The Guardian recently caused a splash by publishing a piece discussing Donald Trump’s remarkable resilience in the polls despite the near universal opprobrium being heaped on him by the media. It had some sage words for why media hostility was actually hardening Trump support, as well as pointing out that ultimately, Trump is giving most Republicans what they want. Both are true, but the piece also omits one major explanation for the stubbornness of the numbers; after all, 87% of Republicans support Trump, but that is far too little to explain 43% approval numbers. Instead, it is the support of 36% of “Independents” and even more surprising 9% of Democrats which he continues to command (both numbers which have increased markedly during the first half of 2018), which make up the difference:

Presidential Approval Ratings between Q1 and Q2 of 2018

Source: Gallup

In the climate of public discourse, his avowed critics find it incomprehensible to imagine who these non-Republicans might be. But yet it is these independents and Democrats who make up the group supposedly so “racist” that they voted twice for Obama before voting for Trump. Why, as the Economist asks, will the Democrats “struggle to win back Obama-Trump voters”?

The biggest problem for Trump’s detractors is the fact that he is, on some level, on “the right side of history” at a moment when hardly anyone else in public life is. By this, I mean that on some of the largest issues weighing on the public today such as trade, immigration and even international institutions, it is Trump who is pushing at an open door, not his opponents. We can be pretty certain for instance that whoever wins the next few elections will not be doing so on a wave of championing more free trade, more open immigration or more faith in organisations such as the UN, NATO, the IMF or the WTO. Instead, the winners are likely to be those who are talking Trump’s language, even if they are not using his vocabulary.

No doubt this idea will cause outcry amongst my liberal friends, but let us consider the evidence. The first such exhibits are the underlying macro themes. For instance, UBS released a note in 2016 charting the recent decline of globalization as a very natural part of the development cycle, and why also there are structural tensions being created in the current situation:

The globalization cycle typically sees high growth in trade matching high levels of growth, followed by periods when trade and growth decline. These are the moments when societies spend a moment to draw their breath and “catch up” to the excessive changes that have been wrought. In an earlier blog I noted the limitations of explaining away trade deficits with capital surpluses for instance, as some commentators quite unashamedly continue to do. The reality is that those who gain from the latter are not the same who lose out from the former, resulting in a political and social tension unaccounted for in scholarship which is postgrad IQ but high school EQ.

Additionally, there is the element of inequality over growth distribution. In the UBS analysis, we can see that despite a substantial slowdown in growth, exports remain at an unrelentingly high percentage of GDP resulting in limited social recalibration. Furthermore, the growth even during the previous wave of globalisation mainly benefited the non-West as this recent HBR study shows:

This is supported from a different angle by HSBC’s analysis of which countries have gained in which era of the recent past:

Source: HSBC presentation, January 2017 (not available online)

In broad terms therefore, there is such a thing as “too much trade” and its corollary “too much freedom of movement” (aka immigration). For all these reasons, from the perspective of the American voter, the “right side of history” is the side which will make these changes.

The second piece of evidence for Trump being on the “right side of history” is the surprising consensus for change in these areas. The China “trade war” – an irresponsibly used term if ever there were one – has seen much fear and anguish in the media (very few of whom understand even the basics of trade economics) but actually commands widespread bipartisan support in Congress and has done for some time. The same applies to pulling the plug on TPP and questioning NAFTA – both positions that have long animated the party that produced Bernie Sanders, Dennis Kucinich and Howard Dean. Some determined anti-Trumpers of the Left have now painted themselves into the absurd position of defending the free trade of the WTO, when just a few years ago they were its greatest opponents. On this, they have a credibility problem if nothing else.

But it is not just trade. On immigration, the Democrats are caught between arguing against Trump’s policies even whilst occasionally defending the fact that Obama deported more illegal immigrants than any other president. The reason he did this was popular support for the general principle that borders mean borders. And even with regards international institutions, it has long been understood that many are not working for the US. Obama called his NATO allies “free riders” as recently as 2016, and abandoned the Quadrilateral and G7 to try and reach an agreement in Copenhagen in 2010 much to their anger; meanwhile George W Bush spent the best part of two terms criticizing the WTO and finally abandoned the Doha Round. Clearly, no-one thought these institutions were working well or serving best American interests.

