Geo Political Economics

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How the South Won the Civil War review: the path from Jim Crow to Donald Trump

Heather Cox Richardson’s How the South Won the Civil War is not principally about that war. Instead, it is a broad sweep of American history on the theme of the struggle between democracy and oligarchy – between the vision that “all men are created equal” and the frequency with which power has accumulated in the hands of a few, who have then sought to thwart equality.


What she terms the “paradox” of the founding – that “the principle of equality depended on inequality”, that democracy relied on the subjugation of others so that those who were considered “equal”, principally white men, could rule, led to this continuing struggle. She draws a line, more or less straight, between “the oligarchic principles of the Confederacy” based on the cotton economy and racial inequality, western oligarchs in agribusiness and mining, and “movement conservatives in the Republican party”.

More specifically, she writes that the west was “based on hierarchies”. California was a free state but with racial inequality in its constitution. Racism was rife in the west, from lynchings of Mexicans and “Juan Crow” to killings of Native Americans and migrants who built the transcontinental railroad but were the target of the Chinese Exclusion Act of 1882.

There, aided by migration of white southerners, “Confederate ideology took on a new life, and from there over the course of the next 150 years, it came to dominate America.” This ranged from western Republicans working with southern Democrats on issues like agriculture, in opposition to eastern interests, to shared feelings on race.


Once Reconstruction ended, and with it black voting in the south, Republicans looked west. Anti-lynching and voting rights legislation lost because of the votes of westerners, and new states aligned for decades more “with the hierarchical structure of the south than with the democratic principles of the civil war Republicans”, thanks to their reliance on extractive industries and agribusiness.

For Richardson, Barry Goldwater’s opposition to the Civil Rights Act in 1964 was thus not an electoral strategy but a culmination of a century of history between the south and west, designed to preserve oligarchic government in “a world defined by hierarchies”. Richardson sees Lyndon Johnson’s Great Society and the reaction against it as “almost an exact replay of Reconstruction”. What she terms the “movement conservative” reaction promoted ideals of individualism – but cemented the power of oligarchies once again.

But isn’t America the home of individualism? Richardson agrees, to a point. The images of the yeoman farmer before the civil war and the cowboy afterwards were defining tropes but ultimately only that, as oligarchies sought to maintain power. Indeed, she believes, during Reconstruction, “to oppose Republican policies, Democrats mythologized the cowboy, self-reliant and tough, making his way in the world on his own”, notably ignoring the brutal work required and the fact that about a third of cowboys were people of color.

These tropes mattered: “Just as the image of the rising yeoman farmer had helped pave the way for the rise of wealthy southern planters, so the image of the independent rising westerner helped pave the way for the rise of industrialists.” And for Jim and Juan Crow and discrimination against other races and women, which put inequality firmly in American law once again.


Yet ironically, as in the movies, the archetype came to the rescue: “Inequality did not spell the triumph of oligarchy, though, for the simple reason that the emergence of the western individualist as a national archetype re-engaged the paradox at the core of America’s foundation.” In the Depression, “when for many the walls seemed to be closing in, John Wayne’s cowboy turned the American paradox into the American dream.” (Wayne’s Ringo Kid in Stagecoach marked the emergence of the western antihero as hero.)

Indeed, the flame was never fully extinguished despite the burdens of inequality on so many. In Reconstruction, the Radical Republicans fought for equality for black people. The “liberal consensus” during and after the second world war promoted democracy and tolerance. Superman fought racial discrimination.

In all it is a fascinating thesis, and Richardson marshals strong support for it in noting everything from personal connections to voting patterns in Congress over decades. She errs slightly at times. John Kennedy, not Ronald Reagan, first said “a rising tide lifts all boats” (it apparently derives from a marketing slogan for New England); she is too harsh on Theodore Roosevelt’s reforms; and William Jennings Bryan – a western populist Democrat who railed against oligarchy even as he did not support racial equality – belongs in the story.
Barack Obama addresses the Democratic national convention, in August.
Barack Obama addresses the Democratic national convention, in August. Photograph: DNCC/Getty Images

Richardson has achieved prominence for her Letters from an American series, which daily chronicles the latest from the Trump administration. As with many American histories these days, Trump and Trumpism form a backdrop to her work. She subtly draws connections between echoes of the past and actions of the Trump administration which appear as their natural, if absurd, conclusion.
Rick Perlstein: 'If you're not writing about the berserk, you're not writing about America'
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As Richardson writes, after the Kansas-Nebraska Act extended the possibility of slavery in those territories, “moderate Democrats were gone, and slave owners had taken control of the national party”. She needn’t finish the analogy, other than to say that “[t]he world of 2018 looked a lot like that of 1860”.

The broader question is vital: does American democracy somehow require the subjugation and subordination of others? Richardson eloquently and passionately accounts why that principle is so dangerous and damaging.

Refuting it – precisely by asking America to extend the benefits of the founding to everyone – is the principal task for Americans today. She concludes that “for the second time, we are called to defend the principle of democracy” – something that can be done only by expanding its definition in practice to match the ideal. Only in that way can the American paradox be resolved.

Or, as Joe Biden recently said in fewer words: “Democracy is on the ballot.”

https://www.theguardian.com/books/2020/sep/13/how-the-south-won-the-civil-war-review-heather-cox-richardson-donald-trump

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Southern elites, Western libertarians and the conservative coalition

https://www.washingtonpost.com/outlook/southern-elites-western-libertarians-and-the-conservative-coalition/2020/04/17/f4352c1c-6d4d-11ea-b148-e4ce3fbd85b5_story.html

In 1964 the Republican Party nominated Sen. Barry Goldwater of Arizona for president. Goldwater, a strident conservative who liked to wear a cowboy hat, called for reductions in federal spending, criticized an “activist” Supreme Court and hoped to curtail welfare programs. In his 1960 book, “The Conscience of a Conservative,” which helped revive the conservative movement, Goldwater proclaimed that he had “little interest in streamlining government or in making it more efficient, for I mean to reduce its size.” His aim was “not to pass laws, but to repeal them.”

It seemed like an odd, if not dangerous position to those Americans who had depended on the government during the dark days of depression and war in the 1930s and ’40s. Baffled by Goldwater’s national appeal, the Columbia University historian Richard Hofstadter asked, “When, in all our history, has anyone with ideas so bizarre, so archaic, so self-confounding, so remote from the basic American consensus, ever got so far?” Bucking the consensus, the Southwestern senator had opposed the 1964 Civil Rights Act on the grounds that the federal government should not compel states or individuals on such matters. Southern segregationists nodded with approval.
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(Oxford University)

Martin Luther King Jr., like many other African Americans, believed that Goldwater was a threat to democracy and to the black freedom struggle in the South. In King’s estimation, Goldwater gave “aid and comfort to the racists.” King warned that Goldwater’s campaign was “obviously an attempt to appeal to all of the fearful, the insecure, prejudiced people in our society.”
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Heather Cox Richardson, a professor of history at Boston College, explains Goldwater’s crusade and the trajectory of modern conservatism in her masterful “How the South Won the Civil War: Oligarchy, Democracy, and the Continuing Fight for the Soul of America.” A timely book, it sheds light on what was perhaps the most important political coalition of the 20th century.

It’s not surprising that Goldwater won his home state of Arizona. Yet he also swept the Deep South, taking Alabama, Georgia, Louisiana, Mississippi and South Carolina. White Southerners, many of them Democrats, saw a kindred spirit in the square-jawed, bespectacled stalwart from the West. His campaign may have been a colossal failure, but, Richardson claims, it established a new, fiery brand of conservatism, drawing on long-standing connections between the South and the West.

For decades there had been a Western brand of anti-government, anti-communist, free-market, right-wing libertarianism that had united Americans from Southern California to South Carolina. Regions and cultures that seemed so different were, in fact, joined in a common cause. Richardson tells the engrossing and deeply relevant story of these connections, and she ties that story to the most important political and social developments of American history. While the Confederate South may have lost the war in 1865, its conservative, elitist ideology found fertile soil in the sprawling American West.
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Goldwater, a key player in Richardson’s account, won the 1964 nomination with the support of South Carolinian delegates, who rallied to his cause. Similar to the elite slaveholders of the pre-Civil War South, says Richardson, these men held fast to hierarchies and considered the lesser sorts — the poor, minorities, women and the weak — to be dangerously unfit for self-governance. Throughout, she emphasizes that this oligarchic “vision of the world stood against a very different set of principles that lay at the heart of the idea of American democracy: equality and self-determination.” Since the election of Donald Trump in 2016, these competing visions have been in sharp contrast.

Another central figure in Richardson’s narrative is the South Carolina slaveholder, governor and senator James Henry Hammond, perhaps one of the vilest characters in American history. Hammond ascended to power even though he admitted to sexually assaulting his four young nieces, “lovely creatures,” in his words. For Richardson, Hammond embodied the ironclad authoritarianism of the white slavocracy. White Southern elites saw themselves as destined to lead and rule over menial laborers, slaves and a horde of inferiors. These men built the region’s slave system on this rigid order, and the Confederacy aimed to protect it at all costs.

That old Southern order seemed to come to a swift end in 1865. The Civil War and Reconstruction, writes Richardson, “had given the nation a new birth of freedom.” The Northern victory, for a time, did away with the threat that oligarchy posed. Yet that victory was short-lived. Southern states stripped African Americans of hard-won rights, and an era of white-supremacist violence lasted decades.
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Shifting to the West, Richardson traces the other ways the freedoms secured during the Civil War evaporated. As settlers fanned out across new territory and the government provided incentives for exploration and homesteading, the ideals of the Confederacy took root. Violent campaigns against indigenous peoples, Mexicans and new Chinese immigrants, along with white beliefs about natural rights to land and resources, drove the quest for empire. Notions of racial and gender hierarchy followed the migration of Southerners into the West.

Richardson fittingly turns to the myth of the American cowboy, which “carried all the hallmarks of the strife of the immediate postwar years: [The cowboy] was a hardworking white man who started from nothing, asked for nothing, and could rise on his own.” In fact, she underscores, about a third of cowboys were people of color, and it was a dangerous, unrewarding life. Theodore Roosevelt and the historian Frederick Jackson Turner celebrated the West as a land of opportunity and promise, but those perceptions bore little relation to the harsher realities. As in the South before, so now in the West, “poor white men had little opportunity, people of color and women had even less, and leaders worked to keep it that way,” Richardson writes.

Barry Goldwater and Ronald Reagan built their political careers on the Western myths of proud independence and self-made heroism. Both also had a taste for cowboy cosplay. Goldwater appeared on the cover of Life magazine in 1963 in Western gear with his arm around the muzzle of a tan horse. In the 1970s and 1980s, photojournalists snapped pictures of Reagan on horseback, wearing his white cowboy hat, at his Rancho del Cielo in the Santa Ynez Mountains, known as the Western White House. Reagan defined himself against effete, urban New Deal liberalism. His political philosophy was as ill-suited to the economic realities of the late 20th century as Hollywood western film sets were to the elements. Reagan was fond of telling adoring crowds: “The nine most terrifying words in the English language are: I’m from the government, and I’m here to help.” Today, amid the worst health crisis of the modern era and when Americans could use more government help, that tired saying seems particularly grotesque.
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Moving from Reagan and the rise of the New Right, Richardson turns to more recent history. She sees in President Trump the culmination of an elite white paternalism, imbued with a sense of macho self-reliance, that the Republican Party has nurtured for decades. In the 2016 election, Trump swept all the states of the former Confederacy, with the exception of Virginia. He also had a strong showing in the West. His cynical vision of an America that only he could save, his cronyism, his casual misogyny, and his preference for elite corporations over the middle and working classes fit a long-standing pattern. It was little wonder that Trump fulfilled his promise to gut the government, ignore expertise and “put in charge of government departments officials whose only qualification was great wealth.”

Richardson ends her book with a kind of call to action. The conservative vision of oligarchs, she argues, stands in direct contrast to other American ideals of equality and self-determination. She fittingly titles her conclusion “What Then Is This American?” Does the nation truly hold to its possibilities and promises? When he started his presidency, Trump defined it as “a land of carnage, a nightmare.” But Richardson sees positive developments in the resistance and the female candidates who claimed stunning victories in the 2018 midterms. An otherwise dark picture is brightened when she notes that “women and voters of color are helping to redefine the image of an American for the twenty-first century, as they did briefly, after the Civil War and after World War II.” There is a glimmer of hope, especially in these tumultuous times, that a more just and equal America will emerge and thrive.

How the South Won the Civil War

https://books.google.com/books?id=7RK-yQEACAAJ&printsec=copyright#v=onepage&q&f=false

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HE CUTTING ROOM FILES, PART 3: THE FUTURE OF CANADA

By Peter and Michael N. Nayebi-Oskoui

Canada is… not a normal place.

Everything from its settlement patterns to its defense strategy to its national politics to its economic structure is wildly different not just from the United States, but from every other country on the globe. Until now that has not had an overly negative impact upon Canadian-American relations, but times are changing (and from the Canadian point of view, not for the better). To really understand recent shifts, we need to start not in Canada, but in Mexico.

It comes down to demography.

Mexico has a more-or-less standard demographic profile. Lots of children, a good number of young workers, fewer mature workers and very few retirees. Chart it out, children on the bottom and retirees on the top, and courtesy of simple mortality you get a pyramid.


For purposes of the North American market, there are two big takeaways here. First, Mexico is hungry. All those young workers having lots of kids means the country is a never-ending festive parade of spending on education and food and diapers and homes and cars. Second, Mexico isn’t all that skilled. This is less an indictment of Mexico’s educational system, and simply that people below age 40 don’t have all that much experience in their chosen professions. It makes Mexico excel at relatively low-value-added manufacturing and assembly, but the Mexicans are forced to leave the high-value-added stuff and design to others.

For the Americans, this makes Mexico the perfect complement. Its people are ravenous for American exports, the Mexican work force meshes nicely America’s more high-value-added workers, and for the most part the two countries do not compete head-to head. No wonder that Trump’s rhetoric on Mexico has evolved so strongly over the course of the past two years from issues of trade to issues of identity and migration.

Simply put, from American point of view, the Mexican demography is the demography of the perfect partner.

Canada’s is not.


Canada’s population bulge isn’t among the young workers who complement the American economic structure, but instead among the mature-worker demographic who compete. A demographic bulge in the 40-65 bracket means Canada is super-saturated with high-skill workers. This extra supply depresses the cost of skilled labor within the Canadian system, which has a similar impact upon the price of the goods the country’s skilled labor force produces.

Even worse, the lack of 20- and 30-something Canadians means Canada cannot even consume its own production. It must dump that production on foreign markets, and proximity alone means that some 75% of it goes to the United States. Economically, Canada isn’t a partner. It is a competitor, and that’s before one considers the Canadian tendency to subsidize industries as unrelated as dairy and aerospace and timber and electricity.

In a time when the Americans are pulling back from the global system and rewriting all their trade relationships, this alone would be cause for great concern in the Great White North. But the Canadian-American economic mismatch is only the first problem.

The second problem in Canadian-American relations is the Americans are having a change of heart about their northern neighbor not simply in economic terms, but overall.

When the Trump administration started its whole the-world-is-screwing-us-and-we’re-going-to-forcibly-renegotiate-all-trade-deals campaign, the Canadians took it as an opportunity to make demands of the United States. That clearly didn’t fit with TeamTrump’s understanding of what was supposed to be going on. Why in the world would the Canadians believe they have leverage over the government who controls the only market that matters to Canada, and global finance, energy and sea lanes to boot?

Canada’s confidence dates back to the Cold War. The flight path for the feared Soviet nuclear missile strike on the United States would have been over Canada. There was no version of American security that would not by default also guarantee Canadian security. The Canadians could have been security free-riders if they had chosen to, but to their credit they have fought and died alongside American soldiers in nearly every overseas endeavor the U.S. military has undertaken.

That does not mean the Canadians did not use their leverage, they just used it on issues of trade rather than security, leveraging their strategic position to gain concessions on market access for their products. The Canadians had a strong hand and they played it well. Repeatedly. Those trade victories were all folded into the original NAFTA accord back in the early 1990s.

It all fit with the times. The whole concept of the American-led global Order was that the Americans would create and subsidize a security and trade rubric to induce countries to join them in the fight against the Soviets. Guns-for-butter was the rule of the era. Canada’s position meant it had more to offer, and granting Ottawa some extra trade concessions for its cooperation was a price the Americans were eager to pay.

Times change.

Canadian negotiators resisted the Trump administration’s trade goals, thinking Canada’s leverage still existed. But with the Cold War over, the Americans no longer fear Russian attack. Canada is now just another country. Once the Americans had finalized NAFTA2 with Mexico, they turned to Canada and issued a simple ultimatum:

Mexico’s market is growing. Yours is not. Your market is protected. Mexico’s is not. The Mexican labor force is complementary to ours. Yours is not. We have a deal with the country that matters, and that isn’t you. We are leaving NAFTA. You know our terms. Take them or leave them. We are moving on.

In a single searing moment of revelation, everything that had guaranteed Canada leverage over America, everything that granted Canada a place in the world, everything that had generated any meaningful international influence, had evaporated. Canada capitulated within days and signed on for NAFTA2.

All things considered, as emotionally crushing and economically damaging as a forced rejiggering of Canadian-American relations will be, it could be (a lot) worse. Canada is very close to the top of a very short list of countries that the Americans have positive feelings for. Will the Canadian ego and economy suffer under NAFTA2? You betcha. But Canada will still enjoy privileged, security-risk-free access to the American market. In a post-Order world precious few countries can claim the same. Canada may limp, but it will still be able to walk.

Unless the third issue completely overturns the Canadian system from the inside.

Again, Canada is not a normal place. Unlike the United States where the states and federal government exercise roughly equal amounts of power, in Canada the provinces are preeminent and often have the ability to block federal policies they do not like. The country didn’t even get its first comprehensive internal free trade agreement until 2017.

As such, the provinces of Canada function less like components of a common country, and more like a loose clutch of independent countries which compete – oftentimes furiously. That would be problematic enough if the provinces shared a common demographic base. That, they do not.

Quebec is as vitriolically Francophone as the Maritimes are Anglophone. A huge chunk of the population of Toronto is South Asian, while East Asians tend to be overrepresented in Vancouver. The Prairies are as white bread as America’s upper-Midwest. These splits at least partially explain the seemingly never-ending drama of Quebecois separatism, but it is the intersection of demography and economics where the real problems erupt:

The Maritimes’ economies crashed decades ago and its subsequent “recovery” has been anemic at best. Now those provinces have all aged into mass retirement making them de facto wards of the national government. Mighty Quebec is only a few years behind, and is making the transition to demographic basket case right now. Both British Colombia and Ontario are no more than five years behind Quebec. A big piece of the BC economy is serving as the gateway to Asia, and the Trump administration’s trade war is likely to enervate those links. Even worse, the NAFTA-integrated manufacturing and agriculture that makes Ontario and Quebec hum were sectors that specifically benefited from NAFTA1, and which now face far steeper competition from the United States and Mexico under NAFTA2. More specifically, Quebec’s aerospace company, Bombardier, is both one of the most heavily subsidized in the world and is linked into Airbus – a firm that is both the target of extensive American tariffs and one whose fate is locked up in the Brexit drama.

Functionally, that restricts economic dynamism to the demographically young provinces of Alberta and Saskatchewan, a pair of entities whose economies depend upon old-school oil and natural gas production. For years now, funds transfers from the pair – quintuply so from Alberta – to the center is what has enabled Canada to enjoy its much-lauded social welfare state.

That’s not the end of the story, but instead just the beginning.

Canada’s leader is one Justin Trudeau, a scion of a powerful family. Justin’s father, Pierre, was a force of nature. Love him or hate him, everyone acknowledged that Trudeau the Senior was a commensurate politician. Dude could work a room, and it isn’t much of a surprise that he served as Canada’s prime minister for 16 years.

Justin, in comparison, isn’t a particularly smooth operator. His rise to the prime minister’s chair five years ago largely occurred because of circumstance. Many Canadians had tired of a decade of conservative minority rule under the somewhat curmudgeonly Stephen Harper. A coalition of liberal players banded together around the Trudeau name and managed to carry an election.

In that environment, Trudeau the Younger fit the bill. He isn’t very bright, his French is on the weak side, his past work experience was at best mediocre, but he is young and so very very pretty. In a world of social media and an increasing split between modern liberal values and traditional economic sectors, that proved enough.

Under Justin Trudeau’s rule Canada has… gotten by. There have been no disasters, but few serious new policies. Really, Justin Trudeau’s administration has only shifted two things.

First, it has steadily centralized power in Ottawa, making it easier to drain cash from Alberta and Saskatchewan both to balance out the slipping economic performance of the rest of the country, and to push this or that pet policy. Second, the pet policy of the moment is a fairly aggressive environmental program that has proven popular with Justin Trudeau’s base. That program has put ever-more-stringent restrictions on the economies of Alberta and Saskatchewan – specifically on the sectors that make the Canadian national budget possible.

