europe, that were hoping to build on the big expansion of trade with and investment in Iran after the July 2015 nuclear deal was signed. But it is more than just an economic opportunity under threat. As Germany’s Zeit Online commented ‘with nationalism and protectionism, Donald Trump is gradually eliminating the world order shaped by the USA’. Here I look at some implications of the latest US policy and the reasons for its timing.

Holy orders

The extent of the new US sanctions is at present unclear, although there will be some delay before full implementation. What worries the Europeans is that they are unlikely to apply only to US companies, like Boeing.
On past form, any company not doing as the US wishes could be liable to suffer financial penalties. They could also face problems of access to the US market and its banking system – the latter being necessary for all international companies that use the US dollar. This extra-territoriality of US sanctions, in the words of France’s Finance Minister, Bruno Le Maire, makes the US ‘the economic policeman of the planet’, and that is ‘not acceptable’.
Last October, the now ex-Secretary of State Rex Tillerson claimed that the US will not interfere in Europe’s business dealings with Iran. But the newly appointed US ambassador to Germany, Richard Grenell, has taken a very different tack. He followed up Trump’s statement with a threatening tweet: ‘German companies doing business in Iran should wind down operations immediately’.
It would be hard to top that as a sign of imperial arrogance, something that has become ever more embarrassing for US allies under the Trump regime. To have a smoothy like Obama advance US interests after a chat among ‘friends’ was acceptable. Now the veneer is off and the modus operandi of the nincompoop POTUS is to fart, blame someone else and carry on regardless.[1]

The little, big problem

Following the long years of sanctions, Iran is far from being a big economic partner for the major western powers. Last year it was only number 33 in the ranking of external trading partners of the European Union. Trade between the EU and Iran was close to €21bn, with a little over €10bn of both exports and imports, but this made up less than 1% of the EU’s total external trade. EU trade with India is four times bigger, and it is more than seven times bigger with Turkey. US trade with Iran is much smaller still, roughly $200m last year, which is barely a rounding error in the statistics.
Nevertheless, there had been rapid growth in trade for the EU in recent years, mostly imports of fuel from Iran and exports to Iran of manufactured goods, especially machinery and transport equipment. From 2014 to 2017, EU exports grew by nearly 70% and EU imports by nearly nine times.
Much more trade growth has been in prospect, together with attractive investment opportunities, for EU companies such as Renault, PSA Group, Airbus, Siemens, Total, Alstom and others. Iran’s half-wrecked economy offered a cornucopia of deals in the tens of billions to refurbish, resupply and rebuild.
All that is at risk with the new US policy. More important, however, is that the Iran deal was the result of a longwinded negotiation involving all the major powers, and now the US has walked away from it. This calls into doubt the status of more or less anything else the US has signed up for in the past, and also the status of the US as the unquestioned leader of the western powers.

Why now?

Why did former president Obama’s signing of the joint agreement with Iran look like the ‘worst deal ever’ for Trump? First, note that the US has sustained hostility to a country that dared to step out of line in 1979, when the Shah was overthrown, and has since not been cooperative enough. While the US has come around to accepting other miscreants – notably Vietnam, which beat it in a war – this is very rare and is, in any case, a very slow process. Similarly for Cuba. The irony in Iran’s case is that, aside from sections of the elite who make gains from managing the sanctions regime to their advantage, the country was overwhelmingly in favour of doing a deal with the west as a means of gaining access to technology and development. Nevertheless, despite signing the 2015 deal, Obama was not exactly friendly to Iran. Even afterwards, US political prejudice hindered American business prospects in Iran, with the Europeans much quicker to take advantage.
What seems to have scuppered the Iran deal now is the problem that US policy faces in the Middle East region. This is behind Trump’s long signalled change of course.
Apart from its own direct military intervention, the US has had two elements of control in the Middle East: Israel and Saudi Arabia. Each of these has become more unstable and problematic in recent years, causing trouble for western policy and some embarrassment when it comes to ‘human rights’ in family plutocracy Saudi Arabia and Palestinian rights in the racist gangster state of Israel. Yet the US has not been able to find alternative local tools. After the disaster of US policy in Iraq, another adventure, to replace Assad in Syria, and so to undermine Russia, has failed. This now leaves the US with two dysfunctional supports in a region scarred by imperialism, a mess that it cannot sort out.
The US inability to get rid of Assad has raised Saudi Arabian and Israeli paranoia about Iran. Worried about the stability of their own regimes, they see a long shadow from the bogeyman who does not necessarily do what the US wants and use this to disturb the US’s own discontent. This is neatly summed up in the invention of the so-called ‘Shia crescent’ of Iranian power and influence from Iran through Iraq, Syria and into Lebanon and the Gaza Strip. Saudi Arabia even sees Iran in Yemen, while Netanyahu starred in his own special anti-Iran video for Trump. In an inversion of reality that only someone of his powers can provide, Trump even outdid them with his latest comment that Iran backs al-Qaeda and ISIS.
Trump will tweet and things may change again. But it looks like the foundations of the world order are crumbling further.