Yet strangely the Democrats have done almost nothing about this, and have found no real successor to Sanders, the only candidate from their side who talked about this. Sanders’ various successors – whether Liz Warren or the newly crowned Alexandria Ocasio-Cortez, have surprisingly little to say on any of these themes other than wanting to abolish ICE. Instead they have left the field to Trump who therefore feels (to the average voter) more like someone who is looking forwards, not backwards, about the world we live in. Where a politician stands on that nexus of trade, immigration and institutions has become a defining and almost apolitical issue; once you strip that away, you are only left with the usual rancorous debates on gun control and whether to install transgender toilets. Those arguments though, pale into insignificance against the background of how to remedy (rightly or wrongly) median wage stagnation. Democrats and Republicans are navel-gazing whilst Trump is allowed to speak unhindered to large swathes of the nation that voted for him in 2016. At the moment, he owns that space even if his methods seem clumsy – as former Australian Prime Minister Kevin Rudd recently said, Trump has been “strategically comforting but tactically terrifying”.

(As an aside, I would point out that the liberal desire to cast Trump as some sort of “reactionary” does not ring true either. I do not believe most of the public actually see him as being particularly anti-gay or anti-abortion for instance. Instead, one of his defining moments on the campaign trail was the highly pragmatic response to the transgender toilets issue, saying they should use whichever one they wanted but business could not pay for new facilities. Mostly, he just does not care. Sure, he is not actively helpful to liberal causes but he is hardly aiming to contain them. Remember, too, that in the Republican primaries almost every sort of more extreme candidate ran: states’ rights fundamentalists, religious fanatics, neo-conservatives and Koch-ite free traders. Trump was none of these things and triangulated quite effectively between them all.)

Of course much of the support for Trump remains cultural, and on what is sustaining this one need look no further than the exceptional piece written by Joan C Williams in the days immediately following the 2016 election. It remains the best depiction of that amalgam of economic, cultural and social thought which passes for “what’s best for my family” in many voters’ minds:

One little-known element of that gap is that the white working class (WWC) resents professionals but admires the rich. Class migrants (white-collar professionals born to blue-collar families) report that “professional people were generally suspect” and that managers are college kids “who don’t know shit about how to do anything but are full of ideas about how I have to do my job,” said Alfred Lubrano in Limbo. Barbara Ehrenreich recalled in 1990 that her blue-collar dad “could not say the word doctor without the virtual prefix quack. Lawyers were shysters…and professors were without exception phonies.” Annette Lareau found tremendous resentment against teachers, who were perceived as condescending and unhelpful.

Michèle Lamont, in The Dignity of Working Men, also found resentment of professionals — but not of the rich. “[I] can’t knock anyone for succeeding,” a laborer told her. “There’s a lot of people out there who are wealthy and I’m sure they worked darned hard for every cent they have,” chimed in a receiving clerk. Why the difference? For one thing, most blue-collar workers have little direct contact with the rich outside of Lifestyles of the Rich and Famous. But professionals order them around every day. The dream is not to become upper-middle-class, with its different food, family, and friendship patterns; the dream is to live in your own class milieu, where you feel comfortable — just with more money. “The main thing is to be independent and give your own orders and not have to take them from anybody else,” a machine operator told Lamont. Owning one’s own business — that’s the goal. That’s another part of Trump’s appeal.

Hillary Clinton, by contrast, epitomizes the dorky arrogance and smugness of the professional elite.

This is a major part of the real world, and Trump has no competitors here. It has led, as the Economist lamented well before Trump arrived on the scene, to “the return of history”. Skillful as Trump is, he did not create these issues or the popular sentiment driving the polls; years of poor governance did.

The fact is that none of these things – free trade, more multiculturalism, faith in institutions – are going to be more popular in five years time than today. In the areas of policy most commonly associated with Trump, there is a near consensus amongst the population but yet he alone is telling the story. The Democrats are therefore reduced to hoping for a candidate to come along that will articulate Trump’s message better than Trump. That may happen; but it’s an audacious hope. In the meantime, whisper it: whilst the Democrats and Republicans are wrangling over tax cuts and repealing Obamacare, it is Trump who is on the right side of history. For now, anyway.

My attention was drawn to this piece, detailing a new book – Unfinished Miracle: Taiwan’s Economy and Society in Transition – which feels like it could be quite important. Whilst I await the final version, I nonetheless would offer a few thoughts on Taiwan, and not least its asymmetric relationship with China.

Few states are as substantially bound to and distorted by a single other large, connected country as Taiwan is by China (for the record, I do not acknowledge Taiwan as a sovereign nation but will for the purposes of this blog post refer to it in the short hand). The only other examples which spring immediately to mind are the relationships between the US and Britain, and between Brazil and Portugal – and both of those are largely historical cases. In each instance, the existence of the larger and younger frontier came to capture the economic imagination of the wealthier, older land – such that in many cases there was a disproportionate focus on these opportunities at the expense of other potentially more profitable ones.