Justin Trudeau’s lackluster performance has cost him. His Liberal Party has been ejected from parliaments in Alberta, Saskatchewan, Ontario and some of the Maritimes in favor of the conservatives; in BC in favor of the left-leaning NDP and Greens; and in Quebec in favor of more nationalist sentiments who are furious with his capitulation to the Americans in NAFTA2.

Within the Liberals, the future isn’t all that bright either. Aside from the Trudeau name, the one characteristic that Justin inherited from his father is the charisma necessary to suck all the air out of the room. Justin is such a big presence that there is no next-generation of young leaders working their way up through the Liberal Party ranks. When Justin falls, so too will the party.

Fast forward to this week.

The Canadians voted in national elections October 21. Justin Trudeau’s Liberals were not exactly gutted, but they lost a lot of seats ending up with just 157, thirteen shy of what’s necessary to form a majority government. That will force the Liberals to rely upon support from the Greens (whose primary concerns are climate change policies) and the NDP (who are like a more math-challenged version of the Greens).

For Canada as a whole, this courts disaster.

Political sentiment in Alberta and Saskatchewan turned sharply anti-Green and anti-Trudeau years ago. The Albertans and Saskatchewanians assert the Greens, the NDP and the Trudeau government are actively conspiring to stymie any and all efforts to get Albertan and Saskatchewan energy exports to the wider world. The Greens and NDP openly say they do, with anti-Albertan policies in the one province they control – British Colombia – having reached the point that BC and Alberta have a hot little inter-provincial trade war going. The Trudeau government attempts to be at least a bit circumspect on the issue, but under Justin Trudeau’s rule construction has yet to begin on a single cross-province pipeline.

Legally, there is an excruciatingly painful route forward. Quebec’s on-again, off-again independence spasms firmly established that Canadian provinces have the right to leave Canada. Paths to secession have been approved – at least in theory – by both the Canadian parliament and the Canadian Supreme Court. We are approaching the witching hour.

There is no modern Canada without Albertan and Saskatchewan financial strength, and there is no Albertan and Saskatchewan financial strength without the two provinces’ energy sectors. Now, with the Liberals needing Green/NDP support to rule, the already-deep political split is taking on more ideological, more hostile overtones.

The vote breakdown is not encouraging. In Monday’s elections the Liberals lost every seat they previously held in both Alberta and Saskatchewan. In an echo of America’s 2016 presidential elections, the opposition Conservatives actually won the popular vote, but because of Canada’s equivalent of America’s electoral college they earned 25 fewer seats than the Liberals. Further mirroring America’s more recent political evolutions, Justin Trudeau claimed a “clear mandate” for stricter climate-change-related policies – an assertion positively Trumpian in its ability to creatively reinterpret the facts on the ground.

We are likely to see two things over the course of 2020.

First, the new federal political alignments are the absolute worst-case scenario for Alberta and Saskatchewan. They have already tried and failed – horribly – to renegotiate their financial relationship with Ottawa, and now they can look forward to ever harsher restrictions on their economic capacity paired with ever more robust siphoning of their wealth to the Canadian center. The formal, open, public debate on secession begins now.

Second, the Americans are likely to take both notice and action.

In the War of 1812 Canadian colonials burned down the American capital. In the war’s aftermath, realizing the Americans would be jonesing for revenge, the Canadians carried out what has arguably been the most successful rebranding effort in history, from trigger-happy arsonists to polite, cuddly socialists.

That effort enabled Canada to avoid American wrath. Later, Canada maintained a bit of protection due to its status as part of the British Empire. In the interwar period the U.S. had bigger fish to fry at home, what with the Great Depression and all. Post-World War II the Americans’ need to maintain the global Order meant that Canada, for all its inconsistencies, was under American protection – which included protection from America.

The Canadian system is splitting along provincial, economic, demographic and ideological lines, and there is no one in the Trump administration who likes Justin Trudeau personally, ideologically or politically. Add in a now-unrestrained America, an America who sees Canada as a competitor, an America who sees the Canadian government as a mix of annoying and ungrateful and self-righteous, and a complete role-reversal is fully in play. Unless the Canadians can get their shit together, it will be eeeeeeasy for Washington to start cutting deals with individual Canadian provinces to hammer preexisting wedges ever-deeper into the Canadian system.

Alberta has the means and motive to destroy Canada. Washington has the means and motive to destroy Canada. And the likely format of the new Trudeau government is providing the opportunity.

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THE CUTTING ROOM FILES, PART 2: THE FUTURE OF MEXICO

By Peter and Michael N. Nayebi-Oskoui

American-Mexican relations have been…colorful of late. American President Donald Trump has threatened Mexico with a rising tariff system that would constitute the greatest tariff effort in dollar terms by Americans in their history. Mexican President Andres Manuel Lopez Obrador (AMLO) is pushing a change to tax law that would more or less treat businesspeople like money launderers which would throw trade relations into the freezer. Threats and counterthreats on migration and trade and law enforcement and energy and water rights have ratcheted up to near-crisis levels.

This is actually… really good. Ever since Mexican independence in the early 19th century, American-Mexican relations have oscillated between cold-shoulders and American invasions. Today, really for the first time in both countries’ histories, the Americans and Mexicans are not talking past one another, but instead speaking with each other. The process is loud and messy, yes, but it is actually a conversation. The United States and Mexico are working out deals, making functional compromises, and finding common ground. What’s been happening the past two years are the sorts of interactions one would expect between two countries who find themselves increasingly intermingled both economically and demographically. We all fight most vociferously with our families.

That hardly means it is all well thought out. One of the most frustrating things about working in the geopolitical forecasting space is that sometimes luck plays a role, and that has most certainly been the case of late.

Consider the individuals helming both countries.

In the United States, Donald Trump rose to power on a wave unapologetic nativism, which expressly included a harsh campaign against Mexico on economic, political, security and racist grounds. On the other side of the border is AMLO, a guy who combined Trump’s disdain of foreigners, Elizabeth Warren’s enthusiasm for dressing down corporate interests, Ted Cruz’s penchant for blind obedience to ideological dogma, a Clinton-esque love-affair with political corruption, and Bernie Sanders’ pathological refusal to engage in basic mathematics. It’s difficult to imagine a set-up that would be less constructive to functional bilateral relations.

And yet, here we are, with the Americans and Mexicans enjoying the most positive bilateral relationship ever.

The unexpected outcome largely has to do with an olive branch from AMLO. After his election in mid-2018, but before his inauguration in late-2018, AMLO apparently had an epiphany. He realized that if he and Trump engaged in a binational pissing contest over who was more populist, the bad blood would consume his entire presidency. As he had put together a laundry list of tasks to remake Mexico in his own image, that simply would not do. So he reached out to both his predecessor and Trump, and indicated that if they could complete the renegotiation of NAFTA2 before he took office, he would not seek to reopen talks and would ensure the new deal would be ratified in a timely manner.

AMLO has since proven to be a man of his word. Mexican ratification occurred on June 19 of this year.

While there are obviously portions of NAFTA2 the Mexicans are less than enthused about and the new deal will disrupt a great many industrial patterns across the length and breadth of Mexico, for the most part the new deal is as much a win for Mexico as it is for the United States.

Among the Trump administration’s biggest goals in the NAFTA renegotiations was to make sure goods that benefitted from the low tariffs of the NAFTA system were mostly produced inside of it. These “rules of origin” quotas were increased and ensure that a certain percentage of the product’s value was produced within Mexico, Canada, and the United States rather than outside of it. As Mexican manufacturing capacity is both less expensive and more efficient than most manufacturing in both China and Canada, Mexico will certainly pick up a disproportionate share of whatever relocates to the North American market. Add in the general breakdown of the global Order, and Mexico’s now-even-more-privileged access to the American market, and Mexico’s economic future looks brighter and brighter.

Merchandise trade is only one of several aspects of a tightening, more constructive, relationship between the two North American powers.


One of the many aspects of America’s shale revolution is an accidental, incidental oversupply of natural gas prices in the U.S. market. American natural gas prices are now the lowest (unsubsidized) in the world, and a dozen major pipeline networks have been laid down to connect that supply to Mexican demand. All the pipes are now completed and soon about half of the electricity consumed in Mexico will be sourced from American natural gas.
One of AMLO’s less-functional plans is an overhaul of Mexico’s state energy monopoly Pemex, a company so badly run and a process so ill-conceived that it would probably be better for Mexico to burn the entire company to the ground, shoot everyone involved, and start over from scratch. The more dysfunctional Pemex is, the less able Pemex will be able to meet Mexico’s growing energy needs… and so the more reliable a customer Mexico is for American energy product exports.
Mexico has rapidly developed since the implementation of the first NAFTA accords back in the early 1990s. That has shifted millions of Mexicans off subsistence farms and into urban environments, even as the standard of living of the average Mexican has surged. Less agricultural production plus more disposable income makes Mexico a premier destination for American agricultural products. In particular, when Mexicans get a bit of extra scratch, the first food product they reach for is beef – American beef.
Higher living standards within Mexico have gutted immigration from Mexico to the United States – it has been negative for ten straight years. That gives both countries a vested political interest in regulating Central American migration through Mexico to the United States. One of the dirty secrets of the immigration debate in North America is that Mexicans are even more opposed to Central American migration than Americans. Trump has provided the Mexicans with the perfect excuse to crack down on the through-migration, while enabling the Mexican government to rack up a public relations win.
While Mexican migration to the United States peaked years ago, past migration has made Americans of Mexican extraction the second-largest minority in the United States. Even if the economic mingling were not occurring – and it has already surpassed that of any other American co-mingling in history – the demographic co-mingling easily puts Mexican cultural influences in third place behind German and British culture.

Taken together, Mexico is now America’s second-largest partner in energy, trade, agriculture and security, and is on the cusp of taking the top spot in all categories.

So… that’s the good news.

Understanding the bad news requires a bit of a step back.

Roughly a decade ago Mexican and American authorities were tracking hundreds of small groups involved in moving cocaine and marijuana through Mexico to America’s southern border. Just as mountainous regions help fracture regions among several competing countries, Mexico’s mountainous geography meant no single drug trafficking organization (DTO) could command all that much territory. A small DTO might control a single stretch of highway, or a single city or a local shake-down racket. Violence between these groups and Mexican law enforcement was horrific, but that carnage was nothing compared the violence among the various drug trafficking groups as they battled to expand their role in the drug trade or defend their patches from one another. In that environment, Mexico’s murder rate soared.


But even then, not all DTOs were created equal because not all DTO leaders were created equal. Today’s story involves a 5’ 6” dude by the name of Joaquín Guzmán, aka El Chapo (which roughly translates as “shorty”), who ran his drug group less like the Sopranos or a street gang, and more like a Korean chaebol.

Under his hand, the Sinaloa alliance focused on three general themes:


First, the bread and butter of drug smuggling to the United States. Violence within the alliance was snuffed out, while the sort of petty violence – assaults, rapes and robberies – that characterized other DTOs was frowned upon. Regular Mexican citizens living in Sinaloa territory were not terrorized by the cartel, so they tended to not resist its efforts.
Second, experimentation with new business lines that would enable the Sinaloa to deepen and expand its business. Cocaine never went out of fashion, but the cartel also commercialized heroin and methamphetamines. Selling counterfeit pills to profit from Americans’ opiate addition was an easy add. Cash-heavy businesses found favor as a means of assisting in the drug-money-laundering effort: limes, beef, avocados, real estate, tourism. More business lines mean more and more stable profits.
Third, oblique cooperation with the Mexican government to help weaken the competition. Officially, the Sinaloa would provide the Mexican government with scads of intel on their competitors’ operations. Unofficially, the Mexican government would turn a blind eye to the Sinaloa’s operations because Mexico City could only prosecute raids on so many targets at a time. The Gulf and Zeta cartels tended to suffer the most from this de facto alliance.

El Chapo’s strategies were so successful the Sinaloa grew to become the most powerful organized crime group not simply in Mexico, but the world. As the Sinaloa alliance expanded and deepened, violence among its constituent components plummeted. After all, they were all on the same side, and El Chapo did not tolerate infighting. Mexico’s murder rate fell.


But nothing happens in a vacuum. Sinaloa’s success meant it also became the most powerful organized crime group in the United States, which earned El Chapo a spot at the top of the Obama administration’s most-wanted list. A joint American-Mexican effort resulted in his arrest in 2014. El Chapo promptly escaped… and was re-arrested in 2015. Mexico extradited him to the United States in 2017, where following his conviction on… lots of charges he is now serving multiple life sentences in an American prison.

Without the business-minded El Chapo to ride herd on the Sinaloa alliance, the relative peace of the Sinaloa era quickly collapsed as the DTO’s various factions fought for control. The biggest and baddest of those factions is known as the Jalisco Cartel Nuevo Generacion, a group run by the Sinaloa’s former enforcers. Whereas the Sinaloa expanded by collaboration and diversification, the Jalisco expands by brute violence.

Four things come from this.

First, the Jalisco is not the Sinaloa v2.0. The Jalisco’s leader – Nemesio Oseguera Cervantes aka El Mencho – first instinct is to kill everyone in every room he enters. He absolutely lacks El Chapo’s charisma and management skills. The Jalisco is expanding, particularly in challenging its former patron, the Sinaloa, but it is most certainly not on course to dominate the drug trade.

Second, between the Sinaloa’s fall and the Jalisco’s rise, Mexico’s murder rate is once against setting record after record. El Mencho has also – repeatedly – broken the cartels’ unwritten rule that one does not engage in open violence in tourist areas.

Third, the Sinaloa is not dead and still supplies the majority of drugs that enter the United States. After a year of chaos and breakdown, elements of El Chapo’s family – most notably his sons – have seized control over what was left of the alliance and thrown up substantial roadblocks to El Mencho’s bloody expansion. Los Chapitos may not be the leaders their father was, but they have proven far from incompetent.

To give an idea of just how potent the Sinaloa remains, consider the events of last week. A government raid October 17 on a suspected sniper in the city of Culiacán accidentally captured one of los Chapitos. Shocked by their unexpected haul, the government stammered a bit. Shocked by the loss of one of their own, the entire Sinaloa alliance descended upon the city in a tsunami of carnage, forcing the unprepared government to release El Chapo’s son. In northwest Mexico, the Sinaloa remains the de facto government. The old man would undoubtedly be proud.


Which brings us to the fourth and arguably most important outcome. El Chapo’s business diversification efforts combined with the breakdown in the “peaceful” nature of the Sinaloa’s management strategy combined with the rapidly deepening economic integration between the American and Mexican markets means that the cartels are now becoming part of the North American economic picture and they are bringing their violence levels with them.

At present this expansion has not penetrated manufacturing – that’s an industry that’s simply too high value-add and too finance-heavy for easy links with DTOs. But nearly everything else is game: transport, trucking, energy, agriculture, construction, tourism, real estate. All these sectors and more now have DTO threads woven throughout, particularly in the Sinaloa heartland of northwest Mexico. And it doesn’t take a big leap to link these Mexican sectors with their American peers. First landfall of Mexican DTOs in these veins will be U.S. regions just across the border from Sinaloa strongholds: Tucson, Phoenix, El Paso, San Diego, Los Angeles and the California Central Valley.

It is worth remembering that while the collapse of the global Order has consequences for everyone, and in many cases those consequences will be the determining factor in a country’s future, regional and local factors don’t simple fade away. Countries’ local geographies and local economic trends and local histories remain relevant. Global shifts are likely to favor Mexico more than any other country, but it can still get tripped up on issues closer to home.

And the same goes for the third NAFTA partner…

[cdrom]

CRF FILES, PART I: THE FUTURE OF KOREA

By Peter Zeihan

When Donald Trump became president, world leaders fell into two broad buckets. The first thought that if the Americans were going to drop the global mantle of leadership, then perhaps there is some space for us. Russia’s Vladimir Putin became more aggressive throughout the Russian near abroad. France’s Emmanuel Macron tried to become the voice of the West. Canada’s Justin Trudeau became a liberal supermodel.

The second were those leaders who weren’t sure the Americans knew what they were doing in electing an isolationist, and thought the best bet was to not rock the boat. This club included Germany’s Angela Merkel, Australia’s Malcolm Turnbull, and Britain’s Theresa May. All and more bet/hoped that Trump would be little more than a hiccup in normal relations. They kept quiet and aimed to not do anything that might annoy the Americans as a whole, so that when Trump left the stage their relations with America could get back to normal.

There was one exception: South Korean President Moon Jae In. Rather than strike out or hunker down, Moon bluntly asked for the terms of a revised trade deal that Trump would approve of.

Moon’s logic was unassailable. Put simply, Moon recognized that he completely lacked leverage, (correctly) calculating that being an eager first volunteer might allow South Korea to walk away without undue sacrifice as the Trump administration looked for an early win. The revised deal’s technical talks took but a few weeks, and the revised KORUS is already implemented.

Good thing too. “Logic” was about all Moon had going for him. Everything about Korea’s success is exclusively because of the Order.

South Korea imports all its oil and natural gas, and its import/export flows are so large that it is the world’s 5th-largest trading power by value despite having a population of only 51 million. As with many of the world’s developed economies, South Korea cannot look internally for greater economic growth; The country’s population has all but peaked and, again like much the rest of the world, faces a rapidly aging demography supported by an ever-smaller working age population.


South Korea’s largest trading partner today is actually China, but that is the beauty of the Order. South Korea can trade with whomever is willing to buy their goods. For now. It all relies on American guarantees that seem to be crumbling.

That’s the numbers and dollars argument. In strategic terms things are far more complicated.

South Korea sits among Japan, China and North Korea and has adversarial relationships with all of them. The only reason South Korea even exists is because American troops ward off the most salient threat to the north, while preventing Japanese and Chinese imperialism. That security guarantee is not easy to maintain:

North Korea believes the best way to beat a Grand Master at chess is to never let them make a first move. Infamously, North Korea has aimed an untold number of pieces of artillery at Seoul, just across the border and home to nearly half the country’s population. In a real war, by the time the first shell lands in Seoul, tens of thousands of others would already be airborne. But this is only one of its many preparations. Turns out that if you dedicate a country’s entire attention span for 70 years to a seething hatred of what’s on the other side, you can accomplish some pretty impressive things, up to and including an effective nuclear deterrent.

South Korea decided to focus instead on ships and trains and petrochemicals and white goods and electronics and computers and cellular tech. South Korea may be able to prevail against North Korea in a knock-down, drag-out fight, but there is no way the South Koreans can K-Pop themselves out of hideous infrastructure damage and mass civilian casualties. Only American forces – massed in and near Seoul and the DMZ – can provide the hitting power to at least partially preempt and mitigate such carnage.

That’s just North Korea. The South Koreans, accurately reading their history and geography, view China and Japan as even more significant security threats. Japan outpopulates South Korea by well over 2:1, China by over 20:1. The navies of either country could wipe the Korean navy from the seas in days. To the south, east, and west, South Korea is surrounded by waters that either Japan or China could dominate given the right push. South Korea’s second city, Busan, is in a particularly vulnerable spot separated from mainland Japan via the Korea Strait, barely more than 100 miles across. Inchon, the western extremity of the Seoul metro region, isn’t much further away from China. And of course, Korean trade links to the wider world are impossible to maintain without both Japanese and Chinese quiescence.

For decades this has all been moot. South Korea, Japan and China were all members of the U.S.-led global Order. The U.S. Navy has ensured peaceful seas and ample trade. Oil, LNG and raw materials flow in, finished goods flow out, and Korea is one of the world’s largest transshipment and manufacturing nodes. So long as the Americans remain involved, Korea’s economic and security problems remain purely theoretical.

But the Americans – left, right and center – want to slim down America’s global position. The Korean deployment is America’s third-largest (after Japan and Germany), and the one that is by far in the trickiest and riskiest strategic position. And that is what keeps Moon’s administration up at night. The Americans are losing interest, and there is no version of a post-Order world where South Korea continues to survive at all – much less as a wealthy, trading nation – unless Seoul can obtain a powerful, dedicated ally.

So it was all Moon could to do cave in trade talks with the American administration on everything. And not just in trade negotiations. The Trump administration is insisting that South Korea compensate the United States for ongoing troop commitments to the tune of at least $5 billion annually. That’s a lot for a country Korea’s size, but honestly it’s a bargain considering what 26,000 American troops can do when they are suitably motivated.

Is caving to the U.S. on trade and defense reimbursement enough to keep the American troops in-country in this post-Order world? No clue. But Moon, correctly, concluded that without conceding to American terms there was no chance whatsoever.

That’s hardly the end of the story.

First, in the post-Order world, getting a deal with the Americans on trade or troops or whatever is not the end of the negotiations. It is the beginning. Because the Americans no longer have a global strategy or see a national interest in play aside from getting some better market access, keeping the Americans interested requires giving in not once, but every single time they ask for anything.

If the Yanks are displeased with the Koreans’ response, they will leave and there is no guarantee they can be induced to come back. It’s bad business to allow a homeowner that refused to pay for fire insurance to do so after the house catches fire. The Americans can – and will – watch the neighborhood burn. They won’t feel good about it, but they won’t feel all that bad about it either.

