The UK,US India China and North Korea are all facing the “guns or butter” problem

I opened last week by discussing the economic situation in China and India. These two countries have taken on an increasing role in the world economy over the past decade and we find that their economic surge over this period to be quite a contrast to the sclerotic effort being made by what calls itself the “first world”. My policy suggestion for them from that article is shown below.

So if we look at the world right now we see that there is a danger of an economic slowdown in 2012 and that inflationary pressure has abated somewhat. This gives an opportunity for a policy response in India and further responses in China (she cut bank reserve requirement on November 30th). They should take it.

The danger to such a strategy was in my opinion the oil price and a possible inflationary surge which should it happen seems most likely to be influenced by the continuing Arab spring. However since I wrote the article the oil price has in fact dropped which only confirms me in my view. The price of a barrel of West Texas Intermediate crude oil has fallen from over US $98 then to US $93.30 as I type this. Now one week’s fall is not conclusive for an argument but it does add some weight to an existing argument I feel.

China’s housing market is slowing

There are now signs of cooling in China’s housing market. From her National Bureau of Statistics.

Comparing with the previous month, among 70 medium and large-sized cities, the sales prices of newly constructed residential buildings declined in 49 cities while that of 16 cities remained at the same level.

Comparing with the previous month, the sales prices of second-hand residential buildings decreased in 51 cities, while that of 12 cities remained the same level.

I think that the new trend is clear and we can see also signs of a fall on a year on year basis too  as for example we see here.

Comparing with the same month last year, the sales prices of second-hand residential buildings decreased in 21 cities, went up 8 cities month-on-month. The growth rates of 40 cities dropped…


Indian inflation did dip in November to 9.1% although such a number is still high. However looking at her situation I see other themes appearing too as we have an Arab Spring type position here. India’s government has proposed a new food subsidy bill which expands her efforts in this area as shown below by the report.

Legal entitlement to subsidized foodgrains to be extended to at least 75% of the country’s population – 90% in Rural areas and 50% in urban areas.

75% of India’s population is an effort on a grand scale to say the least. And we return to my theme for the Arab Spring I believe  we are back to the problems created by the rise in world food prices in the early part of 2011 for the poorer inhabitants on this Earth as for them higher prices can mean hunger and starvation. Indeed in India this problem of hunger and starvation was already a problem as the report points out.

As noted at the outset the Expert Committee is fully in agreement with the idea that 60 years after independence the Indian State should be in a position to ensure that the country is rid of hunger and malnutrition caused by poverty.

In a way this sort of issue is a reflection of what it is to be human I think. We see both our strengths ( a plan to reduce and hopefully eradicate starvation) and our weaknesses ( it has gone on for so long and 60 years is a long time). Indeed there is plenty of room for further thought on this subject by the fact that the Indian Air Force plans to buy 126 advanced fighter jets at an estimated cost of US $10 billion. If nothing else it reminds me of the Guns and Butter curve or equation.

Guns or butter?

I studied Germany in the 1930s when I did  a History S-level ( At that time S-levels were a further A-level) and this discussion accordingly reminds me of a quote from then.

We can do without butter, but, despite all our love of peace, not without arms.  One cannot shoot with butter, but with guns.

It gets even more chilling when you read that it was made by Joseph Goebbels and the concept of him having a “love of peace” is the sort of thing that maybe made the computer HAL go crazy and run amok in the film 2001.

But there is something closer to home here as whilst India has her own issues both the UK and the US have voted for guns over butter in recent years as we have pursued wars in Iraq and the Afghanistan. Over the next few years we may end up ruing such moves which apart from being if one is generous only a partial success militarily have left us weaker as we face the economic challenges of the decade to come.

And overnight we have heard of the death of Kim il Jong of North Korea who is the person who has pursued the guns over butter argument with enormous and indeed to the extent that North Koreans have died of starvation murderous conviction.

Are some mass murderers more acceptable than others?

Recently I attended a meeting in an office which had several pictures of Chairman Mao on the wall. Since then I have mused on the question above and on every occasion my answer is no and yet I know that there will be no outcry on this subject. I would be interested in readers thoughts on this subject.

Even more of a moral maze

If we look at the proposed Indian aircraft order we find ourselves ever more entangled in a moral spider’s web. The UK is competing for this order as part of the Eurofighter consortium so should it win it will be presented as an exporting success. There is always an issue with military exports but if we put that to one side the Indian order poses the “guns or butter” argument in a country with so many hungry and starving citizens. Just to make it worse we currently give a substantial amount of aid to her. This is currently planned to be £280 million a year for the next four years. Can we avoid considering whether the aid is part of the answer or part of the problem?

Stock Markets pose a problem

If I return to markets we see that equity markets are showing concerning signs. If we look at China we see that the Shanghai Composite index which surged by 80% in 2009 fell by 14% in 2010 and by a further 21% in 2011. The Indian Sensex index peaked at just under 21000 at the beginning of Novemeber 2010 but has not fallen to 15,379.

