Blain’s Morning Porridge – Feb 26^th: The Costs of Peace are Worth Paying

“The old lie: “Dulce et decorum est pro patria mori.””

The UK government intends to raise spending on defence by nearly 0.2% of GDP. Give me a break! The costs of trying to fight war on the cheap will be far higher than the costs of maintaining the Peace by being properly prepared to fight a war. To keep the peace means being prepared to fight – and fight hard. Such costs may bring substantial economic benefits.

But first this morning’s Porridge starts on a slightly more speculative note than most of my daily missives ahead of the biggest number of the quarter – Nvidia. More on that tomorrow… probably.

I don’t have a particular view on Nvidia (except its overvalued).  We’ll likely get a binary up-down kneejerk reaction on the numbers. However, Nvidia’s apparent value is just a projection of the expectations for Big Tech and the AI sector. I suspect even a stellar number will swiftly be followed by more considered thinking about the consequences of selling loads more very expensive chips into what looks to be an increasingly saturated market, where folk are beginning to question the basis of AI value, and are asking if it can be done cheaper?

It might just result in a sell the fact moment. (I’m not saying we are doomed… just that there is a possibility we are. (Anyone for the last few choc ice?) The thing is… there is a rising sense of doubt, fear and concern about sustainability around just about everything in current markets.)

Let’s talk about the UK and defence.

On the face of it, the news Sir Keir Starmer is going to raise defence spending to 2.5% of GDP – around £5-6 bln – in the coming year by cutting the spend on foreign aid, should be positive. It will make Trump smile, thinking he’s cowed the UK. It will mean a few more orders for the UK defence sector, jobs and growth. Politically, it’s something the UK’s increasingly polarised political classes can agree upon – the need to defend ourselves, the primary duty of any state!

Er.. maybe not. The Lefty Left (rather than the pragmatic left like myself), and Greens are righteously furious – arguing that reducing foreign aid will make the UK even less safe. The Miliband Brothers looked particularly upset on the box last night.

Hmm. Most ambassadors will privately admit much “foreign aid” is allocated to buy “support and influence” in foreign climes, and that paying off hostile groups with “aid” is a form of Danegeld – a defence strategy shown as bogus over a millennium ago in the days of King Alfred (the only “Great” British Monarch). That said, paying incentives to keep economic migrants at home rather than upset fraxious populist politics is seen as effective politics today.

There is a very good argument to be made that paying bad foreign governments to remain bad, but waving union jacks, is holding these nations back. The trick will be to split vital humanitarian aid (like vaccines and clean water) from foreign aid sunk into corruption. I stress that is a very personal view.

Back to defending the UK…

Most folk agree raising defence spending to 2.5% from 2.3% of GDP is better than doing nothing, but the reality is it will barely touch the sides of the UKs armed forces massive funding needs.

The UK requires a defence spending revolution in line with the kind of sums raised to combat Covid – somewhere in the region of £180 bln of additional government spending… and that’s just to stand still. That will be a massive ask of the UK’s cash strapped economy… which is why we’re effectively in a war-time economy. That means we have to act like it.

There is a reason no one attacks Switzerland. They are prepared. The UK…. Is not.

If/when it’s comes to war with Russia, the numbers say the UK should more than be able to hold our own based on population, economic heft, and our reputation for innovation. Ukraine has also shown a brave, motivated population, can stand up to aggression. However, the UK – despite being the 6^th largest defence spending nation – is largely defenceless against many of the lessons we’re learning from the Ukraine war from hypersonic missiles, war-stocks, reserves and drones.

In a war with Russia we may still win, but the nation could be wrecked. Its therefore in our economic interest to avoid war. And the way to do that is being prepared to fight and win it. The UK has one of the best military records on the planet – for the last 500 years we’ve maintained an excellent away record. (We successful ditched the whiny American colonies by making them think they’d won.) There is a strong compact between the Armed Forces and the People – of which we are all proud. HMS Victory, the Royal Navy’s Battle Flags, the Battle Honours on the Flags of Famous Regiments, and the Iconic Spitfire, Lancaster and Hurricane are symbols we rally around as a nation.

Yet defence has always been a political football based around how little can government spend.

Former NATO Secretary General Lord George Robertson is currently engaged in a “Root and Branch” review of the UK’s defence “enterprise” to “meet the challenges, threats and opportunities of the 21^st Century” – gobblygook for how little can be spent to keep the armed forces looking credible. His task was set before Trump upended the Western Alliance. His team will need a complete rethink on how, what, when and how much. It is supposed to report this Spring. It’s no longer about guessing on short and long-term risks, or “posture and capability/force structure planning” as defence geeks weasel-word how to spend as little today in the hope real threats are years or decades down the road.

The immediate threat is here. Now. That threat may not be war with Russia, but the preferable alternative of persuading Russia it can’t possibly win because the UK, Europe and whatever non-US NATO becomes are prepared and will beat them. The problems to resolve are multiple and will be very, very expensive. Which will have massive implications for the bond markets.

Years of underspend has left the UK armed forces massively “hollowed out”, and utterly reliant on our unreliable former friends – the Americans – for arms, supplies, support, communication, war-stocks, coordination, intel, logistics and even battlefield medicare! Replacing these critical components of the warfighting machine will require massive reinvestment, and/or coordination with Europe – both of which spell time, money and the bureaucratic hell of compromising on multi-nation weapons programmes. (For instance; British tanks are superbly equipped with vital built-in hot-water tea-pots. German tanks do not – thus making them cheap and tacky – according to one of my former Tankie chums.)

UK Military procurement policy is something of a joke. Weapon systems are delivered years late, over-budget and still underperform. It is essentially bureaucratic and out of touch with tech innovation. I’m not aware of any firm in the UK with the disruptive potential of Anduril – but I’m very aware of how US firms are still angling to win European defence contracts. That can’t happen – the US has shown itself unreliable. It’s time to design the next generation of weapons here at home, ourselves.  That’s a massive industrial opportunity for the UK to lead new generation pan-Europe defence industries.

Misguided ambition has seen the Army neglected and the Air Force reliant on others. It’s given us two magnificent white-elephant aircraft carriers for global power protection, (which we can’t afford the aircraft for, American F35Bs), at a time when our strategic imperatives are now Europe, Europe and Europe. The Royal Navy’s new role will be littoral defence of undersea infrastructure. That said, UK attack subs are said to be the best in the World.

The major warfighting imperative of NATO was to defend the Atlantic Sea Lanes and Transatlantic AirBridge that would have rushed American troops to prepositioned weapon depots in Europe in the event of war. Does that remain a priority? Probably yes – Canada is still on the our side.

And then there is the question of who is going to do the fighting and be the boots on the ground, the PBI (the poor bloody infantry) that actually go in and die for King and Country? Much of modern warfighting capabilities demand highly skilled technician roles – from flying drones to battlefield systems, cryptology and logistics. To attract the right motivated warriors, pay and conditions will have to improve, and soldiering become the respected and admired role we think we hold our armed forces in.

As Rudyard Kipling observed:

But, its “saviour of ‘is country” when the guns begin to shoot;

and it’s Tommy this, an’ Tommy that, and anything you please.

An’ Tommy ain’t a blooming fool – you bet that Tommy sees!

And we shall shock them..

Out of time and off to do the day job..

Bill Blain

Author Morning Porridge

billblain@morningporridge.com

www.windshift.capital