Second, the one item in the neighborhood the Americans really do care about – the North Korean nuclear program – is one that they may have found a way to muddle through. The handshake deal Donald Trump appears to have reached with North Korean dictator Kim Jung Un is that the reclusive country can keep their nuclear program so long as they abandon their ICBM program. The Trump administration seems to think it can live with a localized NorK nuclear threat so long as Pyongyang cannot nuke Seattle and beyond. What North Korea “projectiles” that have been launched since the first Trump-Kim summit are of the decidedly short-range sort, and there are at least some indications that North Korea dismantled a significant portion of their long-range missile testing facilities.

In a world where the Americans are blasé about South Korean issues, in a world where Americans no longer consider North Korea a direct threat, the Americans need a lot fewer forces in-theater. That’s great for the Americans…and the ultimate statement of no-interest in South Korea. The Trump administration appears to have handed off the entire North Korean issue to the local powers. And since North Korea already has the capacity to drop a nuke anywhere in South Korea or Japan or in the parts of China that are home to over 80% of the population, the entire region now has to deal with something that has stymied ten American administrations.

Finally, the Koreans have a hideously distasteful choice to make. They must prepare for a world without the Americans and that means they must find a new security guarantor. The menu of options are not encouraging.

While China is currently Korea’s largest trading partner, China is just as dependent upon the Americans as the Koreans for maintaining its economy and security. With the Americans checked out, China’s future will likely mirror its past; that of a broken, impoverished nation completely unable to maintain its own security or even feed its own people. Culturally, China might be Korea’s closest relation, but a long-term partnership will only bring Korea destitution.

In comparison, the future of Japan is bright. It already maintains the world’s second-most-powerful expeditionary navy and is one of the very few countries that has a chance to maintain its supply lines without active American assistance. The “smart” play for the Koreans would be to find a means of inserting themselves into the Japanese sphere of influence. Unfortunately, the politics of such insertion are wretched. The Koreans charge the Japanese with carrying out a cultural genocide during Japan’s 1905-1945 occupation of the Korean peninsula and, so far, have been unwilling to let the past go. Even then, letting that past go would only be the first step to entering Tokyo’s world. Much kowtowing by the proud Koreans would be required.

The third option is for South Korea to become its own defender. That is impossible with conventional weapons, but it just might work if the Koreans build a few dozen nukes to hold everyone at bay. Technically, the obstacles to South Korea becoming a nuclear power are minimal; it could be done in a few months at most. Operationally, however, it would turn South Korea into a regional pariah of the North Korean type and cut the country off from not just global trade, but regional trade (although post-Order that is unlikely to cause the same problems, as much as it is frowned upon today).

Partnership with China might be somewhat comfortable, but it would end with a starvation diet. Partnership with Japan might preserve the Koreans’ standard of living, but it would be politically toxic. Going nuclear might preserve independence, but it would force mass deindustrialization.

For the South Koreans, the future is a land of fear and want.

But that’s not the case for everyone…

[cdrom]

GOODBYE TO THE MIDDLE EAST

By Peter Zeihan

This day was always going to happen.

On October 7, U.S. President Donald Trump announced a partial withdrawal of U.S. forces from Syria. Soon after, Turkish forces began moving south across the border to strike Kurdish forces which had been until extremely recently under American protection. Two days later the partial American withdrawal was upgraded to a full evacuation of all forces.

Wailing and gnashing of teeth across the American political spectrum quickly erupted, with many condemning the tactical and political aspects of the president’s decision. I’m of mixed minds:

On the one hand, the Kurds – whether in Syria or Iraq – have been America’s only reliable regional allies since America’s first major confrontation with Iraq back in the early 1990s. When we have asked, they have answered. Every single time. In many cases U.S. forces didn’t even do the heavy lifting, but instead relegated themselves to providing intelligence and materiel support. Without the Kurds’ assistance the overthrow of Saddam Hussein would have been far nastier affair, post-Saddam Iraq would have been far less stable, the defanging of ISIS and the destruction of the ISIS caliphate would not have happened. In Syria in specific, the Kurds habitually provided at least five times the forces the Americans did.

On the other hand, the United States was always going to leave Syria. If the Americans were unwilling to commit 100,000 troops to the overthrow of Syria’s Assad government and its subsequent forcible reconstruction, then there was little reason to become involved in a decades-long, grinding multi-sided civil war.

The primary reason American forces remain in Syria at this point is to limit Iranian penetration. That battle was lost six years ago when then-President Obama allowed the Syrian government to cross Obama’s own red line on the use of chemical weapons against Syrian civilians. Obama made it crystal clear that any U.S. military action would be small scale, focused on Special Operations Forces, and largely dedicated to backing up the Syrian Kurds. Whether under Obama or Trump, an American withdrawal has always been inevitable. It’s just taken seven years of Syrian-Russian-Iranian victories on the battlefield and the large-scale dismemberment of the ISIS Caliphate to make it imminent.

Aside from the Iranian vector, American national and strategic interests in Syria are utterly nonexistent. Syria – even backed up by Iran – is a military pigmy that Israel could easily shatter. If Jerusalem really wanted to, it could roll into Damascus in a long weekend. (Sticking around, of course, would be a barrel of shiv-wielding monkeys.) American interests in Lebanon are less than American interests in Syria. Jordan has been a de facto Israeli client state for years. And that is quite literally all she wrote.

The far more important fact – comfortable or uncomfortable depending upon your view – is that the evolving American view of Syria is really little more than a microcosm of an evolving American view of the Middle East writ large. American troop deployments throughout the region have been plunging for a decade and are now down to about one-tenth of their peak. America now has more troops in Afghanistan than the rest of the region combined, and that deployment is well on its way to a complete phase out. CENTCOM HQ in Qatar will almost certainly be closed soon (you don’t need a forward command center if there’s nothing to command). The Iraq advisory force is leaving. Kuwait, once the launchpad for multiple wars, has been reduced to lilypad status. The Turks are certain to eject U.S. forces from the Incirlik base within a year.

Within two years the total regional deployment figure will be in the low-to-mid single digits of thousands, at most one-fifth of what is there today.


That sounds shocking and, considering it wasn’t that long ago that the Americans had a quarter-million troops in-region, it kind of is. But take a step back and look – really look – at the region, and it actually isn’t all that mind blowing.

Iraq is falling apart. Mass unrest is now entering its third week and if it continues along its current trajectory it risks bringing down the government. That isn’t “bring down the government” European-style which would mean new elections, but instead “bring down the government” in the post-Arab Spring style, which means an extended period of mass chaos, violence, and very likely a return to some degree of civil war. While it is true that Iraq has experienced cyclical public unrest since 2015, never has the regional climate been more tenuous, with Iran, Turkey, and Saudi Arabia openly involved in regional conflicts – meaning the normal balancing act between Iraq’s Shi’ites, Kurds and Sunnis (and their foreign backers) is over. Stabilizing this mess would require the Americans (re)injecting 100,000 troops. Far more likely, the Americans will remove the five-ish thousand troops which remain, taking the last thin reed of stability with them.

Iran is the regional bugaboo that most Americans fear. Since the end of the Clinton Administration American policy has held quixotic goals: we want the Iranian government gone, but we don’t want to use U.S. forces to do it. Under Clinton that meant the dual containment. Under W Bush it meant a forward blocking position in Iraq. Under Obama it meant trying to set up a regional balance of power. Under Trump it means economic sanctions backed by exactly zero military force.

None of it has worked. None of it was ever going to work. The Shia clergy is the Iranian political elite, giving the Iranians the deepest bench of political leadership in the region. You’d literally have to kill 10,000 mullahs to induce a shift. Nor is Iran revolution-prone. The first task of the country’s infantry-heavy military is to occupy Iran to ensure domestic unity. There are solid reasons why Iran’s 2009 “Green Revolution” was over in under a month.

Nor is knocking Iran off feasible. Iran is a mountain nation, granting it a defensibility which partially obviates the sort of air and tank warfare for which the Americans are renown. Moreover, Iran’s population in 2019 is over triple that of Iraq in 2003. Overthrowing the government would necessitate a force over twice as powerful as the one that took down Saddam’s Iraq, followed by an occupation force three times as large. No thank you. The U.S. military and public has exactly zero interest in putting 400,000 troops back into the Middle East to fight another grinding war of occupation.

What about America’s “allies”?


The Persian Gulf
Qatar is the perfect example of a friends-like-these ally. In per capita terms it is almost certainly the top financial supporter of Islamic terror groups in the world (I say almost certainly since Qatar doesn’t disclose their terror accounting). On the nicer end Qatar fundees include the Muslim Brotherhood and Hamas, ramping up to more knifey groups like al Qaeda and ISIS. Doha also has a nuanced-to-positive relationship with Iran for various reasons, not the least of which is its gas wealth stems from the shared North Dome/South Pars gas field. Qatar has hosted the operational headquarters for most U.S. warfighting in the region for the past two decades despite being a place that is in part responsible for the Americans needing to do the warfighting in the first place.

That’s nothing compared to Saudi Arabia. A half century from now when today’s headlines are parsed for the history books, the world will remember Saudi Arabia’s current de facto leader – Crown Prince Mohammad bin Salman (MBS) – as one of the evilest individuals in modern history.

The sheer volume of public support, money, arms and ideological cover given to religiously-tinted fighters – that’s jihadis or terrorists based on your politics – by various Saudi citizens and royals alike has boomed in step with the Kingdom’s regional ambitions. (Qataris have been implicated in plenty of terrorist financing schemes, but fewer than a relative handful have taken up arms themselves; 9/11 shows that the same cannot be said for Saudis.) Saudi Arabia habitually backs the most extreme, violent interpretation of Islam and regularly exports it far and wide at the end of a gun or leading wave of an explosion.

MBS has taken things further. Once he realized the Americans were serious about leaving the region, he shifted tact and instead of simply seeking destabilization of his enemies, he now seeks to burn down the pillars of civilization across the entire field of competition. Much of the Sunni Islamic extremism in Syria can be laid at his feet, as can much of the ongoing violence and chaos in Iraq and Afghanistan. Nor are MBS’ actions limited to the battlefield. About a year ago on MBS’ orders, a hit squad suffocated and dismembered a Washington Post columnist in Istanbul, transported his remains to the Saudi consul general’s house where they were incinerated in a custom-built “barbeque pit” just before the consul hosted a massive party that utilized the same pit to help degrade any lingering forensic evidence.

MBS is not a friend, nor is Saudi Arabia an ally. America used to have to put up with this sort of activity from the Saudis during the Cold War because without Saudi oil, the global trading system would have collapsed and taken the American alliance network with it. Courtesy of America’s shale revolution, those days are over.

Rhetoric aside, even President Trump doesn’t see the bilateral relationship as all that close. Last month the Iranians launched a drone and missile attack on Saudi energy facilities, taking some 5 million barrels of daily output offline. Under normal circumstances that would have prompted massive American military retaliation. Instead, Trump’s response to MBS’ call for assistance was something along the lines of, “sorry, I have a fundraiser.” For those of you who think oil is a globalized commodity and so the U.S. remains vulnerable to price swings, think again. The president has preexisting authority to limit U.S. crude exports. Should global prices get too crazy, an executive order can keep U.S. shale output at home, splitting the North American energy market off from the global market. The Saudi headache is now optional.

Even Israel isn’t what it once was. Within the next decade the country’s mostly-Palestinian Muslim population will become the majority, although about 90 percent of them have no political rights in the Israeli system. The two-state process that sought to generate a country for the Palestinians has been dead for years and we have already seen the Israelis implement a very successful separation plan more than a bit reminiscent of South Africa’s Apartheid.

In fact, Israeli ultranationalists in private conversations even welcome the comparison to Apartheid, because they think Apartheid was gentler than what modern Israel has achieved. Under Apartheid, the black South Africans could travel to white-controlled zones for work. Under the Israeli program the Palestinians languish behind 35-foot-tall concrete walls in what are little more than open air prisons with the Israelis controlling Palestinian access to power, food and water. As the thinking goes, who cares if this radicalizes the Palestinians if they are radicalized on the other side of a wall. Arguably, places like Tunisia or Pakistan are now “more equal” democracies than Israel. (Ugh, I’m going to get so much hate mail for these last two paragraphs.)

Turkey and the United States have been pulling apart for three decades. In a world where Soviet containment is the end-all be-all, the alliance was everything. Remove the Soviet threat, however, and the Turks have interests in the Balkans, Caucasus, Persia, Mesopotamia and the Levant that have next to nothing to do with American interests. Turkey is reasserting itself as a major regional power, and since the American military position in places like northern Iraq and Syria are largely dependent upon supply routes through Turkey, there is no long-term American strategic position in these regions without express Turkish assistance. That assistance has been removed, so the Americans – regardless of domestic policy preferences – have no choice but to leave.

That just leaves the Kurds, a mostly mountain people. That makes them a fractious bunch whose fractured leadership has traditionally been willing to fight to the last Kurd to determine who is in command, while enabling more homogenous ethno-sectarian groups on all sides to easily demonize them, oppress them, and play them off one another. They are the largest ethno-sectarian group in the world without a country, and their entire land-locked population is split among Turkey, Iraq, Iran and Syria. For those familiar with West Virginia, Switzerland or Chechnya, squabbling oppressed mountain people make great fighters, and since they lack a country they have little to lose by allying with, well, anyone. No wonder the Americans depended on them so much.

But the Kurdish dream of independence was never going to be more than a dream. Landlocked and partitioned, the only way a real Kurdistan could emerge would be if one of the four countries which house Kurds actively sponsor it. That’s just not in the cards. The Kurds are a lost cause; They were never more than an ally of the moment.

They are hardly the only ally of the moment the Americans have abandoned. At the end of the Vietnam War the Americans left the Hmong – another fractious mountain people who allied with the Americans – in the lurch. Their massacre at the hands of the Vietnamese is the stuff of legend. Something similar is about to happen to the Syrian Kurds at the hands of the Turks. The biggest difference between the two groups is there are too many Kurds to resettle them to Minnesota.


So why all the noise back in the United States? Aren’t the Americans exhausted with the Middle East? Shouldn’t they be celebrating?

In part it is because the extreme unpopularity of Donald Trump means any decision he makes is going to be parsed for negative sound bites, and there is no end of hypocrisy in play. My personal favorite are the former Obama team talking heads hitting the airwaves who only now find Syria’s murder and mayhem worthy of American military action.

In part it is because abandoning an ally is bad form, particularly if you think the U.S. should play a role in preventing genocide, promoting human rights, stymieing traditional rivals, or keeping a hand on the throat of the global economy. Even if you think none of this is the U.S.’ business, you’ve got to admit a lot of stuff happens in the region, and having a finger in the pot does prove useful from time to time. In the grand scheme of things, 2000 troops in Syria isn’t that big of a deal.

A deeper (and IMO far more substantive) issue is the fate of America’s national security professionals. Trump initially liked the generals because of their “yes sir” and “can do” attitudes. After all, civilian supremacy means the president is in charge, you do what you are told and if you have a problem with the president’s policy you don’t undermine him, you leave. Well, two years on, pretty much all of them have left.

The break has become so extreme that Trump now considers national security-minded Republicans to be greater ideological foes than the Democrats. One of the big outcomes of the 2018 mid-term elections was the wholesale ejection of that faction from Congress as well as from the Republican Party leadership itself. For many of this group, Syria is the prefect example of poor leadership: Trump’s policy not only betrays a loyal ally, it abdicates an American role throughout an entire region. We can debate the pros and cons of that abdication, but for folks in the military, intelligence and diplomatic communities this is a step that unwinds a half-century of painstaking military, intelligence and diplomatic efforts paid for with untold resources and blood. You don’t have to view the world their way to understand why they’re pissed.

That doesn’t change the simple fact that if not for the seemingly bottomless volume of TrumpDrama in America these days, most Americans would probably be sighing in relief right now. If the Americans really don’t have an interest in maintaining a global Order, then the Middle East is barren of American national interests and it can now firmly be someone else’s problem. It isn’t nice. It isn’t responsible. It won’t be pretty. But that doesn’t mean it isn’t true.

Of course the road from here to there is neither straight nor level. There are still plenty of land-mines to dodge:

The evacuation of U.S. forces has been ordered, but it has not been completed. That evacuation has to proceed through the Turkish advance and through Turkey. Things are already looking dicey. Shortly after the initial withdrawal order some Turkish forces apparently (intentionally) dropped some artillery near remaining American outposts, forcing the remaining Americans to scramble lest they find themselves in a shooting war with the Turks. The U.S.-Turkish alliance is over, but based on how events unfold in the next couple of weeks a U.S.-Turkish hostility may emerge.

The Kurds of Iraq and Syria are both armed and trained and experienced and on the edge of statehood. Just because they (especially the Syrian Kurds) are doomed to fail does not mean they are doomed to fail today. How they fight back and/or seek alignment with Syria and/or Iran and/or Russia will determine the region’s next set of battle lines. This matters the most for the Turks. The Turks are out of practice, having not fought a meaningful military campaign since World War I. If they perform badly it will reshape their regional ambitions. If they perform well there are lots of regional players – Armenia, Russia, Iran and Saudi Arabia come to mind – who will be extremely worried.

Of those, by far the most important one is Russia. Like American forces, Russian forces can really only operate in Syria with Turkish acquiescence. With the Americans gone and the Turks ramping up, it’s probably the Russians’ turn to GTFO of the region. If they don’t, a direct Turkish-Russian clash that leaves the Russians on the wrong side of all their backup will ensue. The climbdown and/or massacre would be globally humiliating.

One smallish bit of good news is that the ISIS Caliphate is definitely gone, and the ISIS militant movement is broken and on the run. Many have opined that without the American-Kurdish alliance ISIS in any form would have never been defeated. That is true. But that’s not the same as saying that ISIS is doomed to rebound. Historically, the territory that comprises eastern Syria and western Iraq – the ISIS heartland – has been on the bleeding edge of useless. Rain doesn’t happen and the only crops grown are those in the Euphrates floodplain. In most places that band is less than 20 miles across. Civilizing this region is wildly expensive, and so the powers of the region tend to ignore it…until some wackadoo group like ISIS starts causing problems. Then one of the region’s powers invades and burns everything to the ground. From 2003 until 2018 the region’s powers were non-functional: Iraq and Syria had civil wars, while Turkey was gun-shy. The fact that the ISIS Caliphate lasted as long as it did was testament to how abnormal the region had become. Well, Turkey is now invading. It will burn everything to the ground. The atrocities the world is about to pin on the Turks mean we are returning to something a lot more normal.

Europe is… screwed. It is one thing to have to deal with a prickly Turkey who stays at home. It is quite another to have Europe’s largest land army deploying in force in a way that most Europeans have publicly condemned. With the exception of the French, no European power has the capacity of independent power projection to the region. And now Turkey is publicly threatening to herd millions of Syrian refugees to Europe’s doorstep unless the Europeans shut up about Turkey’s new military campaign. After the United States, Turkey ties with Russia for being Europe’s most important partner. Expect those ties to burn in the months to come.

Finally, there’s Saudi Arabia. In the aftermath of the Iranian attack on Saudi oil facilities, the Saudis have paid the Americans to deploy 3,000 troops to the Kingdom. Two things from this: First, sooner or later the Americans will internalize just how messed up the Saudis are and will evacuate everything at once, precipitating a whole new regional crisis. Second, the Americans going pseudo-mercenary is about to be the new normal. If you cannot provide something shiny to bait the Americans into your region (cash is shiny), then you are on your own. That development will reverberate far beyond the Persian Gulf region.

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WHY SO NEGATIVE?

By Peter Zeihan

Bonds are sliding toward negative territory across the developed world. Among the largest industrialized economies, only the United States is offering over 2% yields on 30-year bonds. And it’s not just the global economic pillars pushing rates down, but even in places like Poland that stretch the definition of “developed” market. Or Italy, which push the boundaries of concepts like “balanced budgets.” And even in Greece, which stretches the definition of… pretty much damn near everything.

What gives?

First, the technical answer.

Part of the shift toward negative territory is quantitative easing (QE). QE is, in essence, the expansion of monetary supply above and beyond what the economy says it needs, and then using the newly “printed” currency to purchase various bonds. This artificially drives down borrowing costs of all kinds and inflates financial markets. The idea behind it is that cheaper borrowing costs and an inflated finance market will boost business and consumer confidence and from that, spending — thereby boosting demand in the real economy.

Between the American, European and Japanese programs, the equivalent of some $15 trillion has been dumped onto markets through QE since the 2007 financial crisis. One reason for the dollar’s strength under Trump is that the United States’ QE program largely came to an end several years ago and the US has reverted to using more traditional monetary tools. In contrast, Europe has been at near-zero interest rates for a decade (and Japan for twice as long), leaving QE or things like it as their only means of using monetary policy to stimulate economic activity. The Eurozone, after a brief hiatus, just restarted QE again a few weeks ago. Japan never really stopped.

It all adds up to a lot of money chasing limited investment opportunities. That boosts stock and property markets, while the surge into bonds pushes yields negative.

Second, we have the traditional answer.