Now stock markets are by no means a perfect guide to the future but if we look at the pattern above we do not see much room for optimism do we?

The Euro zone continues on its self destruct mission

There are two ways of looking at this. As a child I was often taking at Christmas to see a pantomime where as an actor or actress was giving a speech or monologue the cry was “behind you”. This metaphor holds true each time we have a Euro zone politician or official makes a speech telling us they have fixed the problem as anyone with any sense can join in with the cry “behind you”

Quite often this takes the form of a Friday night downgrade by a ratings agency. These bodies often mimic pantomime villains by the sneaky timing of their moves and by the way that these moves do not follow a random pattern indeed some might consider them to be outright malevolent. Accordingly Belgium’s two-notch downgrade by Moodys fulfilled this pattern.

And if I may be so bold this downgrade it is point ten in the time line for a bank collapse that I published on the 10th of October.

10. Consequently that nation finds that its credit rating is downgraded.

There are points eleven,twelve and thirteen which I would imagine are of particular interest right now to  readers I have in Belgium…..

This entry was posted in Bear Market, China, Emerging Markets, Euro zone Crisis, General Economics, House Prices, Inflation, Interest rates. Bookmark the permalink.
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  • Anonymous

    Shaun – a most prescient article and one that should make each individual question themselves further. If I may quote you: “ the Indian Air Force plans to buy 126 advanced fighter jets at an estimated cost of US$10 billion”. Sacrilege; this amount would go an enormous way to overcoming the problem of malnutrition. Further, why is UK giving aid of over 1 billion over the next four years?   Is this to curry favour or “conscience money”? Who benefits from this? Moving to your question on “mass murderers” – I am fully in agreement with your sentiment; humankind in general has allowed himself (for a wide variety of reasons) to be more concerned with destroying than building. In part it is easier to do the former than the latter. It will take many more lifetimes for this “passion” to destroy to work itself out of his system and to realise the stupidity and vaingloriousness of his feeble attempts to fit the world to himself rather than to fit himself for the world.

  • JW

    Shaun, re India. Pakistan’s armed forces receive massive aid from the US in the misguided attempt to buy their support for anti-Taliban offensives. China is flexing its muscles around the sub-continent. India’s attempts at maintaining a ‘balance of power’ , including better US relations are understandable.
    India continues to have very serious poverty. Some its national ‘virility’ projects such as space shots look stupid . But India is a very complex society with in-built barriers to economic progression due to its caste system. If external aid is well managed to ensure its delivered directly to its intended recipients it can do some good.
    I think its simplistic to moralize from afar.

  • Rods

    Hi Shaun, good thought provoking blog and unusually political.

    Humans are possessive, aggressive, territorial animals. The most dangerous animal to a human is a human. A primary function of a Government is the protection of its citizens, through military and police forces and an independent judicial system. A country only keeps its freedom and right to self determination by having a credible military force to act as a deterrent against aggression from other countries. Most wars are started by dictators and ended by democracies. The Falklands war is a classic example on both counts, with the perceived weakness under John Nott’s defence cuts and an Argentinian dictator trying to save his regime.

    Saddam Hussain was a particularly nasty dictator every bit as evil as Hitler and Stalin. Was the invasion right? I think it will take a least another 10 years to see if Iraq and Iraqi people are better off. There is no doubt that the Americans made a complete mess of the post invasion situation by creating a complete power vacuum where they dismantled the Iraq military and police forces, which was exploited by a number of factions to the great detriment of the Iraqi population as a whole.

    Afghanistan, again I think it will be post 2014 when western troops have left, to see if things are better. Personally I’m not hopeful, where the Taliban are supported by the Pakistani and Iranian Governments.

    In wars there is much human suffering and destruction, but you also see technology gains, like the hospital trauma technology developed by UK doctors in Afghanistan, which has dramatically decreased UK soldiers deaths and which is now being applied to A&E units in the UK.

    Libya, I reasonably optimistic that the country will improve, post Gaffafi.

    In real terms the UK defence budget has shrunk since the early 1990′s post Russia peace dividend, along with most European defence budgets.

    Is the world becoming a more dangerous place, without a doubt with decreasing energy resources and commodities, an increasing number of terrorist groups and the current financial problems. In Asia there  are number of disputes between China and her neighbouring countries, mainly over territory where there are possible oil and mineral resources. The large military expansion by the major countries in the area is providing an increasing military capability. Will this be the cause of a major war? I think there maybe a number of skirmishes between China and her neighbours. A war between Pakistan and India I think is more likely. The situation with Iran and their nuclear program is worrying with their long range missiles capability.