Tony Norfield, 9 May 2018

[1] Apologies for lowering the tone, but the word ‘trump’ in colloquial English also means to break wind.

Sunday, 18 March 2018

Nervous About Russia

Two weeks ago in Salisbury, less than 10 kilometres from the UK’s Porton Down chemical weapons establishment, a Russian and his daughter appear to have been poisoned. Sergei Skripal was a former Russian military intelligence officer who acted as a spy for the UK’s MI6. In 2006, he had been tried and convicted for high treason by the Russian authorities, but was released in 2010 as part of a ‘spy swap’ with the UK and settled in Britain. Skripal and his daughter remain in a critical condition, with medical staff reporting that they had been poisoned with a nerve agent.
The British government has claimed that the Skripals were poisoned with the nerve agent ‘Novichok’. But in the past two weeks it did not release any proof of this either to the Organisation for the Prohibition of Chemical Weapons (OPCW), or to the Russian government that it blames both for producing the agent and for the attack. Alexander Boris de Pfeffel Johnson, UK Foreign Secretary and blathering embodiment of a power in decline, has just revealed that the OPCW will investigate from tomorrow.

Not to be taken: Novichok

Novichok is the name given to a class of extremely toxic nerve agents reported to have been produced by the former Soviet Union and Russia up to 1993. The production took place in several locations, and, with the break up of the Soviet Union, supplies of it and/or knowledge of how to manufacture it could also have been passed on to other countries. It is likely that Porton Down has such knowledge, since that would have been necessary for them to claim the attack on the Skripals was with Novichok rather than something else.

Who dunnit?

Claims that Russia initiated the attack rest on some shaky foundations. It is not clear why such a specialist method was used that would inevitably be linked to the Russian state. Or even why there would be an attempt at assassination at all, unless Skripal had continued to work for the UK intelligence services. However, one could argue that a Russian link was deliberately used to deter other Russian spies who might consider collaborating with the UK – with the message that ‘Eventually, we will punish traitors’.
Less plausible is the view that Putin needed this episode to marshal support in today’s presidential election that will likely result in his fourth term in office. Less plausible still is the Russian argument that the Brits did it to smear Moscow, although anti-Russian hysteria has a long history in Britain so that was a natural reaction.
One notable feature of the UK’s mainstream media coverage of this event was how there was an immediate and unanimous condemnation of Russia, with Labour leader Jeremy Corbyn denounced when he called for evidence.[1] Such is the operation of the ‘free press’.

Winding up

If Russian policy was to poison Sergei Skripal, then, apart from its role as a deterrent, that action could best be understood as a political wind up. The Salisbury location reminds people that the holier-than-though UK also deals in chemical weapons. The rationale for the timing is less clear; although in the wake of Brexit and Trump’s America First policy, the UK is in a weak position to do anything more to Russia than has already been implemented. NATO’s encirclement of Russia is more or less complete, but Russia has now developed new missile systems that undermine this threat. Effective economic sanctions against Russia have probably also reached a limit, because Europe does not want to cut off Russian energy supplies.
Russia can embarrass the UK, an anti-Russian stalwart of the Anglosphere, with little cost. Such an action would also demonstrate that it is not to be trifled with, as already shown by its actions in Syria. By comparison, the Brits have a more appropriate international ambassador than they might have thought in Boris Johnson.

Tony Norfield
18 March 2018

[1] Somewhat inconsistently, Corbyn also agreed with the UK Government’s expulsion of 23 Russian diplomats.

Monday, 12 February 2018

Index of Power

The following chart gives a snapshot of the top 20 countries, ranked by their index of power in the world economy. Readers of this blog or my book, The City, will have seen this concept before,[1] but here the information is updated to 2016-17.