There is a whiff of instability surrounding everything. Germany is undoubtedly in recession and will drag much of the Eurozone down with it. Japan hasn’t seen reliable, sustained economic growth since the 1980s. The American-Chinese trade war has collapsed global confidence in the Chinese economy while the HK protests have collapsed Beijing’s soft power. Meanwhile, it seems that nearly every country in the Middle East is facing some degree of crisis. Even if you’re an aficionado of my brand of Kool-Aid and believe that the US is largely resistant to global upheaval, “resistant” is not synonymous with “immune.” While I still do not see an American recession on the horizon, the American economy has most certainly slowed.

Recessions — even fears of recessions — have consequences for capital. Spooked investors tend to push money into assets backed by either long-term income streams, government guarantees, or both. Fewer stocks, more bonds. High bond demand pushes yields down towards, to, and through zero.

It isn’t so much that either answer is wrong. In fact, they are dead on. But they are not the whole picture. There’s something else going on. Something much bigger than QE and much more structural than the normal ebb and flow of economic cycles.

It’s demography.

People act differently depending on their age. There’s aren’t a lot of retirees at spin class, nor do college students frequent buffets that specialize in creamed vegetable products. In a “normal” economy there’s a set balance of roughly four children to three young adults to two mature adults to one revered elder. So long as that proportion holds the economic system has some somewhat straightforward characteristics: young workers spend and borrow, mature workers invest, while retirees shift their financial holdings into decidedly less interesting and volatile holdings. Fewer stocks — more t-bills and cash.

The problem, if “problem” is the correct word, is that the onset of the Second Industrial Revolution roughly 140 years ago both pushed people off of the farm and into urban environments while vastly, dramatically increasing lifespans. As the decades rolled by our definition of “normal” has shifted. Families became smaller and smaller until most of the developed world slipped below the replacement level of 2.1 children per family. Among the developing world the process started latter, but the downward shift in fertility has been two and three times as fast. The partial exception? The United States. Its wealth of arable land has made it an industrialized country that urbanized slowly. The result? China’s population is already older on average than America’s, while Indonesia and Brazil’s will surpass America’s average ages in about a quarter-century.

The problem (and this time “problem” is certainly the correct word) is that the demographic shift has altered the structure of capital. From roughly 1970 to 2010 the decline in birth rates steadily increased the proportion of mature workers in the population relative to everyone else. It is this block that saves the most both in relative terms and in aggregate. Those savings are the bulk of the world’s working capital. Left unchecked, the growth of the mature worker cohort will eventually oversupply the world with capital.

Well, “eventually” is here. Right now, the population of mature workers as a proportion of global population is at its peak. As this cohort inexorably edges toward retirement, they are shifting their portfolios into less risky assets. Less venture capital, more bonds. The veritable tsunami of capital into the bond space has pushed the safest of those bonds — government debt — firmly into the negative.

Don’t get used to it.

The biggest thing that separates mature works from retirees is time, and in 2022 the majority of the world’s Baby Boomer cadre will have aged into mass retirement. Denied much in the realm of fresh income, the incoming tsunami of government-bond-capital won’t so much recede as evaporate.

Without those inflows, capital costs will — must — rise.

That’s the best-case scenario. It assumes no disruptions. No breaks in global continuity. A rapid climbdown from the trade war. That Italy doesn’t implode. That the Eurozone holds together. That the Brexit debacle calms down. That the Japanese economy can manage its aging and shrinking worker pool via automation and robotics. That the Chinese political center holds. That the broad swathe of the developing world can somehow double their standards of living in under a decade without sacrificing family size. That there’s no shock to energy markets. That the economic contortions of mass aging somehow magically avoid touching banking and finance. That the Americans elect a mild-mannered accountant to be their next president.

Anything that injures either globalization in general or employment and wealth levels specifically immediately imposes burdens, both in terms of raising financing costs directly and preventing capital created in one region from pouring into another. Fragmenting global capital markets will, all by itself, turn regions that have recently become used to ultracheap capital (sub-Saharan Africa, Brazil, and India come to mind) once again into capital deserts.

That’s still a pretty good scenario.

It assumes the global system while beaten and bloodied ultimately holds. Historically speaking, the downturns an instability we’ve experienced to date — and this includes the Great Recession — are pretty minor stuff. The global Order is what has enabled many countries to exist in the first place, and if you cannot exist you cannot issue bonds. A heartily inconvenient fact of economic history is that before the Order (that is, 1946), it was pretty common for markets to not simply fail but go to zero.

The first time that happens the financial markets will come face-to-face with a level of risk and risk pricing that no one alive has any expertise in managing.

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The Shocking Paper Predicting the End of Democracy

https://www.politico.com/magazine/story/2019/09/08/shawn-rosenberg-democracy-228045

Human brains aren’t built for self-rule, says Shawn Rosenberg. That’s more evident than ever.

By RICK SHENKMAN September 08, 2019

Everything was unfolding as it usually does. The academics who gathered in Lisbon this summer for the International Society of Political Psychologists’ annual meeting had been politely listening for four days, nodding along as their peers took to the podium and delivered papers on everything from the explosion in conspiracy theories to the rise of authoritarianism.

Then, the mood changed. As one of the lions of the profession, 68-year-old Shawn Rosenberg, began delivering his paper, people in the crowd of about a hundred started shifting in their seats. They loudly whispered objections to their friends. Three women seated next to me near the back row grew so loud and heated I had difficulty hearing for a moment what Rosenberg was saying.


What caused the stir? Rosenberg, a professor at UC Irvine, was challenging a core assumption about America and the West. His theory? Democracy is devouring itself—his phrase — and it won’t last.

As much as President Donald Trump’s liberal critics might want to lay America’s ills at his door, Rosenberg says the president is not the cause of democracy’s fall—even if Trump’s successful anti-immigrant populist campaign may have been a symptom of democracy’s decline.

We’re to blame, said Rosenberg. As in “we the people.”

Democracy is hard work. And as society’s “elites”—experts and public figures who help those around them navigate the heavy responsibilities that come with self-rule—have increasingly been sidelined, citizens have proved ill equipped cognitively and emotionally to run a well-functioning democracy. As a consequence, the center has collapsed and millions of frustrated and angst-filled voters have turned in desperation to right-wing populists.

His prediction? “In well-established democracies like the United States, democratic governance will continue its inexorable decline and will eventually fail.”

***

The last half of the 20th century was the golden age of democracy. In 1945, according to one survey, there were just 12 democracies in the entire world. By the end of the century there were 87. But then came the great reversal: In the second decade of the 21st century, the shift to democracy rather suddenly and ominously stopped—and reversed.

Right-wing populist politicians have taken power or threatened to in Poland, Hungary, France, Britain, Italy, Brazil and the United States. As Rosenberg notes, “by some metrics, the right wing populist share of the popular vote in Europe overall has more than tripled from 4% in 1998 to approximately 13% in 2018.” In Germany, the right-wing populist vote increased even after the end of the Great Recession and after an influx of immigrants entering the country subsided.

A brief three decades after some had heralded the “end of history” it’s possible that it’s democracy that’s nearing the end. And it’s not just populist rabble-rousers who are saying this. So is one of the establishment’s pioneer social scientists, who’s daring to actually predict the end of democracy as we know it.

Rosenberg, who earned degrees at Yale, Oxford and Harvard, may be the social scientist for our time if events play out as he suggests they will. His theory is that over the next few decades, the number of large Western-style democracies around the globe will continue to shrink, and those that remain will become shells of themselves. Taking democracy’s place, Rosenberg says, will be right-wing populist governments that offer voters simple answers to complicated questions.

And therein lies the core of his argument: Democracy is hard work and requires a lot from those who participate in it. It requires people to respect those with different views from theirs and people who don’t look like them. It asks citizens to be able to sift through large amounts of information and process the good from the bad, the true from the false. It requires thoughtfulness, discipline and logic.

Unfortunately, evolution did not favor the exercise of these qualities in the context of a modern mass democracy. Citing reams of psychological research, findings that by now have become more or less familiar, Rosenberg makes his case that human beings don’t think straight. Biases of various kinds skew our brains at the most fundamental level. For example, racism is easily triggered unconsciously in whites by a picture of a black man wearing a hoodie. We discount evidence when it doesn’t square up with our goals while we embrace information that confirms our biases. Sometimes hearing we’re wrong makes us double down. And so on and so forth.

Our brains, says Rosenberg, are proving fatal to modern democracy. Humans just aren’t built for it.

People have been saying for two millennia that democracy is unworkable, going back to Plato. The Founding Fathers were sufficiently worried that they left only one half of one branch of the federal government in the hands of the people. And yet for two centuries democracy in America more or less proceeded apace without blowing itself up.

So why is Rosenberg, who made his name back in the 1980s with a study that disturbingly showed that many voters select candidates on the basis of their looks, predicting the end of democracy now?

He has concluded that the reason for right-wing populists’ recent success is that “elites” are losing control of the institutions that have traditionally saved people from their most undemocratic impulses. When people are left to make political decisions on their own they drift toward the simple solutions right-wing populists worldwide offer: a deadly mix of xenophobia, racism and authoritarianism.

The elites, as Rosenberg defines them, are the people holding power at the top of the economic, political and intellectual pyramid who have “the motivation to support democratic culture and institutions and the power to do so effectively.” In their roles as senators, journalists, professors, judges and government administrators, to name a few, the elites have traditionally held sway over public discourse and U.S. institutions—and have in that role helped the populace understand the importance democratic values. But today that is changing. Thanks to social media and new technologies, anyone with access to the Internet can publish a blog and garner attention for their cause—even if it’s rooted in conspiracy and is based on a false claim, like the lie that Hillary Clinton was running a child sex ring from the basement of a Washington D.C. pizza parlor, which ended in a shooting.

While the elites formerly might have successfully squashed conspiracy theories and called out populists for their inconsistencies, today fewer and fewer citizens take the elites seriously. Now that people get their news from social media rather than from established newspapers or the old three TV news networks (ABC, CBS and NBC), fake news proliferates. It’s surmised that 10 million people saw on Facebook the false claim that Pope Francis came out in favor of Trump’s election in 2016. Living in a news bubble of their own making many undoubtedly believed it. (This was the most-shared news story on Facebook in the three months leading up to the 2016 election, researchers report.)

The irony is that more democracy—ushered in by social media and the Internet, where information flows more freely than ever before—is what has unmoored our politics, and is leading us towards authoritarianism. Rosenberg argues that the elites have traditionally prevented society from becoming a totally unfettered democracy; their “oligarchic ‘democratic’ authority” or “democratic control” has until now kept the authoritarian impulses of the populace in check.

Compared with the harsh demands made by democracy, which requires a tolerance for compromise and diversity, right-wing populism is like cotton candy. Whereas democracy requires us to accept the fact that we have to share our country with people who think and look differently than we do, right-wing populism offers a quick sugar high. Forget political correctness. You can feel exactly the way you really want about people who belong to other tribes.

Right-wing populists don’t have to make much sense. They can simultaneously blame immigrants for taking jobs away from Americans while claiming that these same people are lazy layabouts sponging off welfare. All the populist followers care is that they now have an enemy to blame for their feelings of ennui.

And unlike democracy, which makes many demands, the populists make just one. They insist that people be loyal. Loyalty entails surrendering to the populist nationalist vision. But this is less a burden than an advantage. It’s easier to pledge allegiance to an authoritarian leader than to do the hard work of thinking for yourself demanded by democracy.

“In sum, the majority of Americans are generally unable to understand or value democratic culture, institutions, practices or citizenship in the manner required,” Rosenberg has concluded. “To the degree to which they are required to do so, they will interpret what is demanded of them in distorting and inadequate ways. As a result they will interact and communicate in ways that undermine the functioning of democratic institutions and the meaning of democratic practices and values.”

I should clarify that the loud whispers in the crowd in Lisbon weren’t a response to Rosenberg’s pessimism. This was after all a meeting of political psychologists—a group who focus on flaws in voters’ thinking and the violation of democratic norms. At the conference Ariel Malka reported evidence that conservatives are increasingly open to authoritarianism. Brian Shaffer related statistics showing that since Trump’s election teachers have noted a rise in bullying. Andreas Zick observed that racist crimes shot up dramatically in Germany after a million immigrants were allowed in.

What stirred the crowd was that Rosenberg has gone beyond pessimism into outright defeatism. What riled the crowd was that he’s seemingly embraced a kind of reverence for elitism no longer fashionable in the academy. When challenged on this front, he quickly insisted he didn’t mean to exempt himself from the claim that people suffer from cognitive and emotional limitations. He conceded that the psychological research shows everybody’s irrational, professors included! But it was unclear that he convinced the members of the audience he really meant it. And they apparently found this discomforting.

There were less discomforting moments in Lisbon. The convention gave an award to George Marcus, one of the founders of the discipline, who has dedicated his career to the optimistic theory that human beings by nature readjust their ideas to match the world as it is and not as they’d like it to be—just as democracy requires.

But this isn’t a moment for optimism, is it? What is happening around the world shows that the far-right is on the march. And when it comes to the U.S., the problem might be larger than one man. Liberals have been praying for the end of the Trump presidency, but if Rosenberg is right, democracy will remain under threat no matter who is in power.

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Inevitability and Eternity
Pawel Machcewicz

The Road to Unfreedom: Russia, Europe, America
by Timothy Snyder

Pawel Machcewicz is Professor at the Institute of Political Studies of the Polish Academy of Sciences.

Article
BOOK REVIEW
Topic
POLITICAL SCIENCE
Issue
VOLUME 4, ISSUE 3
MARCH 2019
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THUCYDIDES, the ancient Greek historian whose account of the Peloponnesian War marks the beginning of modern historiography, can be considered the patron of Timothy Snyder’s latest book. In recounting the conflict between the Delian and Peloponnesian leagues, Thucydides rejected the lies and propaganda disseminated by the leaders of both sides, seeking instead to discern and describe their real motives. Snyder has the same objectives in mind. Political and media manipulation, he believes, has obscured our understanding of the present time. In The Road to Unfreedom, Snyder seeks “patterns and concepts that can help us make sense of our own time,” and to “define the political problems of the present, and to dispel some of the myths that enshroud them.”1

Snyder, an American historian and professor at Yale, has become well-known for his commentary on contemporary politics, striving not only to divine meaning in the complications and chaos of the present, but also to explain the historical roots of current phenomena. This role is, in fact, a relatively recent development. Snyder’s earlier books were concerned with more distant times. First published in 1998, Nationalism, Marxism, and Modern Central Europe explored the life and work of Kazimierz Kelles-Krauz, a Polish philosopher and sociologist active during the late nineteenth and early twentieth centuries.2 The Reconstruction of Nations examined the emergence of the Central and Eastern European nations, beginning in the early modern period.3 Bloodlands, Snyder’s work on the Nazi and Soviet genocides of the 1930s and 1940s, was widely acclaimed for the scale and depth of its analysis, the incorporation of new source material in countless languages, and the author’s literary talent.4 Its successor, Black Earth, was a step towards the present day.5 Although primarily concerned with the Holocaust, Black Earth concludes with a warning that competition for food and resources arising from ecological catastrophes could see genocide occur once again.

But, above all else, it was the election of Donald Trump in 2016 that refocused Snyder’s attention on the current era. A year later, he published an essay entitled On Tyranny, in which he diagnosed the threats faced by democratic institutions and described their antecedents in the prior century.6

The Road to Unfreedom is, on the one hand, an erudite and expansive historical account that reaches back to the Kievan Rus’ in the early Middle Ages and brings to light Russian political philosophers from the early twentieth century who remain virtually unknown in the West. But it is also a political treatise, written with passion and infused with the contemporary experiences of its author.

The events described in the book are ascribed to two competing worldviews. Their point of intersection, according to Snyder, is where the most important events of recent decades can be found. Snyder labels these two worldviews the politics of inevitability and the politics of eternity. The former encapsulates the outlook of most Western societies throughout the postwar era: the triumph of liberal democracy, capitalism, prosperity, European integration, and transatlantic cooperation. Snyder describes it as

the sense that the future is just more of the present, that the laws of progress are known, that there are no alternatives, and therefore nothing really to be done. In the American capitalist version of this story, nature brought the market, which brought democracy, which brought happiness. In the European version, history brought the nation, which learned from the war that peace was good, and hence chose cooperation and prosperity.7
The collapse of the Soviet Union and the decline of communism as a viable alternative ideology lent an air of triumphalism to this vision.

Americans reasoned that the failure of the communist story confirmed the truth of the capitalist one. Americans and Europeans kept telling themselves their tales of inevitability for a quarter century after the end of communism, and so raised a millennial generation without history.8
Snyder does not explicitly mention Francis Fukuyama’s end of history thesis, widely popular around the turn of the eighties and nineties, but these views are symptomatic of the intellectual and political difficulties that have emerged in Western democratic societies.9 Understood as the irrevocable triumph of liberal democracy and capitalism, the end of history excluded the possibility of there being any real political and ideological alternatives. As a result, Western Europeans and Americans were left vulnerable when threats to their way of life appeared unexpectedly. It seemed that the lessons of the world wars, genocide, fascism, and communism had been forgotten. Little thought was given to the idea that these scourges might one day return in different guises, making use of the latest media technologies, or harnessing the policy of inevitability’s resulting emptiness, reflection, and confusion.

“The collapse of the politics of inevitability,” writes Snyder, “ushers in another experience of time: the politics of eternity [emphasis original].”10 Rejecting democratic pluralism and the right to choose, this is an ordered, one-dimensional vision of the world, with an unambiguous view of the enemy. “Whereas inevitability promises a better future for everyone,” Snyder notes, “eternity places one nation at the center of a cyclical story of victimhood.”11 The contemporary version was born in Vladimir Putin’s Russia and spread from there to other countries, first in Europe, and then the United States. An analysis of its emergence and expansion is the most important element of The Road to Unfreedom. According to Snyder, rigged parliamentary elections in 2011 and presidential elections in 2012 marked the turning point. Thereafter, Putin made no further efforts to respect democratic rules, albeit even in their flimsy Russian and post-Soviet editions, and authoritarianism gathered pace. At the same time, Putin began attempting to undermine the cohesion of the European Union by offering support for extreme-right, nationalist, and even fascist movements.

A Philosopher Reborn
THE QUESTION OF Russia’s involvement in the 2016 US presidential campaign and potential links between Trump’s campaign team and the Kremlin has been the subject of widespread coverage, not least by American media outlets and journalists. In The Road to Unfreedom, Snyder takes a different approach, charting the origins and development of Putin’s policies and examining his ideological influences. The latter is a topic that is not well understood among the public in Western Europe and the United States. The key figure is Ivan Ilyin, a Russian political philosopher.

Ilyin was born in 1883 to an aristocratic family in Moscow. “After the disaster of the First World War,” Snyder writes, “and the experience of the Bolshevik Revolution of 1917, Ilyin became a counterrevolutionary, an advocate of violent methods against revolution, and with time the author of a Christian fascism meant to overcome Bolshevism.”12 In 1922, Ilyin was expelled from Russia. He continued working abroad until his death in 1954. During his time in exile, Ilyin became fascinated by Benito Mussolini and Adolf Hitler. He believed that Hitler was the savior of Russia and would also spare the world from Bolshevism.

Ilyin subsequently developed a bizarre and idiosyncratic ideology that drew upon threads from not only fascism and Nazism, but also Christianity. “A youthful supporter of the rule of law,” Snyder observes, “[Ilyin] shifted to the extreme Right while admiring tactics he had observed on the extreme Left.”13 Ilyin believed that Russia would ultimately reject and be liberated from communism. Once Bolshevism had been vanquished, he predicted that Russia, drawing upon Christian orthodoxy, would become a source of historical salvation for the rest of Europe, freeing it from decadence, liberalism, individualism, and atheism.

After the fall of the Soviet Union, the work of Ilyin, long forgotten in his homeland, was finally published again in Russia. “His ideas had no effect on the end of the Soviet Union,” observes Snyder, “but they did influence how post-Soviet oligarchs consolidated a new kind of authoritarianism in the 2000s and 2010s.”14 Snyder describes how the figure of Ilyin and his ideas were reinvigorated during the early years of the Putin era.

[Ilyin] had died forgotten in Switzerland; Putin organized a reburial in Moscow in 2005. Ilyin’s personal papers had found their way to Michigan State University; Putin sent an emissary to reclaim them in 2006. By then Putin was citing Ilyin in his annual presidential addresses to the general assembly of the Russian parliament. … When asked to name a historian, Putin cited Ilyin as his authority on the past.15
Ilyin quickly became a popular figure among the Kremlin elite and Russia’s oligarchy. For the ruling class, Ilyin came to be seen as something approaching an official patron.

In early 2014, members of Russia’s ruling party and all of Russia’s civil servants received a collection of Ilyin’s political publications from the Kremlin. In 2017, Russian television commemorated the hundredth anniversary of the Bolshevik Revolution with a film that presented Ilyin as a moral authority.16
It remains unclear just how real this apparent fascination with Ilyin’s fascist thought actually was among Putin and his inner circle, or to what degree it simply became a convenient tool for legitimizing authoritarianism and justifying the adoption of an increasingly anti-Western outlook in international affairs. Snyder does not attempt to answer this question. Instead he offers colorful portraits of the numerous figures in Putin’s orbit that have openly expressed fascist views, such as Alexander Dugin and Sergei Glazyev.