Taiwan’s love-hate relationship with the Mainland along these same lines appears to be the heart of the thesis offered in the new book. In particular, the writers detail the “three-way trade” in which Taiwanese companies operate an export model using Chinese assets rather than domestic Taiwanese ones, creating employment and generating returns in China rather than at “home”:

“One can see from employment figures that Taiwanese enterprises have created far more jobs overseas than in Taiwan. The top 500 companies employ about 2.5 million people abroad (mostly in China) but only 1.5 million people at home. According to estimates, for every 29 people these companies employ in China, they employ one less person in Taiwan.”

Not every point makes sense to me. For instance the authors start off with the matter of SMEs accounting for a declining proportion of direct exports – which may well be true but I will have to wait for the book to see why it is relevant. After all any economy, as it develops and consolidates along the value chain, should see local export champions aggregate value so that a few higher end entities become the point of export, rather than SMEs serving as offshore suppliers to a foreign aggregator.

But the issue of how and where Taiwanese companies are making money is of great consequence. If the article is correct, Taiwanese companies are struggling to improve their gross margins despite moving their workforce into the PRC. This is clearly an issue about where they sit on the value chain. But there is another, even more gigantic elephant looming in the room: Taiwan is becoming nothing more than a remittance economy barely differing from the Philippines.

Consider that an estimated two million Taiwanese live abroad – one million in China alone (and half a million just in the Shanghai area). And these are not the old and invalid – they are the young, the brightest, the entrepreneurial two million out of a total workforce of only 11.8m people. Those that can, leave; those that can’t, remain. The social and cultural disjuncture between the diaspora and those staying at home, where graduate salaries are now lower than comparable roles in Shanghai or Beijing, is increasingly stark.

Furthermore, whilst domestic salaries are stagnating, business engaged in the offshore model discussed in this paper (“SMEs that become big companies in China”) are making huge returns, and often repatriating large amounts as a consequence. The earnings made from Chinese exports is leading to a huge asset bubble, particularly in property prices. Those same left-behind graduates are therefore experiencing not only depressed wages, but increasingly unaffordable housing. Even Chinese tourism is driving up the cost of living. The ongoing polarization of Taiwanese politics has its roots in this dichotomy. It is a perfect storm into which the DPP and the Sunflower Movement have emerged, but without any noticeable plan and only trite promises.

Political unrest is an outcome of the country’s inevitable economic model – inevitable because of China’s clever strategy of stymying Taiwanese attempts to trade elsewhere; but giving privileged access to China itself. This integration by stealth has paid huge dividends in terms of making the Taiwanese understand which side their bread is buttered. And it has led to two tangential outcomes – but only one is positive.

First, Taiwan has become a major centre for RMB internationalization. Much of the corporate earnings on the Mainland end up flooding back into Taiwan in its original currency. The island province therefore already constitutes the world’s second largest offshore RMB pool after Hong Kong (which occupies its leadership position for other reasons). Ordinary people are already getting used to RMB banking and wealth products on a day-to-day level, whilst corporates are beginning to issue RMB Formosa bonds. Mainland China is a fact of life for many people, accounting for the relative prima facie ambivalence towards independence.

Secondly and more worryingly, left-behind Taiwan has become increasingly parochial, with a poverty of means being matched by a poverty of ambition. Indeed the Taiwanese even have a term for this, the monstrous concept of 小確幸 which tells them that “good enough is good enough”, the ultimate expression of a “small country” mentality. Fewer and fewer overseas voters – “those that can” – bother to return for elections, especially in midterms, leading to legislative gridlock. And the media, who are left to focus on “those that can’t”, enter a downward spiral of navel-gazing such that news is more akin to a parish newsletter than real journalism.*

All this makes it far more problematic either for the KMT or any “One China” platform to succeed; and easier for peddlers of cheap myths for independence. In this sense, the Chinese strategy of binding Taiwan close may have the unexpected effect of creating a more troublesome rump population who have so little that they also have nothing to lose.

Taiwan’s economic decline is something of a tragedy. Of the four Tigers, its comparative decline is the most visual: Taipei looks like a city that simply stopped developing in c. 1990. Yet for many of us, it is a hugely romantic – and romanticized – version of much that is good about China. Unless someone can come up with a plan of action that captures the essence of all this, the island will continue slipping into a sea of irrelevance, regardless of any formal takeover by the PRC. That will be a situation where everyone is a loser.

* My own speculative thesis is that Taiwan, despite being very educated, has a lower per capita consumption of international quality media such as the Financial Times, the Economist or the Wall Street Journal than other equally non Anglophone societies such as Japan or Korea, or China.