Index of Power, 2016-17

Notes: The height of each bar is given by the country’s total index value, which is then broken down into the respective components. Countries are identified by their two-letter ISO code. Take care, because CH is Switzerland, not China (which is CN), and DE is Germany.
The overall picture shows a small number of countries, led by the US, towering over the rest. Only 33 countries out of 180 have an index that is more than 1% of the US index number! In a chart, most of the columns would look like the x-axis, so here I have shown just the top 20 countries. Of those, only five are close to or above 20% of the US number: the UK, China, Japan, France and Germany.

The UK remains number 2 on these updated figures. But its index value has slipped back in the past few years on most measures, and likely will slip further in future with the impact of Brexit. China stays number 3, but has come in closer, helped by its GDP growth, a greater use of its currency in world markets and by the size of its foreign direct investment assets (FDI).[2] France has edged a little above Germany in the latest ranking, helped by the better relative position of banks in France.
I have excluded from the chart several countries whose ranking is boosted artificially, namely in ways that do not reflect its power. For example, in the latest data the Cayman Islands stood out as an international banking centre and a home of foreign direct investment. But the banks and the assets have little to do with citizens of the Caymans. Ireland and the British Virgin Islands are excluded for similar reasons relating to FDI.

Statistical details

Roughly 180 countries have been taken into account for this ranking. Depending on the statistical measure used, data are available only for 40 to 150 or so.
My five measures are:
- Nominal GDP (2017 estimates, IMF)
- Foreign Direct Investment stock outstanding (at end-2016, UNCTAD)
- Outstanding cross-border lending and borrowing by banks (September 2017, BIS)
- The use of a country’s currency in international markets (April 2016, BIS)
- A country’s military expenditure (2016, SIPRI)
If a country is top in all categories, eg it has the biggest GDP, the biggest military spending, and so forth, then it would have an index number of 100.0. If another country had a GDP half the size of the biggest one, then its number on this measure would be 50; if its FDI were only one-quarter of the biggest country (not necessarily the same country), then its number would be 25; if it had the biggest international bank lending and borrowing, then its number would be 100. Taking each of its five individual measures and dividing by 5 would give the final index number for that country’s power rank. The measures have equal weights.

So what?

The idea behind this chart is to present key features of the world economy in a summary way. At the very least, it gives the lie to the absurd notion that there is an ‘international community’ and instead makes one focus on global power relationships. Each of the measures has limitations, discussed elsewhere, as is true for any set of data. But the evolution of the chart is also useful for tracking how the relative strengths of the major powers change over time.

Tony Norfield, 12 February 2018

[1] See here for one of the early versions, and Chapter 5, ‘The World Hierarchy’, of The City: London and the Global Power of Finance, Verso 2016 and 2017, for a fuller explanation.
[2] Data for Hong Kong and China should be combined, since they are one country. However, there are difficulties. For example, this can easily be done for GDP, but in the case of FDI, most of Hong Kong’s is in China. So I have included only China’s FDI (most of which I believe is outside Hong Kong). In the China data shown, I have added Hong Kong only for GDP and FX. Banking is taken as the average of the two; FDI and military spending is China only. The resulting index number will probably slightly understate China’s importance.

Sunday, 4 February 2018

The Long Arm of the Law No More

By Susil Gupta
The recent appeal case of Mr Thomas O’Connor highlights some of the pitfalls of the British strategy – one has to call it something – of having its cake and eating it in its future relations with the European Union. The case concerns the European Arrest Warrant (EAW) regime and nicely illustrates how law binds European nations together and why British cherry-picking isn’t possible.

Since its introduction in 2002, EAWs have has made a major contribution to law enforcement. Under the scheme, about 5000 people are extradited every year in relation to often serious charges.
Much confusion about the European Arrest Warrant regime arises from the fact that it is often considered an extradition procedure when it is actually designed not to be an extradition procedure.
In international law an extradition procedure is a request from one sovereign State to another sovereign State, both having different jurisdictions. Such a request normally has two stages. A judicial stage where a court considers the legal merit of the received request. If all is in order, and the court approves the request, it is passed on to the executive for final approval. This is always a cumbersome and expensive procedure and may result in frustrating the aims of justice in a requesting country as trials can be held up for years and witnesses and evidence go astray.
The EAW scheme is designed to do away with all this. Courts have only limited powers to review a request, and there is no executive phase. The key element of the scheme is the concept of a ‘common jurisdiction’, that is, all courts within the scheme have sufficiently similar legal regimes to allow the EU to create, by law, a common jurisdiction. The request to ‘extradite’ is simply a request from one court to another.
As is obvious, an assumed ‘common jurisdiction’ can only operate within European Law and has the European Court of Justice (Luxembourg) as its appellate court. A state that leaves the jurisdiction of the European Court, leaves the ‘common jurisdiction’ that is the basis of the EAW scheme.

