28 December 2010

Debt, Power, and Revolution: In Media Res

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We are living in interesting times, and any attempt to predict exactly how our world dynamics will resolve is doomed to fail. Here are some things that are happening around the world.

The Western World

The western world is looking at massive and growing debt combined with an enormous demographic transition. That particular combination points to a coming of potentially cataclysmic change in the everyday existence of most of the region's residents.
...once the fatal spiral begins, how can a state escape disaster? There are only eight options: (1) higher taxes; (2) less spending; (3) more growth; (4) more lenient interest rates; (5) worse inflation; (6) war; (7) external aid; or (8) default. All eight options have been used in the past, but only one of them is both plausible and desirable today: growth. A growing economy (which raises tax revenue) permits the absorption of debt and restores sustainable public finances. Then borrowing can resume—if it will encourage further growth. Responsible governments do not finance their everyday expenses by borrowing, and they keep their investments at a level they can repay.

History offers one final lesson. The power of sovereign states can foster a sense of impunity that encourages excessive debt. In the past, sovereign states have sometimes rid themselves of creditors by simply driving them out (as they did repeatedly with Europe’s Jews), by tormenting them, or by simply refusing to pay. When modern states borrow from a range of anonymous investors on global markets, sovereign immunity protects their assets against seizure—China cannot seize the White House as collateral for U.S. Treasury debt. But creditors can still negotiate, even with sovereign debtors. When a state loses the market’s confidence, the threat of a financial cutoff is a jolt back to reality. Just ask Greece, as its leaders scramble to reduce its public deficit as quickly as possible. The West needs to wake up now, shake off the yoke of public debt, and take the path of liberty. That path is long and difficult. It means balancing budgets and stabilizing the financial sector. But the great reward will be a return to confidence and growth—for those who put in the effort, and for those with the audacity to see it through. _Newsweek


The recent second conviction of former Yukos head Khodorkovsky opens a window on what may be one of many potentially fatal dynamics at the core of Russian power.
the real meaning of the Khodorkovsky case is that the authorities are weak, and scared. If the first trial of Khodorkovsky was a kind of perverse victory for Putin over the once-powerful oligarchs, the second trial shows that the Kremlin is afraid of showing what it sees as weakness. More, the ham-handedness of the charges themselves, and the heavy police presence and mass arrests at the trial today, betrays a dangerous amateurishness. Totalitarianism is scary. Incompetent totalitarianism is actually scarier.

For evidence of just how totalitarian – and now incompetent – Russia’s authorities are, look no further than the desperately eloquent scene in the courtroom during the trial, day in, day out. On one side sat the state prosecutors in their 1980s-style uniforms, surrounded by stacks of paper bulging out of Victorian-style ledgers. They mumbled their evidence in a monotone. At several points in the trial their accusations were so absurd that even the judge burst into laughter (my favorite prosecution malapropism – “The defendant is doing an excellent impression of being a normal person.”) On the other side sat the Khodorkovsky defense team, smartly dressed, each with a laptop. In a glass cage behind them, looking more at ease and in a strange way freer than anyone in the room, sat Khodorkovsky and Lebedev, taking turns to follow the documentary evidence on a large Mac screen set up in front of their box while the other made notes. It was as though two Russias were sparring in the courtroom, one mediocre, nervous and browbeaten, the other smart, modern and surprisingly relaxed. As Khodorkovsky himself said last year, a country that plunders its best companies and jails its brightest businessmen and instead puts its trust in the secret police and bureaucrats has its priorities seriously wrong.

The oligarchs were, unarguably, bad for Russia. They used their money to buy political power, and in the process corrupted the Duma, the press and the government. But the bureaucrat-kleptocrats who succeeded them are far worse. Khodorkovsky, in his years of incarceration in a Siberian labor camp, has transformed himself from a symbol of the hated oligarchy into a bellwether for a different sort of Russian rottenness. The oligarchs abused their money, the Kremlin now abuses power to silence opposition and to cover up the mass theft by the bureaucratic class of what has been estimated as a third of Russia’s GDP, annually. Medvedev is right that Russia is rotting from within; he’s even put his finger on exactly how. But the second conviction of Khodorkovsky shows that Medvedev, with all his brains and talk of reform, hasn’t made a whit of difference. _Newsweek


China is widely celebrated as the economic success story for the 21st century. The rapid growth of China's economic and military power suggests that the world may be approaching a change of hegemons. But is it possible that both China's military power, and its economic prospects, may be somewhat overstated?
When a government loses control of monetary policy, inflation follows. A few months ago, only the scariest "China bears" predicted 6% inflation for next year; now the People's Daily is admitting it may reach those levels "in some months."