With all this in mind, it becomes much easier to understand Russia’s consistent political, financial, and propaganda support for numerous movements among Western Europe’s extreme right. These include organizations and parties with established roots in neofascism and neo-Nazism: the French Front national, recently renamed the Rassemblement national (National Rally), the Alternative für Deutschland (Alternative for Germany), and the Freiheitliche Partei Österreichs (Austrian Freedom Party). Together they share a common ideological platform that has facilitated cooperation among groups aiming to weaken democratic institutions and break away from the European Union. Snyder provides ample and persuasive evidence of direct support from the Kremlin. In short, Russian money flowed freely and was distributed widely. Leaders from the antiestablishment European right were invited and feted at the Kremlin. The television network Russia Today (RT), funded by the Russian government and broadcasting in English, became an effective means of spreading propaganda. RT, it should be noted, was a vigorous supporter of the Leave campaign during the UK’s Brexit referendum.

In mid-January 2016, state-controlled Russian broadcasters publicized a news story concerning a thirteen-year-old girl of Russian descent living in Berlin, Lisa F., who claimed that she had been kidnapped and raped by migrants. The news of Lisa F.’s abduction triggered demonstrations against migrants in Berlin by Russian-Germans, the Russlanddeutsche, and anti-immigrant groups, such as the far-right Pegida (Patriotic Europeans Against the Islamization of the Occident).

The story spread from [Channel One] across Russian television and print media, told the same way everywhere: the German state welcomed Muslim rapists, failed to protect innocent girls, and lied. On January 24, a protest organized by an anti-immigration group was covered by Russian media under the headline “Lisa, we are with you! Germans rally under Merkel’s window against migrant rapists.”17
The entire story was subsequently proven to be false. The girl had fabricated the details of an abduction to avoid getting in trouble with her family. “[A] fictional wrong was used to generate a sense of Russian victimhood,” Snyder writes, “and an occasion for the display of Russian power.”18

Intervention in Ukraine
PUTIN’S NEO-IMPERIAL and anti-Western policies were evident in Russia’s aggression towards Ukraine during 2014. The cover that was created for Russia’s activities demonstrated both the capabilities and limitations of the Kremlin propaganda machine. Its effectiveness can be deduced from public opinion in the west, which is yet to embrace the obvious facts concerning Russian military troops entering Ukraine. Yet the Ukrainians were ultimately able to defend their independence and it was clear that a majority did not wish to become a part of Russian Eurasia, despite appeals to anti-Westernism, authoritarianism, and the fascist ideas of Ilyin.

In The Road to Unfreedom, Snyder describes the paradoxes of the Russian war and propaganda machine. Against Ukraine, the Kremlin mobilized politicians and separatist forces known for their fiercely nationalistic, and even fascist views. A breakaway was envisioned for the southern and eastern areas of the country, the self-declared Donetsk and Luhansk People’s Republics. Once separated from Ukraine, these two areas would combine to form Novorossiya (New Russia), which would, in turn, become a part of the Russian Federation. In an effort to discredit Ukrainian resistance, the Russian propaganda machine sought to depict anti-Russian forces as extreme nationalists, fascists, and Nazis committing war crimes on a mass scale.

For many young Russian men, the intervention in Ukraine took place in an imagined 1941, amidst the remembered glory of their great-grandfathers’ defense of the USSR from Nazi Germany. Television enforced this perspective by its constant invocation of terms associated with the Great Fatherland War. … After subsequent interventions in southeastern Ukraine, Russians made their prisoners of war march in public, imitating the humiliation parades of German soldiers Stalin had organized.19
Attempts to replicate history sometimes bordered on the farcical. “Ukrainian citizens who chose to fight on the Russian side,” Snyder recounts, “stole a World War Two–era tank from a monument. (Its engine was in working order because it had been repaired for a parade the previous year.)”20

Despite these efforts, the Russian plan ultimately failed. Thousands of mostly young Ukrainians protestors made the difference. They were prepared to fight and die for their independence, first at the Maidan square in Kiev, where they demonstrated against the pro-Russian government of President Viktor Yanukovych, and soon after defending their country against the Russian invasion. Snyder’s book is written in their honor and he mentions many who died fighting for their ideals. In The Road to Unfreedom, Snyder also expresses disappointment that a similar level of resistance has not been evident in Western Europe and America in response to similar but less clearly recognized challenges.

Putin failed in Ukraine, but the election of Trump as US President is widely seen as a triumph. Snyder has amassed a vast amount of information about connections between Russia and Trump’s team and the scale of Russian involvement in the presidential campaign. A special counsel investigation, led by Robert Mueller, is underway and fresh revelations are being reported on an almost daily basis.21 In his book, Snyder draws attention to several connections with events in Ukraine. The first of these is widely known: Trump’s former campaign chairman, Paul Manafort, was previously a political consultant and advisor to Yanukovych. The second is much less well known. The flag of Novorossiya bears a striking resemblance to the battle flag of the Confederate States from the US Civil War. White supremacists, racists, and neo-Nazis have all been known to coalesce around the Confederate flag. Snyder points out that far-right groups in Europe, among whom the Confederate flag has proven popular, publicly supported Putin’s aggression in Ukraine.22

The Road to Unfreedom also offers clues as to why Russia and the United States have proven so fertile for right-wing extremism. According to Snyder, more attention must be paid to drastically deepening social inequalities and an increasing consolidation of power and influence among oligarchies and financial elites. Democratic institutions have become less and less reflective of the views and concerns of the general public. In relation to the US, Snyder’s analysis is not only suggestive due to the wealth of data and evidence he presents, but also extremely pessimistic.23 In winning the presidency, Trump effectively harnessed the fears of middle and lower-class white Americans, among whom there are common feelings of marginalization and frustration. Deprived of education and knowledge about the world, these groups proved vulnerable to a flood of propaganda and disinformation, which, in large part, originated from Russia.

Meddling in Poland
POLAND, THE LARGEST country in the European Union, is also a country that Snyder knows very well, having spent considerable time there in the course of his work. In recent years, Poland’s democratic institutions have not only faced stern challenges from right-wing authoritarian movements, but have largely been taken over and subordinated to a single political party.

Snyder begins The Road to Unfreedom with his recollections of hearing the news about the plane crash near Smolensk on April 10, 2010. The crash claimed the lives of Poland’s president, Lech Kaczynski, and a party of officials travelling to a ceremony marking the seventieth anniversary of the Katyn massacre. This event marked an important turning point, not only due to the tragedy of the crash itself, but also because it became the focus of widely circulated conspiracy theories that served to diminish public confidence in the Polish ruling class and the country’s democratic institutions. Theories postulating that the president had, in fact, been assassinated on the orders of Putin energized the supporters of the right-wing Law and Justice party (Prawo i Sprawiedliwosc, PiS), cofounded by Kaczynski and his brother Jaroslaw. The 2015 presidential and parliamentary elections were both won by PiS.

The Smolensk assassination theories may have been anti-Russian in character, but Snyder argues that they empowered domestic forces whose actions dovetailed with Putin’s interests. The result was an increasingly isolated Poland within the European Union, its democratic foundations under attack and in crisis. In arriving at this outcome, Snyder sees clear signs of Russian involvement. Although the Russian connections are not as explicit as among Trump’s associates, the available evidence is sufficient to suggest that the notion of Russian interference in Polish politics is plausible.

Antoni Macierewicz, one of the most radical PiS politicians, promoted theories about Russian involvement in the tragedy at Smolensk. During his time as the minister of national defense between 2015 and 2018, Macierewicz carried out a purge among Polish generals, canceled contracts for the supply of modern military equipment, and left the army in a state of chaos. Two new books by investigative journalists, both well documented and thoroughly sourced, describe many threads connecting people close to Macierewicz with Putin’s circle.24 We now know much more about this subject than Snyder did when he was writing The Road to Unfreedom.

Traces of Russian involvement can also be seen in the eavesdropping scandal that engulfed the ruling Civic Platform (Platforma Obywatelska, PO) party in 2014. Illegal recordings emerged of conversations that had taken place between leading PO politicians dining at exclusive Warsaw restaurants. “The problem was not that the tapes revealed scandals, although they did,” Snyder remarks, “but that they allowed Poles to hear how politicians speak in private. It is a rare politician who can survive his constituents knowing how he orders food or tells jokes.”25 Strongly pro-European in outlook, PO was drastically weakened by the disclosure of the tapes. The ensuing scandal was identified as a contributing factor in its defeat at the 2015 elections. As was the case with Macierewicz, the work of investigative journalists has brought to light many new details that Snyder could not have known.26

For all that, Poland does not fit neatly within Snyder’s explanations for the erosion of democratic norms in countries such as Russia and the US. The long period of economic growth that followed the fall of communism, along with an accompanying rise in the standard of living for much of the population, remains unprecedented in the country’s history. Poland has no financial oligarchy comparable to that of Russia or the wealthiest strata of US society, and social inequalities are not any worse in Poland, generally speaking, than they are in other EU member states.

The rise to power of antidemocratic and anti-European forces in Poland cannot be solely attributed to Russian meddling. Instead, it seems that cultural factors have been more important. Fatigued by modernization and unsettled by new patterns of life adopted from the West, it was the conservative majority in Poland, among whom the Catholic church remains influential, that were instrumental. At a time when Europe was experiencing a huge influx of refugees, it proved relatively straightforward to mobilize their fears.27 By contrast, the electorate in favor of liberal democracy and an inclusive civil society exhibited an alarming degree of passivity. Snyder is right to highlight the harmful implications of the policy of inevitability. The comforting belief that the status quo is inviolable and that its benefits are self-evident is a dangerous illusion.

From the arguments and evidence presented by Snyder in The Road to Unfreedom, and from the case of Poland in particular, it is the inherent fragility of democracy and freedom that is most striking. Further grounds for pessimism are the scarcity of public defenders. According to Polish sociologists, there is broad support among their countrymen for authoritarian and xenophobic politics.28 The degree of attachment to democratic values has turned out to be considerably less than it seemed just ten years ago.

Are there any reasons for optimism?

In the absence of truth, according to Snyder, democracy cannot survive. It is for this reason that the book is dedicated to reporters and invokes the work of Thucydides. In practical terms, what is really needed to safeguard the future of democracy and freedom are people ready to accept risks and make sacrifices. It is the Ukrainian protestors who are the real heroes of The Road to Unfreedom.

https://inference-review.com/article/inevitability-and-eternity

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Neoliberalism Against Democracy?: Wendy Brown’s “In the Ruins of Neoliberalism” and the Specter of Fascism

By Martijn Konings

SEPTEMBER 22, 2019

POLITICAL DEVELOPMENTS of recent years have pushed the question of fascism to the forefront of many people’s minds. The word was used occasionally during the first decade of the 21st century, as a way of condemning the policies of the Bush administration. But that was typically in a spirit of purposeful exaggeration. In the era of Trump, claims that our political situation is incipiently fascist are losing their theatrical character. Predictably enough, such concerns are met by loud objections that the f-word is not appropriate, subject to inflation, and should be reserved for describing specific historical instances. But more and more, such objections feel like desperate attempts to deny the growing pertinence of the word. When the mainstream media pundits and outlets debate whether or not it is permissible to refer as “concentration camps” to the border camps where people of color are locked up and abused, such desperation becomes palpable.

Of course, there are no easy historical parallels to draw. Trump’s self-identification with the spirit of American do-it-yourself individualism may be laughable, but it does put him at some distance from the corporatist spirit of interwar fascism. And it is hard to imagine him being actively interested in or capable of organizing a systematic militarization of everyday life. But perhaps the main, and most worrisome, argument used to soothe political spirits is that Trump’s fascism has remained stuck at the level of rhetoric, its forward movement blocked both by his own incompetence and by the “deep state,” the historically grown layers of bureaucratic power that will put the brakes on the implementation of any radical plan. Such arguments work with a naïve understanding of how political rhetoric and practice interact.

If there are lessons to learn from the 1930s, they would certainly have to include that the most violent material horrors start out with the power of rhetoric and that routine-driven bureaucracies can come to serve as reliable functionaries of fascist regimes. In fact, the growing sense that fascism is in the air has everything to do precisely with this renewed emotional charge, the effectiveness with which Trump’s virulent rhetoric taps into the grievances of a white working or middle class and encourages it to embrace, revitalize, and act on its prejudices. After all, Trump’s policies are certainly a few steps up from those pursued by the Bush administration, but they can hardly be said to represent a drastic escalation of them. The most significant shift is that whereas the latter still dressed up its policies in terms of the unifying language of national security and opportunity for all (no matter how perfunctory this may have sounded), Trump is far more forthright about the fact that his policies are meant to divide the worthy from the unworthy.

The concept of fascism does not appear prominently in Wendy Brown’s latest book, In the Ruins of Neoliberalism: The Rise of Antidemocratic Politics in the West, [1] but one gets the feeling that it is constantly on the tip of her tongue. Instead, the book engages with another concept: neoliberalism. While certainly less politically charged and contentious than the concept of fascism, in recent years it has given rise to debates characterized by oddly similar dynamics: alongside the growing awareness that the implementation of a neoliberal project has been central to the shape of the present, a chorus of voices has risen to decry this as conspiracy thinking.

Such objections are not always unreasonable: many contributions to the burgeoning literature assume a far too straightforward translation of neoliberal theory into practice. But Brown’s take is more subtle. Already in her previous book, Undoing the Demos: Neoliberalism’s Stealth Revolution, [2] she followed Foucault by emphasizing the workings of a more diffuse market ethos, referred to as “neoliberal reason.” She also followed Foucault’s argument that neoliberalism represented not a return to classic neoliberalism but was instead a more imperialist project — no longer limiting itself to the economic sphere, it aims to marketize and rationalize politics. The book depicted homo politicus as being absorbed by homo economicus, and it saw the rise of entrepreneurial subjectivity and human capital thinking as displacing democratic politics and public deliberation.

Undoing the Demos has been an extraordinarily influential book, and deservedly so. It connected two ways of seeing the world — political theory and political economy — that have long been immune to each other’s insights, and did so to great effect, offering a wide-ranging analysis of some of the most important issues plaguing contemporary polities, and pressing theoretical points into the service of a convincing analysis of the commercialization of higher education.

As tends to be the case with defining works, the book raised as many questions as it answered. In one of the more insightful reviews, Annie McClanahan argued that in an important sense neoliberalism has meant not the rise but the decline of human capital, i.e., its devaluation. As she puts it,

by characterizing neoliberalism through a specific kind of entrepreneurial subject — the subject who polishes her college application, who selects among schools for his kid, who improves her scholarly CV through obtaining national grants — we miss the possibility that neoliberalism is not the becoming-economic of the non-economic, but rather the introduction of economic exigencies into the lives of a group — white, educated, upper middle-class citizens of the developed world — formerly protected from them. [3]

This also led McClanahan to wonder if Brown might have overstated the internal coherence of neoliberal governance. The neoliberal subjects she sees do not respond to increased precarity simply by stepping up their commitment to entrepreneurial principles, but they often also react in less functional, more politicized and potentially disruptive ways.

I think McClanahan’s points raise the question: was Brown’s diagnosis of the effects of neoliberalism in terms of dedemocratization meant to be primarily a normative or a descriptive claim? Most people likely to pick up an academic book on neoliberalism will agree that there is something antidemocratic about it, but that does not by itself amount to an accurate description of the way neoliberalism operates in a society with (compromised and limited but real) democratic institutions. Indeed, Brown seemed to associate neoliberalism primarily with the dreams of technocratic governance through market metrics that Third Way politics like Clinton, Blair, and Obama entertained, rather than with the more ideologically charged mixture of authoritarian and populist impulses that marked the politics of Thatcher, Reagan, and Bush.

But that was before Trump. Brown explains that she started working on In the Ruins of Neoliberalism in response to the shock of the 2016 presidential election, and indeed Trump’s presence can be felt on every page. The book builds directly on her previous one to consider how we should understand the troubling political dynamics that have been so apparent in recent years. It begins by revising the definition of neoliberalism, noting that by focusing on the rationalizing and utilitarian thrust of neoliberalism, Undoing the Demos might have inadvertently privileged the civilized appearances of neoliberalism over its more virulent manifestations. In the Ruins of Neoliberalism therefore places more emphasis on neoliberalism’s moral aspect and the way this has permitted an organic alliance with reactionary neoconservatism and its concern to restore traditional morality. Neoliberalism is now understood as a “market-and-morals project.” [4]

Taken by itself, bringing norms back into the picture is a familiar move as a way to criticize capitalism or economics. But Brown is not looking for trite reassurances of the survival of moral sentiment or human compassion. Indeed, the picture becomes even bleaker. Neoliberalism’s objective is not simply the marketization of politics as such, with democracy as collateral damage, but it is driven by a more active animosity toward the idea of a people ruling itself: “More than submitted to an economizing semiotics, as I argued in Undoing the Demos, democracy is explicitly demonized.” [5]

But is this really the case? Is democracy no longer simply limited and compromised but actively portrayed as a bad thing? Can neoliberals brazenly declare that they act on behalf of elite interests and that the will of the people is secondary? I find it difficult to recognize that as an accurate picture of contemporary political discourse — as far as I can see, claiming to speak in the name of the people remains as imperative as ever. And is the problem with Trump really that he is not democratic? It is not an entirely implausible way of framing the problem of course, but it seems a little defensive. It’s a little like complaining about “how someone is arguing” when the real issue you have is with what they feel or do. Of course, one can see the reasons for adopting that position even if one has reservations about how democratic our actually existing democracy has been at the best of times — that is, “democracy may not exist but we’ll miss it when it’s gone,” as the title of a recent book puts it. [6] But isn’t the political problem experienced by progressives in the current moment precisely that such principled defenses of democracy have lost traction? What does it mean to stand up for democracy in a context where actually existing democracy produces Trump and where crowds are so easily provoked into spontaneous “send her back” chants? Should the Trump phenomenon not lead us to undertake a significant reconsideration of what we mean by democracy?

Of course, Brown would be the first to recognize that the situation would be worse rather than better if Trump got a larger percentage of the American population on board (and in that sense became more democratic). For Brown, democracy is something more complex than simple majority rule through representative institutions. Her understanding of democracy is rooted in a broadly republican tradition that centers on civic virtue and active citizenship as distinctive qualities of the homo politicus. This is clearly an appealing vision of politics, but I wonder if it can really work as a measure to assess the present by. After all, if neoliberalism is the main source of dedemocratization, we would presumably be looking for a more meaningful democracy in the period before the 1970s. Not only was the democratic system in place then hardly known for its civic virtue, and not only was the relative sanity of the public sphere bought at the expense of harsh racial exclusions and strict gender hierarchies; even at that very time a republican thinker like Hannah Arendt was expressing similar sentiments about the decline of politics. The problem here is the appeal to an abstract standard of democracy that has difficulty communicating with the world of actually existing democracy. In the public arena of the Trump era, all those desirable features of a rational democratic polity are systematically ridiculed, to great democratic effect.

Brown aims to keep her distance from the judgmental style of analysis that was expressed in the title of What’s the Matter with Kansas? [7] and more recently led Hillary Clinton to speak about the “basket of deplorables,” but she finds it difficult. So, when she writes about “aggrieved white midlanders” who “reflexively roar against abortion, same-sex marriage, Islam, ‘attacks on whites,’ godlessness, and intellectualism,” she isn’t willing to view this as manifesting neoliberalism’s traditional morality: “This is not ‘tradition’ or even morality speaking, but hatred of a world perceived to be wishing and washing theirs away.” [8] But of course, this leaves one wondering what the emphasis on traditional morality was meant to accomplish. I don’t think Brown is trying to file bourgeois forms of exclusion under “traditional values,” and cruder forms of racism and misogyny emanating from the lower classes under “nihilistic resentment.” But the logic of her argument seems to push in that direction.

Brown speaks of “populist rage attacking democracy,” [9] but she doesn’t thematize the paradox that this formulation hints at. The way in which the power of the people turns on itself is something that post-Marxist authors like Claude Lefort and Ernesto Laclau wrote on, but they receive short shrift in Brown’s book. That is perhaps understandable, as such authors had little to say about capital, economic policy, or neoliberalism, which are the things that Brown wants to connect to questions of political theory. But, even so, to describe the process as one of dedemocratization at the hands of an outside force is oddly old-fashioned, reminiscent of the more structuralist Marxist analyses that Brown is keen to dissociate her approach from.

Is the problem that neoliberalism has produced a “political deficit”? Or is the problem that neoliberalism has redistributed opportunities in ways that demand ample political expression and lead to the kind of unruly spectacles that we are currently witnessing, where competing sources of discontent offer endless opportunities for demagoguery? To frame the problem as the alliance of markets and traditional morals does not sufficiently recognize the depth of this well of discontent, nor the volatility and potential explosiveness of its activation. Reaction does not so much work against but through the world of actually existing democracy: it involves the continuous provocation of popular energies to legitimate authoritarian impulses that inflict violence on those at the margins.