The facts of the case

Thomas O’Connor, 51, a building company director, was convicted of tax fraud in 2007 in the UK. While on bail, he absconded to Ireland. The UK courts issued an EAW and O’Connor was duly arrested by the Irish police. At first instance, a Dublin court granted the EAW request. O’Connor appealed against the court order and eventually his case came before Ireland’s Supreme Court. The Supreme Court allowed the appeal, arguing that, were the extradition granted, O’Connor would still be serving his sentence while the UK would have withdrawn from the jurisdiction of the European Court of Justice, in effect delivering O’Connor to a country outside the EAW jurisdiction and possibly robbing him of recourse to the European Court.
The Irish Court also referred the case to Luxemburg since the issues raised have wider implications and it will have the final say on the mater. However, given the clear-cut nature of the main issue, it is likely that other EU nations will follow the reasoning of the Irish court.

Whitehall cock-up

Britain is very keen to retain the EAW regime and declared its intention to stay with the scheme within weeks of the Brexit referendum in 2016.
Many of its criminals have a tendency to flee its jurisdiction, often for sunnier climes on the south coast of Spain. It is also a cheap and efficient way to get rid of criminal foreign nationals. Brexiters tend also to be hard on crime so no political price to be paid for “remaining in Europe” on this issue.
Didn’t anyone in government realise that withdrawing from European law and its judicial structures might pose a serious problem and strike at the legal foundations of European cross-border law enforcement? Apparently not, amazing as it may seem for a country that prides itself on the rule of law and judicial oversight!
In March last year, Home Secretary Amber Rudd told Parliament that she ruled out any possibility of Britain leaving the EAW mechanism describing it as “an effective tool and that is absolutely essential to delivering effective judgment to the murderers, rapists and paedophiles.” But Lord Paddick, once a high-ranking officer in the Metropolitan Police, was quick to point out the obvious “The Government has to explain how this can be done without European Court of Justice oversight and common data standards.”
As late as September 2017 the UK issued a policy paper – Security, law enforcement and criminal justice: a future partnership paper – that made a strong commitment to remaining within the structures of European law enforcement including, Europol’s 2017 Serious and Organised Crime Threat Assessment, Passenger Name Records (PNR) data collection, the Schengen Information System Alert system, Europol´s Internet Referral Unit (IRU), Serious and Organised Crime Threat Assessment, the Joint Cybercrime Action Taskforce, PrĂ¼m (a system for rapid law enforcement information exchange on fingerprints, DNA and Vehicle Registration Data), Eurodac (a mechanism for sharing fingerprint data for asylum and law enforcement purposes), etc. The 20-page paper firmly asserts that law enforcement after Brexit it will be “business as usual” – but fails to consider any legal issue. Within two months of the paper’s publication, the Irish Times was reporting that EAW cases at the Irish Courts might face problems.
As a consequence, the Irish Court’s ruling has serious implications for crime in the UK. The internet and cross-border economic activities allow criminals to commit offences in the UK from the safety of a number of European countries beyond the reach of the British police. Likewise, any British criminal who does not fancy facing serving a hefty sentence is now only a plane or train ticket away from freedom. Why should any European police force spend valuable resources monitoring and tracking British criminals abroad if they cannot be extradited? Many other law enforcement facilities and activities are likely to be affected because all of them are subject to the legal oversight of European law and its judicial institutions.
So, soon it will no longer be true that Scotland Yard always gets its man.