    In Europe there is a dispute between Turkey, Greece and Israel over mineral rights in the Mediterranean sea. Will a Eurozone meltdown cause a war? IMHO very, very unlikely, but I think you may well see much civilian rioting and strife in some of the Southern European countries.

    Is it right that people are starving in India, of course not, but is their military spending any more wrong, than their space program or Government corruption?

    Unfortunately, political situations are very like markets, then can both turn very quickly, so you need a capability to control the situation.

    I heard a though provoking quotation recently: “Droughts are caused by God and Famines by Governments”.

  • John mccusker

    I can let you have an even more thought provoking quote: “Famines are caused by droughts” All my own work, that one, and it has the merit of actually making sense.

  • JW

    This not ‘economics’ so apologies. But I feel some of these comments need a response.
    If Saddam was a ‘Hitler’ are you advocating Germany being left with the SS and Gestapo intact after the 2nd world war?
    There is a big difference between the Pakistani Taliban and the Afghan Taliban. I doubt either Pakistan nor Iran wants a ‘failed state’ on their borders. They will turn a blind eye whilst they are killing some Yanks and Brits, but not for the long-term.
    The Earth is a planet under stress from huge internal energy and externally from its local star. Climatic conditions vary in the short, medium and longer term. Droughts and famines have happened every year in recorded history and they most likely will for all years in the future. As the population has expanded more people live in ‘marginal areas and so more are effected by these natural events. The only lasting positive thing governments can do to alleviate this situation is to give women the rights and ability to control the use of their own bodies for reproduction. Unfortunately most rapid increases in population are occurring in those areas that have the worst women rights.

  • MickC

    The UK most certainly did not “vote” for guns over butter-there was no vote by the people. There was a vote by a supine parliament-not the same thing.
    I believe most of the UK population would prefer to have a military capable of defending us, not seeking to change other countries.
    A nation of shopkeepers and traders is what we were and should be.

  • Anonymous

    Hi Mick and welcome to my part of the blogosphere

    You raise a valid point about the role of democracy in this. We rarely elect MPs on the subject of wars as mostly they are unexpected and it is not often that the prospect of one coincides with an election.

    Wars which they might be able to pass with general assent such as the war against Adolf Hitler have not been in evidence in recent times. Yes Saddam Hussain was a tyrant and his removal was good but by the time we get to second and third order effects of this I wonder if we are better off. A lot of Iraqis died too

  • Anonymous

    Hi JW

    However you look at it the area is a moral maze and also something of a tinderbox is it not? Indeed  areas with poverty and starvation invariably end up as a tinderbox.

  • JW

    Was Europe in 1914 an ‘area of poverty and starvation’?
    Its too simplistic to talk of ‘poverty’, one man’s riches are another man’s scraps. The fabric of society varies in different countries. The crucial factors are not merely economic but often philosophical and anthropological.

  • MickC

    Thanks-I visit your blog daily and have done for over a year when I first discovered it. It is one of the best for an explanation of what is happening financially and why.

    I know this is more political than financial but I’m not sure that there was much support for war in 1939. The expenditure of blood and treasure was immense, bankrupted the UK and was probably unnecessary. Like the Soviet Union, Germany at that time was essentially bust and would have collapsed given time. The only expenditure would have been treasure to increase defences, but no blood.

    As we saw with Kim Jong (very) il, the leaders die and change will occur. The EU is bust, and change will occcur.

    There we are, back to economics-always trumps politics just needs time to work!

  • Mike

    I am afraid Shaun that the merest mention of any uplift in economic activity is enough to instantly send the oil price rocketing.
    With your ”low” oil price currenty at c$95 per barrel it is still 10x higher than it was at the start of the recovery in c1994.
    What is the reason for this? The emergence of the hedge fund industry, or the global millions of internet based ‘speculators’? I don’t know, but I do know you won’t see any recovery, just continuing slump.

  • Anonymous

    Sadly the external aid is often supplied in military hardware with links between the armaments firm and it’s national government providing the money. I’d call this another case of corrupt politicians.

  • Anonymous

    The war against Hitler unnecessary ? Hitler annexed the Rhineland and Austria. Then he invaded Czechoslovakia and Poland and Denmark and Norway and Holland and Belgium and Luxembourg and France. He gave up on Britain partly because he had a hard fight and mostly because he thought he’d beat Russia first. Next he invaded Yugoslavia and Greece and Russia.

    Yes that war was unwanted, the choice was self defence or submit to a madman’s slavery …

  • MickC

    Well, not guaranteeing what one can’t defend would have been a good start to prevent us getting into a war. Hitler would have died, they all do. Eisenhower played it right in the 50′s.
    However we are in danger of hijacking the blog into a history blog-and its far too good on economics for diversions.

  • Anonymous

    Hi Mike

    I guess you can add Peak Oil theory and the Arab Spring to the list and speaking of such matters the oil price rose by 3% today….