We should turn to Brown’s treatment of Hayek here. In political theory, it has become commonplace to say that, for all Hayek’s concern with the free market, he had deep affinities with authoritarianism and was happy to rely on the strong hand of the state when it came to the enforcement and maintenance of neoliberalism. Brown avoids that argument, instead noting the difference between Hayek and Nazi political theorist Carl Schmitt: “Hayek concurs with Schmitt that sovereignty is a secularized theological concept, but, unlike Schmitt, regards sovereignty as false and dangerous because it is theological.” [10] But she takes this wholesale rejection of sovereignty as only affirming his anti-democratic stance (because it also rejects popular sovereignty). Surely, however, there is something progressive about the suspicion of authority, even when it has been put in place by a democratic public?

Here we should recognize Hayek’s own connections to the republican tradition, which are easy to miss if we concentrate on Hayek’s political writings, as Brown does. If we ignore the specific way Hayek understands economic life, it is difficult for him to appear as more than a minor ideologue offering an uninspired, warmed-over version of classic liberalism. Hayek saw himself as outlining a philosophy of order that did not just aim to cut off the king’s head but also to prevent any tyrannical schemes the people themselves might be tempted to construct — that is, to preempt any resurgence of political theology in the modern age. For him, the discovery of the market as a mechanism of secular self-regulation, without need for either divine intervention or conscious human regulation, was central here. This version of republicanism may be less romantic, but it nonetheless contains a compelling political fantasy that neoliberalism has deployed to great effect: it imagines the market as a guarantor of political neutrality, a source of institutional protection against the entanglement of wealth and authority.

We won’t be able to understand the making of neoliberal society unless we recognize the ethical charge generated by this neoliberal-republican image of market order. Yet it is common for critical perspectives on contemporary politics to underestimate its emotional appeal and popular traction. And in this way, they often end up feeding the logic at work, which systematically resists progressive arguments about the pernicious effects of real-world markets and attempts to fact-check the record of neoliberalism. Every piece of evidence demonstrating that the world doesn’t resemble a free market comes to serve as yet so much more evidence of the depth of corruption and therefore only serves to reinforce the need to “drain the swamp.” Of course, Trump-style theatrics often appear far removed from any actual economic issues, but that is precisely the point. Trump’s key strength is to reject responsibility for any existing problems, and he has fully committed himself to the business of blaming minorities and the progressives that coddle them. The result is a sort of centrifugal dynamic of hatred that aims to suck in any and all expressions of social discontent. To progressives this project seems highly uncivilized, but to the many Americans who support Trump this uncompromising stance seems like a highly principled unconditional refusal to accommodate himself to existing political realities.

In other words, the market, imagined as a decentralized coordination mechanism that ensures that people get what they deserve and works to prevent illegitimate concentrations of power, induces a certain fanaticism that breaks out of the bounds of civilized public debate. Unable to see its own limitations, neoliberal reason can only understand the failure of its core fantasy as the result of corruption by an external force: when the market fails to produce both freedom and social order, there must be a conspiracy at work. This is the distinctive way in which a mentality that takes itself to be rational and secular (answering to no higher authority than the welfare of the people itself) becomes irrational and tends toward conspiracy thinking and scapegoating. Moreover, it is characterized by a certain relentlessness because it recognizes no external limitations as legitimate. If we fail to note the ethical charge of the image of social order around which this unsavory logic revolves, our analysis of the present will only ever get so far.

The logic at work here motivates and legitimates the exclusions and oppressions that permit the partial realization of the republican imaginary. Emotional investment in the idea of the modern economy as a mechanism that lifts all boats has always been deeply bound up with the possibility of limiting its universality, of excluding parts of the population from its benefits in more or less stable ways. Capitalist regimes of relative equality — whether among colonial settlers or unionized workers — function on the basis of an elaborate systems of racial and gendered hierarchy, the organization of society around biopolitical distinctions that rank forms of life. This is not a precapitalist or traditional leftover, but the distinctive product of modern capitalism.

These points, echoing the notion of fascism as a product of the dialectics of modernity, aren’t perhaps all that far from the argument developed in In the Ruins of Neoliberalism. The book’s pessimism at times channels the spirit of Adorno: it offers no anticipation of redemption, no announcement of a countermovement, no promise of a better future — all highly refreshing in a public sphere that puts such a premium on the profession of optimism. But even though Brown is not tempted to issue the promises of restoration that typically accompany diagnoses of decline, that does not by itself dissociate her intervention from the logic at work. The implicit appeal to a more democratic past is, at best, politically disorienting. The way the book holds up an ideal notion of democracy unintentionally serves to maintain a certain fantasy about community, one that abstracts from the exclusions and hierarchies that most readily available communal identities are built on. [11] In previous work, Brown herself has offered penetrating critiques of contemporary community and its boundaries, [12] so it is no surprise that she keeps her distance from the implications of this political fantasy — but that is just not the same as critically engaging or deconstructing it.

Central to neoliberalism’s real-world success and resilience is the psychopolitics that it has fostered. Brown recognizes this, but her concern to develop an accurate social-scientific definition of neoliberalism means that she becomes focused on the extent to which social reality corresponds to neoliberal ideology — and this is a significant hindrance when it comes to fully plumbing the depths of neoliberalism’s emotional and psychological logics. However we define neoliberalism, we will always find that it has managed to live up to its own image only for the briefest of moments (perhaps the 1990s, if we focus on Clinton’s infusion of public management with market metrics and overlook the mass incarceration, or the Bush administration before 9/11, if we take at face value what they meant by traditional morality). Being too troubled by this is how social scientists are currently filling entire books and journals questioning whether neoliberalism is even a real thing. Brown’s willingness to expand or revise her definition of neoliberalism is welcome, but it is not a substitute for the kind of analysis that locates the power of neoliberalism within the tension between ideology and practice, fantasy and reality.

The last chapters of the book seem to be driven by an awareness of this: they offer a powerful account of the strange affinities and paradoxical psychological dynamics fostered in the contemporary political climate. Revisiting themes from her earlier work, Brown advances a compelling analysis of how nihilism and resentment have mixed to supercharge logics of exclusion in the era of Trump. But here too the definitional issue rears its head. Even on the expanded understanding of neoliberalism as rationalization plus traditional morals, Trump is seen to be breaking the neoliberal mold: “[W]here nihilism intersects neoliberalism, freedom is torn out of the habitus in traditional values by which it was to be contained and disciplined in the original neoliberal formation.” [13] And so Brown ends up seeing the rise of Trump as a symptom of the decline of neoliberalism, the growing difficulty of holding society together on the basis of a market ethos and traditional morals alone, in the absence of a coherent democratic political vision or a democratic public sphere.

Brown’s analysis of the Trump phenomenon makes highly effective use of Marcuse’s notion of “repressive desublimation,” which captures the way subjective expressions that strain against existing social norms and therefore feel authentic and liberating can in fact work to deepen the existing systems of power and its oppressions. Trump is certainly the richest manifestation of repressive desublimation, but Marcuse’s notion can also be easily read as a critique of Hayek’s philosophy of liberalism, which imagined individuals letting loose and unintentionally giving rise to an order that would not be experienced as oppressive by anyone in particular, where nobody’s freedom comes at the expense of anyone else’s. If we had to single out one quality as defining neoliberalism, it might be its ability to catalyze and deploy these psychological dynamics, reflecting our affinities with oppression back to us as opportunities for achieving more authentic ways of living and a social order beyond domination. And this also means that the mechanisms at work are probably less fragile than Brown assumes. For the political deployment of desublimation is self-reinforcing and sets up what I think of as the “Hillbilly Elegy trap” [14]: even the most glaring spotlights on the dysfunctions and prejudices of the white working class somehow work to reinforce its status as the moral backbone of the nation.

This does not mean that Trump is a neoliberal in any doctrinal sense. His political style signals an important shift. If the willingness of elites to provoke forces for which they do not have a user manual has been on the rise for several decades now, until recently they still refrained from fully capitalizing on the possibilities that such popular energies held. Trump’s abandonment of such reservations — his determination to stay the course and constantly double down on his flirtations with fascism — marks a significant change. But this shift from “dog-whistle politics” to active desublimation is better explored as a resurgence of fascism than as a decline of something else. The notion that neoliberalism is now a spent force is only plausible if we took the label too literally in the first place — if we viewed it as a discrete historical phase rather than as a powerful renewal of the fantasy of the market.

To frame the problem of emergent fascism as a conflict between neoliberalism and democracy feels too defensive, an attempt to keep the problem manageable at the level of theory even as it feels increasingly less so in the real world. In that sense, it’s almost as if In the Ruins of Neoliberalism is too purposely driven by the political urgency of the moment. That undercuts what makes Brown such a compelling political thinker — her unique ability to resist the terms in which political problematics present themselves and to reframe them in a way that opens up new lines of sight. In this book, that ability is richly on display in her analysis of the paradoxical identity politics fostered by the rise of desublimation as a political technique — which can be read as an elaboration of her profound earlier insights into the logic of “wounded attachments.” [15] But the sheer fecundity of those pages has the effect of reinforcing the sense that we are dealing with dynamic combinations of psychopolitical forces on which the existing categories of political theory and political economy just do not provide all that much grip. We moderns can come to view our most banal, unexamined sentiments as signposts on the road to redemption. A politically effective understanding of this paradoxical logic will elude any perspective that assesses actually existing democracy against an image of reasoned public debate. And we don’t have to imagine that past fascists were rational, competent creatures in order to think that this emotional logic may well be the key driving force behind the resurgence of fascism in neoliberal times.

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Echoes of Fascism

By Stephen Rohde

“IT IS NOT the light that is needed, but fire; it is not the gentle shower, but thunder.” Nine years before the Civil War, the former enslaved person and ardent abolitionist Frederick Douglass condemned a nation for stubbornly clinging to the abomination of slavery in his blistering speech “What to the Slave Is the Fourth of July.” He pressed on:

We need the storm, the whirlwind, and the earthquake. The feeling of the nation must be quickened; the conscience of the nation must be roused; the propriety of the nation must be startled; the hypocrisy of the nation must be exposed; and its crimes against God and man must be proclaimed and denounced.

In The Terror of the Unforeseen, a timely and audacious new book brimming with Douglass’s seething anger and barely controlled rage, Henry A. Giroux wants to again rouse and startle the conscience of the nation and denounce the crimes it is committing. “Echoes of the formative stages of fascism are with us once again,” Giroux writes, “and provide just one of the historical signposts of an American-style neo-fascism that appears to be engulfing the United States after simmering in the dark for years.” He is calling down fire, thunder, storms, and whirlwinds.

Giroux, a prolific scholar and cultural critic, author of more than 68 books, most recently American Nightmare: Facing the Challenge of Fascism (2018), and over 400 articles, papers, and chapters, teaches at McMaster University, where he is the McMaster University Chair for Scholarship in the Public Interest. He begins his new book by documenting Donald Trump’s deplorable and dangerous language and actions during the first years of his presidency, emphasizing that Trump’s rhetoric is hardly new; it matches what many historians report in the rise of Nazism and fascism. Giroux then traces the domestic origins of Trump’s policies to the neoliberalism of the 1970s. Next he focuses on the steadfast dismantling of public education and more broadly on the rise of anti-intellectualism and the muzzling of open debate. In the face of such a dire portrait of the United States, Giroux concludes by calling for a deeper, more galvanized and interrelated resistance, and a radical transformation of capitalism, in order to restore our democracy.

In the age of Trump, Giroux sees the reemergence of fascism in “an unceasing stream of racism, demonizing insults, lies, and militarized rhetoric, serving as emotional appeals that are endlessly circulated and reproduced at the highest levels of government and the media.” He is precise that what Trump is doing is not simply “updated” Nazism. Instead, he claims that there is a “real and present danger” that many of the same seeds that grew into fascism in the 1920s and 1930s have been planted and cultivated in American soil for years. He gathers the evidence in an extended and alarming compendium:

People in power have turned their backs on the cautionary histories of the fascist and Nazi regimes and, in doing so, willingly embrace a number of authoritarian messages and tropes: the cult of the leader, the discourse of the savior, white nationalism, a narrative of decline, unchecked casino capitalism, systemic racism, silence in the face of a growing police state, the encouragement of state endorsed violence, the hallowing out of democracy by corporate power, a grotesque celebration of greed, a massive growth in the inequality of wealth, power and resources, a brutal politics of disposability, an expanding culture of cruelty, and a disdain for public virtues, all wrapped up in an authoritarian populism.

Here, Giroux names most of the essential targets that he unpacks. This is his bill of particulars, his indictment of both the Trump administration and the conditions that the far-right has been engineering for decades. These conditions are based on principles of white supremacy baked into the founding of our country that even a civil war, several constitutional amendments, a mixed record of court decisions, and the fits and starts of various administrations have failed to eradicate.

In developing his themes, Giroux is not selfish or vain. He readily shares his space with other writers, historians, and scholars whose distinct expression of key ideas he welcomes, including Tom Engelhardt, Chris Hedges, Roger Cohen, Masha Gessen, Juan Cole, Michael Tomasky, Timothy Snyder, Ruth Ben-Ghiat, Richard J. Evans, Ariel Dorfman, Hannah Arendt, Steven Levitsky, Daniel Ziblatt, Naomi Klein, Wendy Brown, Peter Dreier, J. M. Coetzee, Ta-Nehisi Coates, Susan Sontag, Theodor W. Adorno, Stanley Aronowitz, and many others. The presence of these authorities strengthens Giroux’s argument. The book and its 488 footnotes serve as a valuable resource for further reading and study, which is, after all, one of Giroux’s essential prescriptions for overcoming the “knownothingness” of our time. It is a public service to have marshaled so much evidence, statistics, and source material within 245 pages to document the treachery not only of the Trump years but of the decades that preceded them.

Giroux readily observes that there “is nothing new about the possibility of authoritarianism in a particularly distinctive guise coming to America,” citing the alarms sounded by fiction writers from George Orwell, Sinclair Lewis, and Aldous Huxley to Margaret Atwood, Philip K. Dick, and Philip Roth as well as the work of theorists such as Umberto Eco, Hannah Arendt, and Robert O. Paxton (whom in a rare error Giroux misidentifies as “Thomas”). What they all have in common “is an awareness of the changing nature of tyranny and how it could happen under a diverse set of historical, economic, and social circumstances.” Here Giroux reveals the origin of the title of his book, citing Roth’s “insistence that we all have an obligation to recognize ‘the terror of the unforseen’ that hides in the shadows of censorship, makes power invisible, and gains in strength in the absence of historical memory.”

Giroux is deeply concerned about the use of language to solidify authoritarianism and erase historical memory. “The United States has a long history of racist language leading to cruel and harmful practices and, in some cases, violence aimed at groups targeted by such language.” He sees that “the language of white nationalism and racial resentment” creates “a discourse that annihilates social codes and restrains political behavior and undermines the rule of law.”

Giroux believes “it is fair to argue that Orwell’s nightmare vision of the future is no longer fiction.” Under the Trump regime, “the Ministry of Truth has become the Ministry of Fake News, and the language of ‘Newspeak’ has multiple platforms, morphing into a giant disinformation machinery of propaganda, ignorance, hypocrisy, and fear.” Citing Ruth Ben-Ghiat, Giroux reminds us that “fascism starts with words and Trump’s use of language and his manipulative use of the media as political theater echo earlier periods of propaganda, censorship, and repression.” Under fascist regimes, “the language of brutality and culture of cruelty were normalized through the proliferation of the strident metaphors of war, battle, expulsion, racial purity, and demonization.”

In July, we witnessed Trump’s latest appeal to “expulsion, racial purity, and demonization” when he told four congresswomen, all American citizens and persons of color — Alexandria Ocasio-Cortez (D-New York), Ilhan Omar (D-Minnesota), Rashida Tlaib (D-Michigan), and Ayanna Pressley (D-Massachusetts) — to “go back to” where they came from, immediately prompting his rabid fans at a rally in North Carolina to chant, “Send her back! Send her back!” Trump’s deplorable taunts were repeated days later when Senator Rand Paul (R-Kentucky), speaking about Omar, told Breitbart News that he was “willing to contribute to buy her a ticket to go visit Somalia.” Undeterred by a congressional resolution condemning his racist tweets, Trump stepped up his racist attacks by singling out Representative Elijah E. Cummings (D-Maryland) and Reverend Al Sharpton, both persons of color, with demeaning tweets. The spread and normalization of Trump’s persistent neo-fascist language is exactly what Giroux is talking about.

Giroux traces the Trump presidency directly to “the curse of neoliberalism.” Emerging in the 1970s, neoliberalism was based on the work of Friedrich August von Hayek and the Mont Pelerin Society, as well as Milton Friedman and the Chicago School of Economics, and was associated with the politics of Augusto Pinochet in Chile, Ronald Reagan in the United States, and Margaret Thatcher in the United Kingdom. Notably, it was supported by various right-wing think tanks such as the Heritage Foundation and by billionaires such as the Koch Brothers.

As an economic policy, neoliberalism creates an all-encompassing market guided by the principles of privatization, deregulation, commodification, and the free flow of capital. Advancing these agendas, it weakens unions, radically downsizes the welfare state, and wages an assault on public services such as education, libraries, parks, energy, water, prisons, and public transportation. As the state is hollowed out, big corporations take on the functions of government, imposing severe austerity measures, redistributing wealth upward to the rich and powerful, and reinforcing a notion of society as one of winners and losers.

Fifty years in the making, under “a savage neoliberalism,” Giroux writes, “fascistic notions of racial superiority, social cleansing, apocalyptic populism, hyper-militarism, and ultra-nationalism have gained in intensity, moving from the repressed recesses of US history to the centers of state and corporate power.” Consequently,

[decades] of mass inequality, wage slavery, the collapse of the manufacturing sector, tax giveaways to the financial elite, and savage austerity policies that drove a frontal attack on the welfare state have further strengthened fascistic discourses and redirected populist anger against vulnerable populations and undocumented immigrants, Muslims, the racially oppressed, women, LGBTQ+ people, public servants, critical intellectuals, and workers.

To illustrate the human consequences of these policies, Giroux cites a 2017 analysis by Marian Wright Edelman that “millions of America’s children today are suffering from hunger, homelessness, and hopelessness.” The statistics are staggering: “Nearly 13.2 million children are poor — or almost one in five. About 70 percent of them are children of color, who will be a majority of our children by 2020. More than 1.2 million are homeless. About 14.8 million children struggle against hunger in food insecure households.” According to the June 2018 report of UN Special Rapporteur Philip Alston, amid a massive concentration of wealth among the upper one percent in the United States, 40 million people live in poverty and 18.5 Americans live in extreme poverty.

As Giroux sees it, “Trump has elevated himself as patron saint of ruthless neoliberalism” as is evident “in the various miracles he has performed for the rich and powerful,” from environmental and worker safety deregulation to a $1.5 trillion tax gift to the financial elite, from the appointment of neoliberal fundamentalists like Betsy DeVos and Scott Pruitt to his cabinet to a vast $717 billion increase in the Pentagon budget.

Giroux sees education and civic literacy as prime targets of neoliberalism’s assault on democracy.

One precondition for bringing Trump’s neoliberal fascism to a halt is the recognition that democracy cannot exist without knowledgeable citizens who have a passion for public affairs, and who believe that critical consciousness is one precondition through which politics must pass in order to render individuals fit for the kind of collective struggles that offer the possibility for change.

Education creates not only individuals who can think; “it is also a condition for any viable notion of autonomy, self-governing, and agency.”

This is precisely why, in Giroux’s analysis, the “Trump administration, along with other conservative institutions, needs education to fail in a very particular way because it needs democracy to fail.” Higher education poses a threat because of its “potential role as a public sphere capable of educating informed citizens who can resist diverse forms of oppression, interrogate power relations, and exercise civic courage.” Consequently, the Trump regime “is attempting through the logic of a weaponized neoliberalism to reshape education with an intense emphasis on privatization, commodification, deregulation, training, and managerialism.”

For Giroux, the undermining of higher education is part of a much larger and ominously long-term strategy. “Donald Trump’s ascendancy in American politics has made visible a plague of deep-seated civic illiteracy, a corrupt political system, and a contempt for reason that has been decades in the making.” He points to many examples including that two thirds of the American public believe that creationism should be taught in schools and that a majority of Republicans in Congress do not believe that climate change is caused by human activity, making the United States, in his words, “the laughingstock of the world.”

Instead of improving and investing in public schools, Giroux accuses Trump of following the neoliberal playbook by turning schools into commercial profit centers, including, cynically, profit centers for the institutional security industry in the wake of the epidemic of deadly school shootings. According to a February 2018 New York Times report, since a deranged gunman wielding an assault rifle killed 20 first graders and six adults at Sandy Hook Elementary School in 2012, there have been at least 239 school shootings in the United States, in which 438 people were shot, 138 of whom were killed. Nationwide, according to the Gun Violence Archive, 667 children and 2,841 teens were injured or killed by gun violence in 2018. Since 1968, nearly 1.4 million Americans have been killed by guns, compared to a total of almost 1.2 million Americans killed in every war this nation has fought since its founding.