4 February 2018

Tuesday, 23 January 2018

Warren Buffett & Imperial Economics

Warren Buffett is one of the wealthiest people in the world. He is also Chairman of the Board, President and Chief Executive Officer of Berkshire Hathaway, a huge US investment conglomerate. Looking at Berkshire’s investment policy reveals some important features of the economics of imperialism today and the role of money capitalists. Buffett’s public image as a kindly old gentleman – the Sage of Omaha – who favours increasing taxes on the rich and donates to charitable causes, does not sit well with evidence that he is a predatory gouger of profit. But these are the times in which we live.[1]

Berkshire’s nondescript name belies the fact that it is the fifth or sixth largest publicly quoted company by market capitalisation, at more than $500bn. It owns an extraordinarily wide range of companies, from insurance and banking, to specialist engineering, consumer electronics, news media, real estate, energy, railroads and airlines. Berkshire has more than 240 subsidiaries, but in addition to these it has large and small equity stakes in many other companies. Some are enterprises that few have heard of; others are household names. Six big companies account for nearly 70% of its $180bn portfolio of equity holdings: Apple, Coca Cola, Kraft Heinz, American Express, Bank of America and Wells Fargo bank.
Warren Buffett’s business strategy has not always been successful. He has made a number of duff investments, not least an early one in the textiles business that gave his company its name. Subsequent failures include investments in IBM and Tesco, and he was quite late into the boom in ‘technology’ stocks, having viewed these with a traditionalist’s scepticism. But his fund has nevertheless registered dramatic returns over a long period, well above those that would have been gained from investing in a broad index of companies. Like some other companies reviewed on this blog, Berkshire Hathaway does not pay dividends to its investors, relying upon an increasing share price to keep them happy. So far they have been content: from close to $100,000 in early 2010, the share price had risen to more than $300,000 by early 2018, to become the most expensive share in history.[2]
As one might expect, Berkshire Hathaway uses its financial strength to negotiate deals to its advantage, and there are two guiding themes for its investments. Firstly, Berkshire looks for companies with brand loyalty and potential or actual monopolistic positions that are likely to keep future profits secure. Secondly, as far as possible, it wants only to allocate money capital and not to get involved in business operations.

Monopoly sectors and Berkshire investments

The market power of a monopolist is a wonderful thing – if you are the monopolist. There is rarely only one supplier unchallenged by rivals. But being one of very few suppliers, or having a government contract that guarantees high prices for your product, or using advertising and brand recognition to cement market domination, or building a commercial barrier to limit what competitors can do, or using patents to stall their development, are all means of building a favourable position in the market. These are the kinds of company, big and small, that Berkshire Hathaway seeks.
On the big side is Apple. Although he was late to the party, Buffett started jumping into Apple’s shares in 2016, after its price had fallen over the previous year. By late 2017, Berkshire had accumulated more than $20bn in Apple shares, some 2.5% of the company. The rationale for this investment was that Apple had an ‘ecosystem’ and level of brand loyalty that meant consumers were not very sensitive to the exorbitant charges it makes for its products, particularly the iPhone – as revealed in Apple’s confidence when putting a premium price on the iPhone X.
Other large companies include not only the well-known ones like Coca Cola and Kraft Heinz, noted above, but also those that usually remain out of sight. Take energy distribution, for example.
Berkshire owns 99% of Berkshire Hathaway Energy. In addition to its businesses in the US and Canada, this subsidiary owns two of the fourteen ‘distribution network operators’ in the UK. Each of these UK operators is a regional monopoly; there are five other holding companies owning the remaining twelve. Berkshire’s are managed by its Northern Powergrid company, with operations in Yorkshire and the North East of England.
When people complain about high costs of gas and electricity, it is usually the energy producing companies that get the blame, not the distributors. But the latter are often responsible for something like 25% of a household’s energy bill through the distribution prices they charge the producers. In 2016-17, Northern Powergrid (Yorkshire)’s total revenues were £417m and a high proportion of those, nearly half, were its operating profit of £199m.
Berkshire also invests in many smaller companies, often those in a strong niche position. Examples are Precision Castparts (metal components and castings), IMC Group (tungsten carbide metal cutting tools) and Lubrizol (specialist chemicals). These are an important component of the holding company’s returns.
Berkshire’s funds come in both from its direct subsidiaries and from its portfolio of equity investments and interest bearing securities. Its many investments give a claim on revenues from all areas of the economy, both nationally (in the US) and internationally.[3] This is shown by the breakdown of its $25.9bn earnings (profits) before taxes in 2016. Insurance underwriting brought in $2.1bn, with an additional $4.6bn of earnings from the portfolio investments of its insurance division. BNSF, its railroad freight division, brought in $5.7bn, Berkshire Hathaway Energy $3.0bn, its manufacturing subsidiaries $6.2bn, with the remainder from a variety of other businesses and investments.

