Thursday, January 31, 2019

Capital Markets Bonus Edition: "Two Brinkmanship Games and a Possible Third"

From Marc to Market:
Some historians give Adlai Stevenson credit for inventing the word "brinkmanship" as part of his criticism of US foreign policy under Dulles, who said that "if you are scared of going to the brink, you lost." But surely we can agree that the tactic is as old as civilization.

The idea is you take the issue to the very edge, risking a significant confrontation, to force a deal, is the way it may seem. The Cuban Missile Crisis is the classic example. Kennedy's quarantine of Cuba was an act of war, but he dared Khrushchev to risk a direct confrontation with the US if he tried running it.

Often, it seems brinkmanship games can be seen from a different perspective as escalation ladders. In a conflict, the stronger side made try to escalate the issue. If the weaker side matches, it does so again. This may be repeated until a rung is reached that the other cannot or will not take. There are feints, bluffs, and other ploys.

The UK government seems to be engaged in a brinkmanship game with the EU and the House of Commons. She is authorized to seek a new deal on the backstop and has been advised against not securing an agreement. The EC has made it clear this is a non-starter. It refuses to re-open the 18-month negotiated settlement and has demonstrated strong cohesiveness in insisting on the open-ended backstop. The strategy may be to bring the UK to the brink of exiting without a Withdrawal Agreement and count on Parliament or the EC blinking, which in this case, means softening their positions.

Thomas Schelling, who shared a Nobel Prize for his work in game theory, may have called this a version of "burning the bridge." Consider two young people playing what in "chicken." They are to drive their cars at each other, and the first one to turn is ostensibly the "chicken." If you were silly enough to play, how could you best convince your equally silly friend that could would not turn first? Schelling suggested throwing your steering wheel out the window. Purposely limited your options, forces the other to act.

In brinkmanship, you give your adversary little choice but to back down or face even greater potential difficulty. In the face of no alternative between the much-unloved and rejected negotiated Withdrawal Bill and a no-deal exit, something will have to give. The Leave camp wants to avoid a second referendum. No one wants to get blamed for the economic disruption of the UK leaving the EU without an agreement. A later and softer exit still seems like the most likely scenario.

A second brinkmanship game is being played out in the US and Chinese trade talks....