The nonindependent People's Bank of China, staffed by reform-oriented technocrats, is being allowed to raise interest rates a few basis points. But allocating credit on the basis of its cost threatens the whole political economy. The state-owned companies have become accustomed to negative real interest rates. If the price of capital rises, many of the Communist Party elite will face a crunch. _WSJ
When one looks beneath China's Potemkin facade, one is apt to see enormous corruption, infrastructure overbuild, massive misallocation of resources, and a shockingly shoddy level of construction and impending collapse of poorly-built structure.

Emerging Markets

There is a lot of money to be made in emerging markets, if one understands some of the hazards involved.
...there is evidence of growing state involvement in both the economy and corporate sector across many emerging markets. This could hurt investors in a number of ways, most notably by governments forcing companies to prioritise social or geopolitical objectives over economic returns.

From an economic perspective, the main issue facing investors in emerging market equities is currently the degree of overheating, which is evident across a number of economies in the form of rising inflation and/or current account deficits.

Commodity price increases in particular have had a more inflationary impact on emerging than developed economies, because of their higher weightings in price indices and – more importantly – the narrower output gaps. _FT
There are more reasons for caution in the linked FT article.

One Ring to Bind Them, ... To Rule Them All

The United Nations' Intergovernmental Panel on Climate Change (IPCC) aims to write the rules and set the standards which the entire world will live and work under. The goals of the IPCC are ambitious: a massive transfer of resources from the developed world to the undeveloped world. As justification for this resource transfer, the IPCC claims to be saving the world from a cataclysmic collapse resulting from anthropogenic greenhouse gas-caused climate change. How good is the IPCC's record?
Remember all the media brouhaha about global warming causing hurricanes that commenced following the devastating U.S. 2004 season? Opportunities to capitalize on those disasters were certainly not lost on some U.N. Intergovernmental Panel on Climate Change officials. A special press conference called by IPCC spokesman Kevin Trenberth announced "Experts warn global warming likely to continue spurring more outbreaks of intense activity."

But there was a problem. Christopher Landsea, a top U.S. expert on the subject, repeatedly notified the IPCC that no research had been conducted to support that claim--not in the Atlantic basin, or in any other basin. After receiving no replies, he publicly resigned from all IPCC activities. And while the press conference received tumultuous global media coverage, Mother Nature didn't pay much attention. Subsequent hurricane seasons returned to average patterns noted historically over the past 150 years, before exhibiting recent record lows with no 2010 U.S. landfalls.

Much global warming alarm centers upon concerns that melting glaciers will cause a disastrous sea level rise. A globally viewed December 2005 BBC feature alarmingly reported that two massive glaciers in eastern Greenland, Kangderlugssuaq and Helheim, were melting, with water "racing to the sea." Commentators urgently warned that continued recession would be catastrophic.

Helheim's "erratic" behavior reported then was recently recounted again in a dramatic Nov. 13 New York Times article titled "As Glaciers Melt, Science Seeks Data on Rising Seas." Reporters somehow failed to notice that only 18 months later, and despite slightly warmer temperatures, the melting rate of both glaciers not only slowed down and stopped, but actually reversed. Satellite images revealed that by August 2006 Helheim had advanced beyond its 1933 boundary.

According to two separate NASA studies, one conducted by the Jet Propulsion Laboratory, and the other by the Langley Research Center, the oceans now appear to be heading into another natural periodic cooling phase within a typical 55- to 70-year dipolar warm/cool pattern. Although Greenland has recently been experiencing a slight warming trend, satellite measurements show that the ice cap has been accumulating snow growth at a rate of about 2.1 inches per year. Temperatures only recently began to exceed those of the 1930s and 1940s when many glaciers were probably smaller than now. (We can't be certain, because satellites didn't exist to measure them.)

A recent study conducted by U.S. and Dutch scientists that appeared in the journal Nature Geoscience concluded that previous estimates of Greenland and West Antarctica ice melt rate losses may have been exaggerated by double. Earlier projections apparently failed to account for rebounding changes in the Earth's crust following the last Ice Age (referred to as "glacial isostatic adjustment").