With all the traction that crypto-currencies have been gaining in the media, it would be rude for me not to weigh in. One observation I would make is that since even my cousin has been invited to speak as an expert on the subject, we can probably safely assume that it is a bubble of the highest order – as alluded to by Charles Schwab in their recent analysis of similar phenomenon.

Source: Charles Schwab & Co.

On a more serious note however, I remain skeptical mainly because Bitcoin, Ethereum and the rest cannot fulfil one of the three primary functions of money. Yes, they can be used as a medium of exchange, and already are. Yes, I could see a point at which they could become a unit of account. But there is currently no pathway to being a store of value other than the value confidence ascribes to it. This is because it has no central bank or a state to back it up.

Proponents of “cryptos” like to mock conventional money by labelling them “fiat” currencies – in other words, money which has artificial value only on the orders of the government issuing them. “Look,” some gleefully point out, “most money today is not even backed by physical assets such as gold!” By doing so, they miss the point on two levels. First, the very purpose of money is to be an instrument of the state through its national treasury or central bank. In this resides the stability of the economy and society at all levels. Secondly, therefore, the official backing of recognisable assets such as gold is helpful but ultimately irrelevant. A functional government has the resources of an entire country at its disposal, which is why it has the power to issue, or at least back, legal tender in the first place.

At the heart of this lies a necessary understanding of the concept and role of “recourse”. In 2013 I wrote a paper on the why the dollar, despite pessimism from those seeing the end of American dominance, will likely remain the global reserve currency for a long time. Faith in a currency is more than just a confidence trick; it is more even than just the backing by specific collateral. What belief in a given currency rests on is belief in the power of a government to mobilise the totality of its resources in an extreme circumstance, for instance war. To wit:

“Eichengreen has nowhere identified a much more substantial reason as to why institutions across the world, from central banks to investors, choose a given reserve currency: namely, the ability of the issuing party to hold recourse over actual assets. Whether these assets are physical (in the form of industrial facilities or natural resources) or financial, it is a government’s ability to ultimately take control over them – to mobilise them in support of government policy and national necessity – that is the final arbiter of how safe that country’s currency is to you as a holder. This is particularly true of non-resident holders abroad, since they do not suffer downside from asset seizures but are instead a totally arms-length counterparty.”

I went on to explore the concept of Total Resource Mobilisation (TRM) capacity as a mainstay of how a country – and with it, its currency – is supported. I noted that one  the interesting historical example was the delayed decline of the Sterling Area well after Britain had ceased to be the primary global trader – because of a perception that Westminster still held recourse over an empire. For all the contemporary fears of American decline – in trade, hard and soft power and its institutions – the dollar has been unmoved as a reserve currency, as shown by the statistics.

Source: Bank of International Settlements

The same lessons are true of the new virtual currencies. A form of money without a form of state will render the inherent value of that money limited to only supply, demand and confidence –  all fine, but these do not offer a store of value. With no central bank, and no government to back it, there is no recourse for comfort – no “liquidation value” to act as the backstop as it currently does for all real currencies.

On a side note, I also wonder if those pushing the new currencies are being rather too geeky about the whole thing. I have no doubt that in many ways, the technology behind cryptocurrencies are superior to conventional ones. But being more perfect does not necessarily mean it will supersede the less perfect product – indeed history is littered with examples of technically superior inventions which did not end up “winning”, not least because its backers were too worried about theoretical perfection: Microsoft vs Unix, for instance; Betamax vs VHS; even arguably the internal combustion engine vs diesel. The dollar is easily forged, and stolen, and inflated; but it is good enough, and that is good enough.

This is not to say that I see no use for Bitcoin and its ilk. I accept that they can perform a useful function, particularly as a cross-border payment system – which, incidentally, is what many of those currently inside the industry currently see it as. These currencies have the benefits both of allowing anonymity and, potentially, offering greater security of online transfer. But then the real competitors for cryptocurrencies are not so much the Dollar, Euro or RMB, but rather the nexus of Visa / Mastercard, UnionPay and even Western Union. I can also accept that since we are only at the beginning of the cycle,  the ultimate level of valuation of these currencies may still grow. However, short of finally moving into a post-national world, I do not believe they will replace national currencies. The eschatological nature of these crypto-evangelists concerns me.

As ever, it is a lack of awareness about macro historical trends which concerns me – a deficiency which would always see good money thrown after bad. I am going to stick my neck out and short this – and if anyone has any clever ways of shorting the whole sector, let me know!