Being a money capitalist

Many big corporations today do as little production themselves as they can get away with. Instead they monopolise design, technology patents and marketing, while the producers of the goods and services they control become part of their ‘value chains’. Owning many producing, transport and servicing companies, Berkshire Hathaway would not seem to be doing this. But it has its own way of working, as spelled out in its latest annual report:
operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operating businesses.”
In other words, Berkshire may buy out a company and allocate extra capital for investment, but, although it may choose the Chief Executive of the operating business, the holding company stays clear of directly managing anything. This shows Berkshire’s role as money capitalist, even for its operating businesses, quite apart from those companies in which it just holds a portfolio stake.
The funds for Berkshire’s investments are mainly held by its insurance division – a large volume of mostly US dollar-denominated cash, cash equivalents and US Treasury Bills, which amounted to $71bn at end-2016 (total cash, etc, available was $86bn). A portion of those funds may be required to meet payments on insurance and reinsurance policies. But more importantly, this is also a store of cash to use for the opportunistic gouging of other capitalists, especially in times of crisis when cash is king.
Berkshire has often acted as a lender of last resort to selected companies in trouble. They are willing to pay a premium cost for its funds, not only because they have little choice, but also because backing from a big, well-known investor helps restore some financial market confidence in their business. In this type of investment, Berkshire has purchased ‘preference shares’ paying a high fixed rate of interest and which can only be bought back by the company at a premium, usually around 10%. As part of these preference shares, the company may also issue Berkshire long-dated options to buy the company’s stock at very favourable prices.
Examples of such deals include Berkshire investing $5bn in the preferred stock of Goldman Sachs back in 2008. This stock yielded an annual interest rate of 10%. Goldman bought it back in 2011, but had to pay $5.5bn. Berkshire also gained from the stock options it received. Similarly, Berkshire bought $5bn of Bank of America’s preference stock in 2011, although market conditions were not quite so bad and the yield was 6%. Other companies that have been through this Berkshire process include General Electric, Dow, Wrigley, Kraft Heinz and Home Capital.

Buffett and the law of value

Berkshire Hathaway’s business is an example of how a big corporation is often bigger than you think. Its fortunes derive from the operation of hundreds of companies it owns directly and from its myriad of investments that stake a claim on the value produced worldwide, even though most of Berkshire’s business looks US-based. Its mode of operation also responds to how the imperialist world economy works today. Do not just look for a ‘good company’ to invest in, but find the ones with a more protected niche in the market. Do not just lend to a company with ‘good prospects’, but wait to pounce on those with a future that are desperate enough to accept your terms.
Warren Buffett is quite abstemious and gets a relatively small salary for being the Chairman and CEO of a major corporation. Nevertheless, he is one of the top 10 richest people on the planet, with a large income from his personal investments as well as the wealth represented by his Berkshire holdings. Buffett owns some 18% of Berkshire Hathaway’s shares and, like some of his plutocrat peers, he has also organised the company’s shareholdings so that his voting power is higher than this, at nearly 32% of the total.[4]
He has many fans and receives the kinds of accolade that would go to a sports team with a great track record. But this is not a game; it is the world economy, and Buffett’s fund is a prime example of the power of parasitism today. Berkshire ‘puts money to work’ by relying upon the work of others, and it siphons off the product of social labour into the fortunes of private investors.

Tony Norfield, 23 January 2018

[1] This review of Berkshire Hathaway extends the list of corporations covered on this blog. Earlier ones were: Apple, Alibaba, Amazon, Facebook and Alphabet/Google. I do not plan to give a comprehensive overview of Berkshire’s operations, for which see Wikipedia and other Internet sources. Here I want to focus on key points that illustrate the nature of imperial economics today. Information cited is mainly from Berkshire’s accounts.
[2] This is the price of the main Class A shares. See footnote 4 for further details.
[3] When looking at the details, I was surprised that little of Berkshire’s revenue seems to come directly from non-US sources. A lot of Buffett’s attention seems to have been spent scouring the nooks and crannies of the domestic US economy for profitable openings and to buy into cheapened assets. Berkshire owns stakes in airlines, regional newspapers, real estate brokerages and automobile dealerships, among other things.
[4] Berkshire’s Class A shares are the ones that are priced around $300,000 each. The company also has Class B shares that are priced around 1,500th of the A shares, but have only one 10,000th of the voting power. There are 1.65bn Class A shares authorised and 3.225bn Class B shares.