In other circumstances the motivation for secession can be economic. Take the Lega Nord in Italy for example. This independence movement exploited the resentment against a central government in Rome that wasted the resources collected predominantly from northern Italian taxes. The party claims to represent the interests of small and medium-sized industries in the North of the country that form the backbone of the Italian economy and rails against governmental bureaucracy, pork barrel spending and corruption.

On this basis it is a testimony to the tolerance of the people of the South East of England that a regional movement has not taken root there. Let me explain. Oxford Economics produced a study on the staggering scale of the fiscal contribution of London, the South-east and East Anglia. In 2004/05 these three regions generated a budget surplus of £30bn, while the rest of the UK ran a deficit of £58bn. Per head Londoners made a net fiscal contribution per head of £1,740, while the net transfers to Scotland was £2,120 per head, to the North-East of England £2,590 per person, to Wales £2,870 and Northern Ireland £3,720.

There is also a huge divergence in a region's dependence on public spending. In the South-East corner of the UK public spending accounted for only 37.7% of the region's GDP, which is similar to those levels seen in Australia, Japan, Switzerland and the US. However in the rest of the UK, spending was 53.6%, comparable to levels seen in France. Moreover in the North-East of England, Wales and Northern Ireland levels of government spending as a proportion of output comfortably exceed Scandavian levels and bear comparison with the Socialist utopias of yesteryear. In the North East the figure is 63%, Wales 64% and Northern Ireland an astonishing 72.5% . Notwithstanding these huge fiscal transfers the gap in relative prosperity of the South East compared with the Northern and Western fringes remains. For example, per capita income in London at £24,100 is 75% higher than in Wales. The overall picture is then of a prosperous corner of the UK on which a larger number of economically weaker regions are dependent.

And that's not the end of the story. The UK can be divided into two roughly equal parts by drawing a line from the Humber estuary to the mouth of the Severn. At the last election there were 22.3 million registered voters in the South East region and 21.9 million in the North West area. But despite having 400,000 less voters, the North West is represented by 337 MPs nearly 10% more than 308 MPs that represent the South East corner. To put it another way the average constituency size in the North West was 65,000 compared with 72,000 in the South East. Meanwhile the areas where public spending as a share of GDP was high returned Labour MPs 72% of the time with 41% of the vote. Yet in areas where public spending was proportionately low Labour MPs had a 37% success rate with 30% of the vote. In other words a region addicted to high public spending voted in a Labour government while the other region pays for it. "No taxation without representation" was the rallying cry of advocates of American independence, perhaps the time has come for a secessionist party of the South East of England. The author is a Londoner who lives in the North.

Regards,

Brian Durrant
for The Daily Reckoning Australia

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China's runaway economic growth had forced up the price of steel and scrap metal prices followed suit. The 130 manhole covers stolen in Aberdeen were worth £13,000 and the metal would be shipped to China and used to make washing machines and the like. At the time this incident brought home to me the growing influence of China on our way of life.

Then this autumn I read a news item about an outbreak of rioting in the Zambian capital Lusaka in which supporters of the defeated opposition alleged vote rigging. Nothing new here, you might say. But what really caught my eye was that the opposition's anger had been targeted at Zambia's rapidly growing Chinese community. Beijing had been investing heavily in the country and Chinese firms, some of which came under attack, have been accused of driving Zambians out of business. Just as the manhole cover thefts were a symptom of China's voracious appetite for raw materials, was this evidence of 21st colonialism another manifestation of the same thing?

The Chinese have had a stab at securing influence in Africa in the past. In the 1950s Zhou Enlai backed left wing governments, giving aid and funding lavish infrastructure projects. But the strategy was not very successful. Maoist China was not wealthy enough to establish China as a leading force, while the export of revolutionary ideas did not go down well with African leaders. Now, rather than using ideology, China is using trade...with impressive results.