Nils-Axel Morner, head of the Paleogeophysics and Geodynamics department at Stockholm University in Sweden, argues that any concerns regarding rising sea levels are unfounded. _Forbes
The same abysmally misleading alarmism as was applied to glacier melting and sea level rise has been applied to "ocean acidification" and "polar bear extinction". Polar bears are thriving, and ocean pH continues within normal historical ranges -- except in specific third world harbour and river delta areas where dumping of waste will continue regardless of what the IPCC says or does.

It is time for thoughtful humans to understand that they must use their own judgment when evaluating the future prospects of nations, regions, and intergovernmental alliances. Everything is now in a state of flux, due to the collapse of leadership in much of the Anglosphere and in the EU. Debt and demography are combining and building to a coming chaos.

The forces of dissolution have been loosed, consequently. Temptation to revolution, secession, and violence on national & international scales will grow as economic and social conditions deteriorate.

The one counter-trend which can be glimpsed across Europe and the Anglosphere are the popular and grassroots movements -- still small and in minority status -- which are opposing the damning trends of debt and demography. It is possible that these groups will provide a mitigating force, at least in particular regions and countries.

Locate the islands of stability which will provide the safest harbours for you and your families. Hope for the best. Prepare for the worst.

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Blogger Kalashnikat said...

I usually find your observations intriguing, logical and factual...but to cite Newsweek as an authority? Not so much....

If the editors and staff of "NewSpeak" present facts and cogent analysis, it's usually due to the proverbial "even a blind pig finds an acorn now and then" syndrome, or the "stopped clock is right twice a day" effect...

Don't damage your own credibility by citing a $10 corporation with an agenda that includes pseudoscience and liberal fascism among it's guiding principles.

Wednesday, 29 December, 2010  
Blogger al fin said...

Thanks for your caution, Doug. I would like to clear up any possible misconceptions readers may have regarding my use of linked articles and sources.

Links to sources are only provided as a courtesy for the readers who wish to verify the source or to read further in the linked article.

Links are not a declaration of authority beyond whatever the reader wishes to apply for himself to the source.

Most alfin2100 articles are fashioned so as not to be authoritative, but rather to be provocative. It is left to the reader to make up his own mind.

Contradictory sources are often linked within the same article. The purpose is to get the reader to think beyond the superficial level.

Since Newsweek is not a person, but is rather a cacophany of conficting voices, in the future I will attempt to remember to list the author as the source, rather than the publisher or the periodical.

I was advised before the US 2008 elections not to damage the credibility of Al Fin by posting articles critical of Barack Obama. Like all unsolicited advice, it was taken into due consideration.

Wednesday, 29 December, 2010  
Blogger Rollory said...

Regardless of purpose, what Newsweek is saying there is complete bullshit. It is mathematically impossible. Do the math yourself: figure out what the current debts and obligations are, and figure out what the exponential increase in obligations over time are due to interest payments, then figure out how much higher than the interest rates the general economic rate of growth has to be in order to pay off said obligations within X years.

It's not a terribly hard problem. Anybody who's gone through a decent high school math class should be able to do it.

Here's a hint regarding the nature of the answer: the required economic rate of growth is 1) higher than the best average the US has ever posted, 2) _must be consistently maintained over the whole time period in question_.

It's bullshit.

Wednesday, 29 December, 2010  
Blogger al fin said...

I take full responsibility for not attributing the article to Jacques Attali, the actual author -- not Newsweek.

It is unlikely that Attali expects the west to simply grow out of its debt problems. A combination of the 8 choices given by Attali: "(1) higher taxes; (2) less spending; (3) more growth; (4) more lenient interest rates; (5) worse inflation; (6) war; (7) external aid; or (8) default" is likely, with default, inflation, and war being equally likely. Revolution and secession are also possible.

On the other hand, anyone who possesses a reasonable knowledge of the vast wealth available in the inner solar system via space flight -- or a number of other disruptive technologies -- would not entirely dismiss the possibility of significant economic growth among nations that benefited from such economic revolutions.

Given the suicidal tendencies of the Obama regime and the EU -- and the vast and unmoveable pseudo-intellectual and quasi-criminal sub-structures underlying modern suicidal western governments -- the less desireable possibilities are the most likely.

BTW, as most Al Fin readers understand, it is best not to give any particular word, ie "Newsweek", the power to disrupt one's train of thought.

Wednesday, 29 December, 2010  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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