Trump has adopted a “pro-gun script” and embraced the mantra of the NRA to arm teachers and militarize public schools. Giroux points out that after the outrage in reaction to the Parkland, Florida, shooting died down, instead of support programs to hire more teachers, teacher aids, support staff, and school psychologists to help prevent school shootings, the Trump Education Secretary Betsy DeVos proposed that federal funding be taken from the federal Every Student Succeeds Act to purchase firearms and provide weapons training for teachers and school staff. Giroux also notes that in 2017, the sales of security equipment and services to the education sector reached $2.7 billion — that’s billion with a “b.” He writes:

Gun violence in the U.S. is not simply about a growing culture of violence, it is about the emergence of a form of domestic terrorism in which fear, mistrust, lies, corruption, and financial gain become more important than the values, social relations, and institutions that write children into the script of democracy and give them an opportunity to imagine and struggle for a future that embraces human rights, the rule of law, and the institutional and governing structures that strengthen democracy.

¤

In the face of all this, Giroux believes passionately that what is essential “is a renewed perception of education as the crucial site in which the intertwined dynamics of individual agency and democratic politics merge.” He is genuinely heartened by the “spectacular demonstrations of resistance and a proliferation of causes for hope as brave students from Parkland, Florida, and equally courageous teachers throughout the United States have led throughout 2018 mass movements of demonstrations, walkouts, and strikes.” Giroux reports that in the past year, 400,000 teachers in nine states have gone on strike, affecting five million students in West Virginia, Colorado, Kentucky, Chicago, Arizona, and Sacramento, protesting not only law wages, but also school defunding, overcrowded classrooms, and rising health insurance premiums. Teacher pay in the public sector (accounting for inflation) actually fell by $30 per week from 1996 to 2015, while pay for other college graduates increased by $124. On top of that, the National Center of Educational Statistics found that 94 percent of teachers pay out of their own pockets an average of $480 annually for essential school supplies.

Teacher strikes and walkouts dovetail with protests led by students. Parkland students Emma González, Cameron Kasky, David Hogg, Alex Wind, Jaclyn Corin, and many others organized massive protests, including the nationwide March for Our Lives rally held in March 2018 in Washington, DC, and in 880 other locations throughout the United States and around the world. Giroux sees these demonstration and their young leaders as the outgrowth of a new political formation and new movements that have been building for two decades, including the Moral Monday Movement, the New Poor People’s Campaign, and the all-inclusive Movement for Black Lives, which “share a criticism of the interconnecting forces of poverty, racism, sexism, the culture of policing, and call for dismantling the institutions, ideologies, policies, and structures that support a punitive and cruel capitalist system.”

Giroux argues that at the “center of all these movements are efforts to raise consciousness, make education a vital part of their politics, and an attempt to reclaim historical memory, fit events together in a larger narrative, resist moralizing classifications, recognize shared values, and develop unwavering coalitions.” He sees the possibility of “fashioning a new public imagination,” which moves beyond the narrow realm of specific interest “to a more comprehensive grasp of politics that is rooted in a practice of open defiance willing to disrupt corporate tyranny and state violence.” He describes it as “a politics that refuses liberal centrism, the extremism of the right, and a deeply unequal society modeled on the iniquitous precarity and toxic structures of savage capitalism.” This “new political horizon” foreshadows “the need to organize new political formations, massive social movements, and a third party that can make itself present in a variety of institutional, educational, social, and cultural spheres.”

Having issued a provocative call for a third party, Giroux does not explore the idea further. He has offered an elaborate political platform, but he does not develop a pragmatic plan for how such a third party would be created, organized, funded, and populated. Perhaps that will be the subject of his 70th book.

¤

Giroux begins his final chapter by summarizing his entire project with an epigram from Frederick Douglass: “If there is no struggle, there is no progress, […] Power concedes nothing without a demand. It never did and it never will.”

The threads of a general political and ideological crisis run deep in American history, and with each tweet and policy decision Donald Trump pushes the United States closer to a full-fledged fascist state. His words sting, but his policies can kill people. Trump’s endless racist taunts, dehumanizing expressions of misogyny, relentless attacks on all provisions of the social state and ongoing contempt for the rule of law serve to normalize a creeping fascist politics.

Giroux considers it indispensable “for individuals, institutions, labor unions, educators, young people, and others not to be silent in the face of the current fascist turn in the United States and elsewhere.” He insists that “no one can afford to look away, fail to speak out, and risk silence” in the face of “hatred, racism, misogyny, and deceit.” It is time “to build community led broad based social movements from the bottom up” starting in local communities and expanding to the state and national levels. According to Reverend William J. Barber II, founder of the New Poor People’s Campaign, such movements must be “deeply moral, deeply constitutional, anti-racist, anti-poverty, pro-justice, [and] pro-labor.”

Giroux has no time for “banal resistance.” He takes the Democratic Party to task for the role the presidencies of Bill Clinton and Barack Obama played “in creating the economic, political, and social conditions for Trump’s election in 2016,” although he does not identify those conditions or elaborate on how they are to blame for Trump’s election. While he does not disavow resistance, he demands that it be redefined “as inseparable from fundamental change that calls for the overthrow of capitalism itself.” Here, as with his glancing call for a third party, Giroux moves on without explaining what he means by “the overthrow of capitalism itself,” except to reiterate that “what is needed is not only a resistance to the established order of neoliberal capitalism but a radical restructuring of society itself,” adding that this “is not about resisting oppression in its diverse forms but overcoming it — in short, changing it.”

Having so effectively diagnosed the disease, if Giroux is seriously prescribing such life-saving surgery as the cure, readers would no doubt be eager to know how he would radically restructure society and overthrow capitalism itself. For now, in this book, they must content themselves with Giroux’s call for “a new kind of democratic socialist politics,” which would include issues such as

instituting free higher education, eliminating runaway inequality, creating universal health care, reforming the criminal justice system, ending the off-shoring of jobs, eliminating global warming, taking money out of politics, taxing Wall Street trading, cutting military spending, and developing extensive safety nets for the most vulnerable.

¤

As revealed by the handful of excerpts from The Terror of the Unforeseen included in this review, almost every sentence Giroux writes crackles with a piercing clarity. He leaves no doubt where he stands. There is an urgency in his writing, and just when you need it he reinforces his arguments with factual support. One of the many satisfactions in reading Giroux’s searing prose is the pleasure in seeing a writer put into words what so many of us are thinking but are unable to articulate in reaction to Trump’s cruel insanity. Indeed, it is the very sanity of Giroux’s writing that is so encouraging, instilling a common bond that reassures us in these dark times that we are not in this struggle alone.

Giroux has a lot to say and he knows he is struggling uphill against decades of conventional wisdom — what William Whyte and Irving Janis called “groupthink.” Giroux repeats himself for emphasis throughout his book, returning more than once to each of his main themes. Such repetition may annoy some readers but others will welcome it, as one does in the presence of a commanding speaker or an experienced trial lawyer who knows that arguments and evidence are not always grasped the first time around and often need to be recast and reiterated to maximize understanding.

Inspired by the courage and vision of Frederick Douglass and so many others, Giroux’s commanding and profound book demands much from all of us in this ominous and threatening period in American history. “Now is the time to talk back,” he writes, “embrace the radical imagination in private and public, and work until radical democracy becomes a reality. There is no other choice.”

https://lareviewofbooks.org/article/echoes-of-fascism/

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Donald Trump, king of chaos: New research on right-wing psychology points toward big trouble ahead

Trump's supporters want chaos and destruction. When their bad drug high finally wears off, it won't be pretty

BY CHAUNCEY DEVEGA SEPTEMBER 17, 2019

Donald Trump is the King of Chaos. He has lied at least 12,000 times since becoming president of the United States.

These lies are often obvious and lazy — such as incorrectly claiming that Hurricane Dorian would hit Alabama and then forcing scientists at the National Oceanic and Atmospheric Administration to parrot his lies. Trump’s lies are made no less dangerous when they happen to be lazy and obvious.

Trump is unapologetic and unabashed in his contempt for American democracy and the rule of law. Many mental health professionals have concluded he is unwell. He lacks impulse control and evidences sociopathic behavior.

Trump acts like a self-styled mob boss — a corrupt bully who forces his subordinates to “kick up” to him.

America’s own spies do not trust our unpredictable president to act responsibly with the country’s secrets.


Trump is mercurial in his cruelty, waiting until people are in dire need to punish them, often based on sheer bigotry and racism. Most recently he has refused to let desperate people from the Bahamas enter the United States after their homes were destroyed by Hurricane Dorian.

He tells his subordinates to break the law as they execute his plans and promises to pardon them if they do so. He fires people on a whim in order to ensure their loyalty. He ignores any restraints on his power as mandated by the Constitution.

Progress is under assault in America as Trump and his allies are overturning the human and civil rights of nonwhites, women, LGBT people, the disabled and everyone else he and his movement deem to be “less than” and the Other.

Chaos is at the nucleus Age of Trump. This chaos and the disruption and destruction it causes manifest in many ways.

Trumpism is a form of backlash politics fueled by white rage at a perceived loss of privilege and power in a more diverse and cosmopolitan world. Trumpism is a temper tantrum along the global color line fueled by anxieties about power and social dominance.


Writing in the journal Contemporary Sociology, Jeffrey Alexander offers this context:

Backlash does not occur because conservative cadres and followers are anti-modern, irrational, or even unusually bigoted. Backlash is triggered, rather, because ideal and material structures of the status quo have been abruptly displaced, and those who occupied those structures wish to return to the time before displacement, when they were sitting and standing in what was obviously, and not just in retrospect, a better place.

In their 2016 article “Trump, Brexit, and the Rise of Populism,” social scientists Ronald Inglehart and Pippa Norris also locate Trumpism as part of a global right-wing movement that is channeling what they describe as “retro backlash.” This is a feeling “especially among the older generation, white men, and less educated sectors, who sense decline and actively reject the rising tide of progressive values, resent the displacement of familiar traditional norms, and provide a pool of supporters potentially vulnerable to populist appeals.”

Trumpism is doing the work of "accelerationism" — an ideology which holds that the destruction of the existing social order must be hastened, regardless of the human cost, so that a new and “better” world can be created. Trumpism is a means through which a right-wing, reactionary version of accelerationism is being enacted in the United States.

Writing in the Guardian, Andy Beckett summarizes the goals of accelerationist thinkers: “They often favour the deregulation of business, and drastically scaled-back government. They believe that people should stop deluding themselves that economic and technological progress can be controlled. They often believe that social and political upheaval has a value in itself.”

Predictably, white supremacists and other right-wing terrorists have embraced accelerationism because they understand it to be a viable strategy for destroying multiracial society.

Going beyond a conceptual framework, new research shows how backlash politics and accelerationism are lived through and experienced by Trump’s supporters — and makes clear that Trump’s hold on them will be difficult if not impossible to break.

In their new award-winning research paper "A 'Need for Chaos' and the Sharing of Hostile Political Rumors in Advanced Democracies,” political scientists Michael Bang Petersen, Mathias Osmundsen and Kevin Arceneaux show that Donald Trump’s supporters are attracted to chaos and want to inflict it on others. They reached this conclusion by surveying a representative sample of approximately 6,000 people in Denmark (a country with comparatively low political polarization) and the United States.

The researchers asked the subjects if they agreed with the following statements:

I fantasize about a natural disaster wiping out most of humanity such that a small group of people can start all over
I think society should be burned to the ground
Sometimes I just feel like destroying beautiful things
There is no right and wrong in the world
The answers were compiled in an index that Petersen, Osmundsen and Arceneaux label as “Need for Chaos.” The conclusions do not bode well for liberal democracy. Nearly one in four respondents, 24 percent, agreed that society should be burned to the ground, while a remarkable 40 percent agreed with the statement, “We cannot fix the problems in our social institutions, we need to tear them down and start over.” Similarly, 40 percent agreed with the statement, “When it comes to our political and social institutions, I cannot help thinking ‘just let them all burn.’”

In their paper Petersen, Osmundsen, and Arceneaux describe their findings as "staggering." They write:

The extreme discontent expressed in the “Need for Chaos" scale is a minority view but it is a minority view with incredible amounts of support. … A substantial minority of individuals are so discontent that they are willing to mobilize against the current political order to see if what emerges from the resulting chaos has something better in stock for them.

People who measure high in “Need for Chaos” are also more likely to circulate conspiracy theories online. This is done not out of sincere belief but rather from a desire to cause chaos and confusion.

Right-wing authoritarians — a group that strongly correlates with Trump supporters and Republicans — are also emotionally immature. This is the conclusion of social psychologist Alain Van Hiel and his colleagues in their new paper “The Relationship Between Emotional Abilities and Right-Wing and Prejudiced Attitudes.“ Van Hiel explained his findings to the website PsyPost

The results of this study were univocal. People who endorse authority and strong leaders and who do not mind inequality — the two basic dimensions underlying right-wing political ideology — show lower levels of emotional abilities.

When one includes the findings of other research showing that Trump supporters and other conservatives) are likely to exhibit what psychologists call the “dark triad” of human behavior — Machiavellianism, psychopathy and narcissism — we must consider the possibility of significant political violence if and when Trump is removed from office.

Donald Trump’s movement is a type of political body. The brain consists of ideologues, whether they work in the White House (like Stephen Miller), right-wing think tanks and interest groups, the Republican Party or Fox News and parts of the right-wing echo chamber. These people see Trumpism as their best chance to destroy America’s multiracial democracy, profit from environment disaster, gut the social safety net, destroy the commons, slash taxes on the wealthy and large corporations, and/or install a Christian nationalist regime.

The muscles, bones, guts and sinew of Trump’s political body are his coalition of white right-wing evangelicals, white suburbanites who do not care about democracy or the country’s overall health as long as their 401(k) accounts continue to grow, and bigoted, rage-filled members of the “white working class.”

Does Donald Trump’s political body and fascist movement have a heart? Yes. But it is an organ incapable of caring, concern, empathy or regard for human dignity. Nevertheless, the Trumpist heart beats hard and fast.

The Wall Street Journal recently offered an intimate profile of the beating heart of Trump’s political body. These are his superfans, people who have attended dozens of Trump’s political rallies, traveling all over the country to show devotion to their Great Leader.

Donald Trump is their drug. And like other drugs he fills an emotional, spiritual and intellectual void for his supporters:

All of them describe, in different ways, a euphoric flow of emotions between themselves and the president, a sort of adrenaline-fueled, psychic cleansing that follows 90 minutes of chanting and cheering with 15,000 other like-minded Trump junkies.

“Once you start going, it’s kind of like an addiction, honestly,” said April Owens, a 49-year-old financial manager in Kingsport, Tenn., who has been to 11 rallies. “I love the energy. I wouldn’t stand in line for 26 hours to see any rock band. He’s the only person I would do this for, and I’ll be here as many times as I can.”

Like other addicts, these Donald Trump's supporters convince themselves that their addiction is somehow good and normal:

Just before midnight on the eve of the Cincinnati rally, about two dozen fans lounged in lawn chairs or leaned on metal bike racks, scrolling through their phones and sipping from cans of Coors Light. A soft brown blanket covered Ms. Barten and her 12-year-old granddaughter, who slept sitting up in her camp chair.

The 57-year-old Air Force veteran’s disability check is reduced by $5 every month by an automatic donation to the Trump campaign.

“We’re not rich by any means,” Ms. Barten said. “But I’ll tell you what: When we’re rich in our hearts with our country and our president, we’re richer than anybody.”

Donald Trump delivers human cocaine for his followers. He is both a cult leader and a political drug dealer. Inevitably, Trump’s voters will come crashing down from their political cocaine high. Unfortunately, they will not suffer alone in well-deserved and hard-earned misery. Instead, they will lash out against the rest of the American people and the world in a fit of destruction and chaos.

https://www.salon.com/2019/09/17/donald-trump-king-of-chaos-new-research-on-right-wing-psychology-points-toward-big-trouble-ahead/

[cdrom]

Putin, trolling Trump, says Saudi Arabia should buy Russian air defense system

https://www.reuters.com/video/2019/09/17/rouhani-zarif-chuckle-at-putins-offer-to?videoId=601517508


Russian President Vladimir Putin on Monday offered to help Saudi Arabia protect its people and oil infrastructure by selling the kingdom Russian-made air defense systems.

Putin's remark, at a press conference with Iranian President Hassan Rouhani and Turkish President Recep Tayyip Erdogan, came after U.S. officials said that Iran is likely to blame for the attacks over the weekend on two crucial Saudi oil processing facilities, which Tehran denies. In response, U.S. President Donald Trump pronounced his country "locked and loaded."


The Russian president's comments were clearly aimed more at Washington than at Riyadh, and both Rouhani and Iranian Foreign Minister Mohammad Javad Zarif took visible delight in the trolling of the blustery American president, laughing heartily as Putin spoke with a devious glint in his eye.

"We are ready to help Saudi Arabia to protect their people," Putin said at the news conference, which followed the latest meeting of the Russian, Iranian and Turkish leaders aimed at achieving a peace settlement in Syria through a diplomatic effort known as the "Astana process."

"And they need to make one clever decision as Iran did, buying our S-300, and as Mr. Erdogan did by deciding to buy the most advanced S-400 Triumph air defense systems from Russia," Putin continued. "These kinds of systems are capable of defending any kind of infrastructure in Saudi Arabia from any kind of attack."

It was a masterful bit of trolling, even by the standards of Putin, who is well-known for taunting his adversaries.

The United States had long opposed the sale of the S-300 air defense system to Tehran. For nearly a decade, Russia refused to complete the sale under a deal signed in 2007, first bowing to pressure from the U.S. and Israel, and later in complying with U.N. sanctions imposed over Iran's nuclear program. But delivery of the surface-to-air missile system was completed in 2016, after the signing of the Iran nuclear agreement, known as the Joint Comprehensive Plan of Action (JCPOA), which Trump unilaterally abandoned last year.

Similarly, Washington had complained loudly about Turkey's plan to buy the more advanced S-400 system, and had even threatened harsh punishment of Turkey, a NATO ally. The Trump administration had urged Erdogan to instead buy the Patriot air defense system, made by Raytheon, a U.S. defense contractor.

Turkey went ahead with the purchase anyway, and in response, the Trump administration barred Turkey from the U.S. F-35 fighter jet project. But Trump has been urged to punish Turkey more severely, including by the House foreign affairs committee, which last month called on the White House to impose sanctions.

Beyond the disputes over air defense systems, Saudi Arabia is also one of the biggest buyers of U.S.-made weapons and other military hardware and Trump has repeatedly boasted about brokering major deals with Riyadh. Trump even vetoed an effort by the U.S. Congress to block arms sales to Saudi Arabia as punishment over the killing of Washington Post columnist Jamal Khashoggi.

Following a bilateral meeting with Rouhani on Monday, Putin stressed Russia's continuing support for the JCPOA despite Trump's withdrawal. And both the Iranian and Russian leaders spoke about the success of their efforts to improve economic ties.

Russia is the world's third-largest oil producer after the U.S. and Saudi Arabia, so it potentially stands to benefit from any interruption of Saudi oil production as well as from the spike in worldwide oil prices that followed the attacks over the weekend.

But the attack and Trump's response also gives Putin the opportunity to highlight Washington's diminished influence in the Middle East, as well as Trump's isolation on the issue of the Iran nuclear deal. The EU and the other European guarantors of the JCPOA , France, Germany and the United Kingdom, have remained committed to the deal despite Trump's pullout. Critics of Trump say he is at fault for the tensions that led to the attack over the weekend because of his withdrawal from the nuclear deal.


Trump, however, has long insisted that the JCPOA, negotiated by former President Barack Obama, had failed to address Iran's role in a key aspect of regional military conflicts, as well as its support for terrorism.

French President Emmanuel Macron has been working to broker a meeting between Trump and Rouhani aimed at easing tensions and reducing the risk of war. Trump had said he would be open to such talks, but Tehran has now ruled out any possibility of such a meeting on the sidelines of the United Nations General Assembly meeting next week in New York.

[BottomBounce]

Investors Haven’t Noticed, But Trump Is Creating Bullish Gold Price Conditions
https://www.lombardiletter.com/trump-creating-bullish-gold-price-conditions/28536/

[BottomBounce]

$MJNA @ TheStreet. Blake Schroeder, CEO of Kannaway, describing his company's beauty line as an "entry way" product for new markets and more acceptable by the mainstream consumer.

Beauty "went from something we didn't talk about at all at in the company to this becoming a significant part of our sales," says Schroeder in an interview with Real Money. "As we continue to expand, this is a product that we can lead with that's going to have less regulatory issues than other cannabis-based products."

Last year, the beauty line represented less than 5% of Kannaway's business, until the company decided to refocus. The beauty segment shot up to almost 11% of the company's sales.

San Diego-based Kannaway, has six beauty products derived from cannabis, including a detox soak, a toner, serum and an exfoliant. It launched its first beauty product only 2.5 years ago and is fast becoming one of the early movers in the European space.