While African trade with the EU and the US has been declining, its trade with China has been booming, because unlike the west, China imposes no duties on commodity imports. Europe's share of total trade with sub-Saharan Africa has fallen from 44% to 32% over the past 10 years, meanwhile China's has increased from around 2% to 10%. Over the same period trade between China and Africa soared from $3bn in 1995 to $32bn last year. China is now Africa's third most important trading partner after the US and France.

China's push for breakneck economic growth has resulted in an unquenchable thirst for raw materials, including copper, cotton, platinum, lumber, iron ore and most important of all, oil. This year Angola overtook Saudi Arabia as China's largest supplier of crude oil. China realises the strategic importance of oil supplies to its development plans. In January this year the China National Offshore Oil Company paid $2.27bn for a 45% stake in a Nigerian oilfield, trumping a $2bn bid from an Indian rival. China has shown a similar interest in other oil producers like Sudan, Equatorial Guinea, Gabon and Congo-Brazzaville, which already sells a third of its output to Chinese refiners.

Moreover, Africa has found more than a buyer for its raw materials. It has found a new source of aid and investment. China is now Africa's biggest source of aid. This year alone it has pledged more than $8bn in loans to sub-Saharan Africa. By comparison in 2004, the US gave loans of $3.5bn, France $3bn, while this year the World Bank is lending $2.7bn. This investment is often an entry ticket. For example, in Nigeria, Chinese promises to invest $4bn in refineries and power plants were conditional on securing oil rights. In Angola a $4bn low-interest credit line to fund infrastructure rebuilding after decades of war is repaid in oil.

African nations have found that dealing with China offers fewer complications than with the IMF, where loans are sometimes conditional on good governance and human rights records. China has also flooded Africa with workers in straw hats from the Chinese Middle Kingdom.

There are an estimated 44,000 Chinese workers in Namibia. The Chinese are building a railway line in Angola from the capital Luanda to the eastern province of Malange. There are also numerous Chinese traders that sell cheap electronics, plastic goods and textiles manufactured in China, undercutting local traders and manufacturers.

However, given China's unsatisfactory human rights record it is not surprising that it backs the vilest regimes in Africa. When Western nations imposed sanctions on Robert Mugabe's Zimbabwe, China stepped in with aid, arms and electronic communications technology for the corrupt tyrant. From then on Mugabe launched operation Murambatsvina, in which 700,000 had their homes or businesses destroyed. China neutered all attempts at discussion, let alone condemnation, at the UN Security Council.

China's record in Sudan is just as bad. When in 2004 the Sudanese government was said to be fuelling the genocide in Darfur, China resisted UN military intervention and instead invested $150m in the country that year, three times as much as any other donor. In turn China has become Sudan's largest export market.

But China's aid and support for African nations at the UN comes with one important proviso: the ditching of their recognition of Taiwan. To date 48 African countries paid due obeisance to Beijing, which brings us back to the Zambian presidential elections. Given the suggestion that Michael Sata, the main opposition candidate, would have recognised Taiwan, the Chinese ambassador said he would consider cutting diplomatic relations if he won. This is tantamount to a public intervention by China into the internal affairs of a sovereign African country.

There will be plenty of hand wringing in the West about its impotence in these issues, but the actions of its leaders are partly to blame. The war in Iraq has preoccupied the West. Whether the mission was to secure oil supplies for the West, give ordinary Iraqis security or spread freedom and democracy in the region, it has failed dismally on all counts. And there is a wider diplomatic and strategic cost to the West. While Bush and Blair got the West bogged down in Iraq, China has stolen a march on the Western interests in Africa.

With the result that China has an increasingly tight grip on oil supplies and political influence in the region. The West will be regretting playing its first "regime change" card so ineptly.

Regards,

Brian Durrant
for The Daily Reckoning Australia

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A major contribution to the debate comes from David Miles, former advisor to Gordon Brown. He says a UK housing bust is "likely in the next few years" because house price growth has been grounded in unrealistic expectations of double-digit annual increases. Once house price rises come down below expectations, he thinks, significant falls are likely. But he is reluctant to put his neck on the line regarding when this will happen. He says "A sharp fall in real house prices is likely at some point in the relatively near future, though it could be one or two years away".

Indeed Mr Miles himself admits that his model shows why trying to call the housing market over the next year or two is "pretty much hopeless". So there we have it, like those who tell the time from a stopped clock, the people who predict that British house prices will tumble may be right one day. But it has been a long wait and to date it has been wrong to take their advice.

Indeed, talk of a house price crash in the current cycle is already over 10 years old. In 1996 Bob Beckman, the self-styled property market bear, predicted a 20-year fall in UK house prices. Then in 1997 some commentators feared that a Labour win would hit prices hard. The September 11 attacks persuaded many, but not us, that the housing market was about to dive.

Professor Oswald urged British homeowners to sell up in May 2003. Capital Economics forecast that house prices would fall by 20% from 2004 to 2006. Not to be outdone, in February 2004 stockbrokers Durlacher issued a report warning of a 45% decline in house prices even if unemployment and interest rates remained the same! But we have always maintained the view that the housing market would have to be the victim rather than the assassin of the British economy. Accordingly Durlacher’s forecast turned out to be more doomed than the property market.

Every previous crash in UK house prices, in the early 1930’s depression, in the stagflation years of 1973-76 and most recently the early 1990s were accompanied by a severe recession. The crash of early 1990s followed a doubling of interest rates to 15% and a near doubling of unemployment from 1.6m to 3m. So with Britain enjoying

57 successive quarters of growth there is no reason to believe that a house price crash is imminent. History also tells us that the scale of house price crashes, though painful for those that bought at the top, has been quite modest. Both in the early 1930s and early 1990s the fall in house prices from peak-to-trough was only 13%.

Mr Miles’ thesis however does not require the economy to be the assassin of the housing market. He believes that when house price inflation fails to meet expectations, demand for housing will fall. But surely sellers will not cut prices unless forced to do so by economic circumstances.

Most house moves are voluntary. If homeowners are faced with selling at a price they consider to be too low, they are more than likely to withdraw the property from the market. This is why when the property market is overvalued the correction tends to take place by means of price stagnation rather than a crash.

Asset bubbles emerge when the dominant motive for purchase is the expectation of selling on soon to someone else (a bigger fool) at a higher price. The dot.com bubble collapsed because the market ran out of bigger fools. Now as far as housing is concerned, despite the growing popularity of buy-to-let and second homes, the overwhelming majority of those who buy property plan to live in it. The motives for buying are different from dot.com stocks.

For five years now, the expert consensus that UK property prices are overvalued has rested on one central observation that the ratio of house prices to incomes is historically high. Of course you would expect a share price on a demanding price-earnings ratio to revert back to its long -term norm, but what about houses? Houses are different. They are both an asset and a commodity.

Let me explain. The primary purpose of a house is to provide shelter. Consider the market for real estate in Idaho or Nebraska. There is more land there than anyone could wish to build on and usually there is not much to choose between the prestige and convenience of different areas of spacious cities. In these areas house prices are low, stable and tend to move in line with income.

Now consider London or Manhattan. Most of the price reflects the location rather than the accommodation.

Transfer a mews property in Belgravia to Paisley in Scotland and it would lose most of its value.

You cannot make more houses in Mayfair or East 69th Street, so the prices of properties in prestigious areas resemble the price of a commodity in short supply. The aspirant rich do not displace the very rich from the most prestigious locations but they make the very rich pay more for them. Unlike a share in BP, houses in prime locations are also a symbol of status and prestige and that is why the housing market does not conform to simplistic valuation models. This is why forecasts of a house price slump are about as useful as a stopped clock.

Regards,

Brian Durrant
for The Daily Reckoning Australia

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