Kannaway is owned by a publicly listed company Medical Marijuana Inc. $MJNA , whose stock price didn't rise above $1 over the past five years.

https://realmoney.thestreet.com/articles/07/18/2018/bath-bombs-and-muscle-creams-how-beauty-becoming-fast-lane-cannabis-growth

[cdrom]

The US-China trade war has set in motion an unstoppable global economic transformation


by Frederick Kempe

KEY POINTS
- The most knowing delegates at this year’s World Energy Congress continued to worry about the US-Chinese trade war.

- It has slowed growth and placed the biggest drag on oil prices.

- At the same time, however, they were shifting focus to the more momentous and generational event of the decoupling of the world’s two weightiest economies.

ABU DHABI, United Arab Emirates – If one strains hard enough to listen in the humid heat of this oil-rich kingdom, one can hear the rumblings of the most profound event for global energy markets and the world economy, not only for this year but perhaps for this era:

It is the decoupling of the world’s two weightiest economies, that of China and the United States. The process seems as inescapable as its extent and global impact remains incalculable.

This week’s news that President Trump was delaying by two weeks a tariff increase on $250 billion of Chinese goods planned for October 1, the 70th anniversary of the People’s Republic of China, is unlikely to slow this trend, and neither will China’s responding exemption of pork and soybeans from new tariffs.

The most knowing delegates at this year’s World Energy Congress, who met here this week, continued to worry about the US-Chinese trade war. It has slowed growth and placed the biggest drag on oil prices. At the same time, however, they were shifting focus to the more momentous and generational event of decoupling.

They saw it in the Liquified Natural Gas contracts that the world’s fastest growing LNG exporter, the United States, wasn’t signing with the world’s fastest growing importer, China. They recognized it in the recent Chinese deal to take an equity stake in Russia’s Arctic LNG 2 project taken by China National Petroleum Corp (CNPC) and China National Offshore Oil Corp (CNOOC).

Delegates also heard decoupling in the only four LNG vessels that have sailed from the United States to China this year, according to the US Census Bureau, down from 32 in 2018 and 23 in 2017.

LNG has transformed global gas markets dramatically in recent years, driven largely by significant demand in China and the rest of east and southeast Asia. However, in a market where financing is driven by long-term contracts, often even before construction begins, American suppliers are already gauging the potential costs, until recently unanticipated, of lost Chinese buyers.

The tit-for-tat tariffs and accompanying Trump tweets have been driving markets all year, but what traders haven’t even begun to price in is the longer term, structural impact of this decoupling and its particular danger to individual companies.
One can also see decoupling in the oil deliveries not made to China from the United States this year, even though the US has become the world’s largest oil and gas producer and a net exporter. Whereas US shipments of crude oil to China reached half a million barrels a day in summer 2018, they averaged only a third of that in the spring of 2019.

Though delegates had come here to focus on energy markets, the implications of decoupling have begun to touch almost all economic sectors, from aviation to automobiles, from finance to farmers, and from cell phones to semiconductors.

The tit-for-tat tariffs and accompanying Trump tweets have been driving markets all year, but what traders haven’t even begun to price in is the longer term, structural impact of this decoupling and its particular danger to individual companies.

Wary that US leaders fundamentally want to undermine their country’s rise, Chinese leaders increasingly are dissuading or outright preventing their companies from dealing with American partners. Meanwhile, chastened US companies are rethinking supply chains and relocating Chinese-based manufacturing.

If nothing interrupts this process, it will reverse 40 years of increased trade, financial and economic integration of the two countries. Other nations’ companies won’t follow the American lead but rather look to pick up lost US opportunities among China’s 1.4 billion consumers.

Encouraged by his trade advisor Peter Navarro, President Trump made his own decoupling druthers clear in a late-August tweet: “Our great American companies are herby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”

President Trump’s trade policies are resulting in an economic slowdown that could endanger his re-election and thus his revived efforts toward a solution. Yet, it remains unlikely that any major deal can reverse this downward trajectory in bilateral relations in any lasting manner, even as China and the United States open the 13th round of trade talks in October (no specific date set yet).

Beijing remains eager to see the US remove its tariffs. Trump administration negotiators continue to want China to commit to structural changes in how it does its business, ranging from intellectual property protections to state subsidies.

Hunkering down for the long-term
The most profound shift of recent weeks, however, may be Beijing’s move from negotiating the best deal possible to hunkering down for an epochal, systemic contest that Chinese officials fear will long outlive the Trump administration.

Speaking earlier this month to a training session for Communist party cadres, Chinese President Xi Jinping dramatically underscored this change of mood.

The summary of Xi’s speech, published so it would not be missed by the official Xinhua news agency, doesn’t mention the United States but focuses on “all manner of struggles” China will have to undertake to achieve the “Chinese dream” of a “great national rejuvenation” by 2049, the centenary of the People’s Republic of China.

Said Xi, “For those risks or challenges that jeopardize the leadership of the Communist Party and China’s socialist system; for those that endanger China’s sovereignty, security and development interests; for those that undermine China’s core interests and major principles; and for those that deter China’s realization of a great national rejuvenation, we will wage a determined struggle against them as long as they are there. And we must win the struggle.”

The South China Morning Post, in reporting on the speech, said that the Chinese word for “struggle,” douzheng, appeared nearly 60 times in the summary, underscoring the siege mentality that seems to have seeped into Chinese leadership regarding the US.

“It’s a fundamental political statement,” prominent Beijing political commentator Wu Qiang told the newspaper. “China will adopt an antagonist stance, position and approach to handle the deterioration of China-US relations.”

Xi took considerable poetic license, reminiscent of the movie Crouching Tiger, Hidden Dragon in how he instructed Communist cadres to remain watchful of the emerging dangers. He said they should be able “to notice a deer passing by, looking at the grass and leaves, see a tiger jumping out by hearing the wind in the pines, and know the coming of autumn by spotting the changed color of a tree leaf. ”

In the less nuanced world of Trump tweets and global markets, it’s time to buckle up for what is likely to be a long and bumpy ride. It also may be the moment to shift one’s focus from President Trump’s “art of the deal” to what one Chinese expert, Li Mingjiang of Nanyang Technological University, calls President Xi’s unfolding “art of the struggle.”

https://www.cnbc.com/2019/09/14/us-china-trade-wars-unstoppable-global-economic-transformation.html

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THE RETURN OF THE HATEFUL PAIRS

12 August 2019 by Peter Zeihan

A few months back a South Korean court ruled Japanese firms needed to pay compensation to Korean laborers who worked in Japanese-run factories during the 1910-1945 Japanese occupation of Korea. A big piece of this involved compensation to the Korean “comfort women.” In the Asian theater of World War II, the Japanese military created brothels with (mostly) Korean women for their troops. The Japanese said the women were gainfully employed volunteers who were fully compensated. The Koreans assert it was – at best – sex slavery. (Most of the world and nearly every non-Japanese historian sides with the Koreans on this one.) Anywho, from the Korean point of view the Japanese strategy on reparations is to deflect, deflect, deflect until the last of those who suffered pass away from old age, which will undoubtedly occur within a few years, ergo the new push from South Korean courts to provide a new legal footing for prosecution.

The Japanese didn’t like this very much and so slapped the South Korean economy with export restrictions that will cause long delays for certain materials that are absolutely critical to advanced Korean semiconductor manufactures. In retaliation Korean boycotts of Japanese goods have sprung up. Both sides have since withdrawn the other from their respective “white lists” – a classification when enables trade in sensitive technologies without the need for time-consuming and cost-intensive permitting. The Koreans are now threatening to cease intelligence sharing, which would undercut the very existence of Korean-Japanese security cooperation. If the Japanese go through with their threats, this will have a more immediate impact on the South Korean economy than what we’ve seen from the US-China trade war so far. The semiconductor industry is 7% of the South Korean economy so anything that threatens that industry is a threat to the entire economy. Translation: the Japanese are going for the jugular.

At the risk of sounding like a Millennial, wtf? Aren’t these countries supposed to be on the same side?

Some quick background:

American security policy in the post-World War II era is based upon a single, simple premise: we will pay you to be on our side. Everyone gets access to the U.S. market, the U.S. Navy will make the global ocean safe for everyone’s commerce, everyone gets an iron-clad guarantee to their physical security as well as the shelter of the U.S. nuclear umbrella, so long as you stand shoulder to shoulder with the United States against the Soviet Union.

One of the problems of this strategy is that having millennia of human history meant there were millennia to build up mutual antagonisms. The American-led global Order didn’t so much end grievances among the allies as freeze them in place. It would do no good, for example, for France and Germany to go to war (again) if they were supposed to be jointly resisting the Soviets. Making the Order work didn’t just require aircraft carriers and army divisions, but also the American diplomatic corps riding herd on oftentimes quarrelsome partners.

Under “normal” circumstances, the United States would have ordered the South Koreans and Japanese to cut this crap out the day after it started. But the Americans are getting out of the global management business and so the bilateral snit has been allowed to boil up into and beyond a full international incident. It is incorrect to think of the South Koreans and Japanese as being allied. South Korea is allied to the United States, and Japan is allied to the United States, but they only work together under direct, heavy-handed American overwatch. Remove that overwatch (honestly, remove the American interest in the pair of bilateral alliances themselves), and the South Koreans and Japanese revert to what they’ve always been. Two countries sharing an epic poem of mutual dislike. A hateful pair.

Most of my work these days is predicting how the Order of the past seven decades crumbles into the messy Disorder of the future. I christened the path from the mostly functional here to the mostly dysfunctional there the Descent. There is no singular trigger event, but it all stems from the Americans’ washing their hands of the world writ large. It involves everything from food supplies to passenger aircraft routes to manufacturing supply chains to tariffs to armored formations to…squabbling countries that most people thought were allies. Every event triggers more, and as regards hateful pairs there are a lot of squabbles to internalize and so a lot of consequences to be aware of.

Let’s begin with East Asia. The South Koreans and Japanese are hardly the only members of the Order who loathe one another. The most obvious starting point is China v Taiwan. China sees Taiwan as a wayward province and while most of the Chinese’ last decade of naval buildup wouldn’t do jack to threaten the United States, it is fully capable of threatening Taiwan. Taiwanese-Chinese economic integration in the world of computers and electronics is hip deep, with the sector most exposed being Silicon Valley. That sort of integrated supply chain systems will completely go away. The company that stands to lose the most in absolute terms is Apple.

The only country that hates China more than Taiwan and Japan is Vietnam. In nearly every Chinese consolidation period stretching back two millennia Vietnam has been a target. The Vietnamese don’t hold a grudge against the Americans – they don’t see the Vietnam War as all that big of a deal. But the Vietnamese call their conflicts with the Chinese the Two Thousand Years War. All those Chinese firms that are setting up shop in Vietnam in an effort to get around the new U.S. tariffs on China? Pbbbbbbbt.

Further south both Singapore and Malaysia were carved out of the same British colonial administration. At first Malaysia didn’t want Singapore because they feared all the Chinese ethnics there would tip the new country’s demographic balance into being Chinese majority. When Singapore went on to be an economic success story, the Malaysians got peeved, threatened war, and still on occasion threaten the city-state’s water supplies. Not only are they too central to regional manufacturing supply chains – particularly in electronics – they share control of the Strait of Malacca, the world’s busiest trade lane. Singapore does extra duty being Southeast Asia’s primary financial hub.

On the opposite side of Eurasia, it isn’t like any of the Europeans are actually friends with one another. Even with all-hands-on-deck in the U.S. State department during the Cold War, Greece v Turkey managed a couple serious scraps and even today maintain a just-shy-of-snarling relationship.

Of more economic importance, the United Kingdom was the world’s superpower for over two centuries, more than enough time to sow a great deal of mistrust. The UK, even with its navy in a historically weak position, still commands sufficient force to make or break most northern European commerce. And with it feeling a great deal of Brexit-related umbrage, will soon be itching for ways to get back at the Continent.

Germany’s more recent (and failed) bid for superpowerhood generated flat-out detestation, especially from those countries who have no choice but to be in the German sphere of influence. Poland in particular resents being a cog in the German machine, but is now so integrated into Germany’s manufacturing supply chains it is a vital part of Germany’s supply chain network (in other words: exports). France is only Germany’s ally so long as France feels it can control Germany. That ship sailed a decade ago. For the handful of French who can (at least privately) swallow their pride and admit reality, the living horror of the Now-German-dominated European Union cannot end soon enough.

That’s just the big rivalries. There are plenty more: Poland v Lithuania, Romania v Hungary, Austria v Hungary, Bulgaria v Macedonia, the UK v Ireland, Belgium v Belgium (Belgium is weird). About the only European country everyone respects is the Netherlands because the Dutch have made not giving a f**k about other peoples’ passions their defining characteristic.

And that’s just the hateful pairs fully in the Order. There are plenty of ill feelings from Order members towards non-Order members. Iran-Saudi Arabia could get explody at a moments’ notice and set global oil markets on fire. Iran’s relations with Pakistan aren’t much friendlier. Russia hates everybody (and everybody hates Russia).

Since 1946 the Americans haven’t so much poured oil on troubled waters as smothered everything with a lead-weighted, waterlogged blanket. The security framework that supported the Order isn’t simply disintegrating, the economic access the Americans enabled isn’t simply collapsing, but the fires of history are burning through all of it at the same time.

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The United States and China at a Crossroads

Statesmanship and creativity are needed as Washington and Beijing renegotiate a relationship that is too big to fail.

BY HENRY M. PAULSON JR.

America’s Foreign Service officers are important voices for, and representatives of, our country abroad. Your hard work and diplomacy are vital to ensuring that America’s policies and priorities are understood by foreign leaders. I believe your work in China will be particularly important as the U.S.-China relationship will shape the geopolitical landscape for this century. I hope you find this article useful in considering this important bilateral relationship.

There’s a lot of finger pointing between Beijing and Washington these days. It is important to understand how the United States and China arrived at this moment of heightened tension. The drivers of the current downward spiral aren’t complicated.

First, we have diverging interests. On many issues where the United States and China should agree, such as North Korea, we often pursue divergent approaches.

Second, the United States and China disagree about important rules governing the international system. One example is maritime rights and customs—which brought our navies into a near-collision on the high seas last September.

Third, American and Chinese views are opposed in critical areas. For example, China and Russia argue for cyber sovereignty and the right of the state to control cross-border data flows. The United States and the European Union both reject those views.

Taken together, these and other drivers have fueled a new consensus in Washington that China is not just a strategic competitor, but very possibly our major long-term adversary. America’s long-standing “engagement” policy is now widely viewed as being of little use for its own sake. Nobody is arguing against dialogue. But nearly everybody is arguing that the results of U.S.-China dialogue and engagement have been poor.

Underlying tensions will persist beyond any single issue between our countries, such as trade, because the problems we face, and our divergence of views—even in the economic area— are broad. Unless these broader and deeper issues are addressed, we are in for a long winter in U.S.-China relations.

Economics, for Example
Let’s take economics. The United States played the decisive role in facilitating China’s entry into the World Trade Organization. Yet 18 years later, China still hasn’t opened its economy to foreign competition. It retains joint venture requirements and ownership limits. And it uses technical standards, subsidies, licensing procedures and regulations as non-tariff barriers to trade and investment. This is simply unacceptable. It is why the Trump administration has argued for change and modernization of the WTO system. And I agree.

But it also helps explain why so many influential voices in America now argue for a “decoupling” of the two economies. This negative view of China unites politicians from both left and right who agree on nothing else. Trade with China has hurt some American workers. And they have expressed their grievances at the ballot box. So, while many attribute this shift to the Trump administration, I do not.

These and other drivers have fueled a new consensus in Washington that China is not just a strategic competitor, but very possibly our major long-term adversary.

What we are now seeing will likely endure for some time within the American policy establishment. China is viewed— by a growing consensus—not just as a strategic challenge to America, but as a country whose rise has come at our expense. In this environment, it would be helpful if the U.S.-China relationship had more advocates. That it does not reflects another failure.

In large part because China has been slow to open its economy since it joined WTO, the American business community has turned from advocate to skeptic, and even opponent of past U.S. policies toward China. American business doesn’t want a tariff war, but it does want a more aggressive approach from our government. Even though many American businesses continue to prosper in China, a growing number of firms have given up hope that the playing field will ever be level.

Some have accepted the Faustian bargain of maximizing today’s earnings per share while operating under restrictions that jeopardize their future competitiveness. But that doesn’t mean they’re happy about it. Nor does it mean they aren’t acutely aware of the risks—or thinking harder than ever before about how to diversify their risks away from, and beyond, China.

The Risks Are Real
That brings us to the risks. Sadly, I think the risks of a new age of disruption are considerable. For 40 years, the U.S.-China relationship has been characterized by the integration of goods, capital, technology and people. And over these years, economic integration between the two countries was supposed to mitigate security competition. But an intellectually honest appraisal must now admit that the reverse is taking place. And economic tensions are reaching a breaking point.

After 40 years of integration, a surprising number of political and thought leaders on both sides advocate policies that could forcibly de-integrate the two countries across all four of these baskets. The integration of trade in goods could come undone— as supply chains are broken, especially for sensitive technology. Integration through cross-border capital flows will come under greater pressure as restrictions on Chinese investment take hold across big sectors in the United States.

Indeed, if this trend continues, integration of global innovation ecosystems may well collapse as a result of mutual efforts by the United States and China to exclude one another. Meanwhile, the integration of people, especially the brightest young students, could stall—as Washington potentially bans Chinese students from studying whole categories of science and engineering subjects.

If all this persists, I fear that big parts of the global economy will be closed off to the free flow of investment and trade. And that is why I now see the prospect of an economic “Iron Curtain”—one that throws up new walls on each side and unmakes the global economy as we have known it.

A U.S.-China Divorce?
But here’s the problem for those in the United States who advocate a U.S.-China “divorce”—decoupling is easier when you’re actually a couple. The United States can try to divorce; but what if others, especially in Asia, don’t want to follow suit? As a function of geography, economic gravity and strategic reality, I do not believe that any country in Asia can afford to divorce China, even if it wishes to. So in its effort to isolate China, America risks isolating itself.

But let’s also be clear that if Beijing wants to keep its relationship with the United States from spinning out of control, it’s going to have to look hard at some of its policies. Above all, China will need to rediscover the spirit of market-driven reform. 2018 marked the 40th anniversary of “reform and opening” in China, the remarkable transformation launched by Deng Xiaoping and other leaders in 1978.

The United States can try to divorce China; but what if others, especially in Asia, don’t want to follow suit?

It’s been a good run for China over these years. And it’s been an especially good run for China since it entered the WTO in 2001. Its $1 trillion economy in 2001 has become a $14 trillion behemoth today. Its $220 billion in foreign exchange reserves ballooned to a staggering $3 trillion.

But what China has lost, especially over the last decade and a half, is the bold impulse to reform that led leaders like Zhu Rongji to undertake significant changes to the state-led sector in the 1990s, as Beijing prepared for its WTO accession. Today, the prevailing view in the United States is that China is increasingly content to pursue its own standards, privilege its domestic rules, and erect rather than demolish walls for foreign competitors.

So I continue to encourage China’s leaders to pursue meaningful competitive and commercial reforms, and to do more to foster and protect innovation. The key to avoiding an economic “Iron Curtain” is for China to see its interest in making these reforms and changes. If China doesn’t move quickly, divorce is a real risk.

Considerations for Both Sides
While the current trajectory cannot be easily reversed, I offer these considerations for both sides.

For China: First, do no harm. For example, implement robust rules of engagement to prevent People’s Liberation Army Navy captains from undertaking the kind of maneuver that nearly resulted in a collision in the South China Sea last September.

Second, work constructively with America’s allies.

Third, be bold. Open your economy. Have confidence that your firms no longer need to hide behind a wall of government protection.

Fourth, be proactive in protecting proprietary foreign knowhow and end policies that compel technology transfer.

Fifth, work with the United States on its top strategic priorities, especially North Korea.

If the United States and China cannot find a way to develop a workable consensus, it will pose a systemic risk of monumental proportions.

As for the United States: First, dial down the rhetoric. Strategic competition is a fact. China does not pose an existential threat to American civilization. In the 243rd year of our great democratic experiment, we should have more confidence in America and the resilience of our system. We should prepare for the obvious challenges from China. But let’s not sacrifice those values that have made us the strongest, most competitive and most admired country in the world.

Second, enlist partners. And then, working in coalition with these partners, try to foster some workable understandings with Beijing. The World Trade Organization is perhaps the best example. It is in desperate need of an upgrade. So, China and the United States could be part of leading efforts to bring the WTO into the digital age.

In a similar vein, I wish President Trump would reconsider the withdrawal from the Trans-Pacific Partnership. A TPP 2.0 would offer a ready-made vehicle to shape the trade environment in which Beijing operates.

Third, negotiate with China and find frameworks to resolve issues.

Fourth, invest in America—big time. A strong military. A strong economy. Strong educational institutions. Strong investments in science and engineering. Openness to the world. Investment in alliances. Investment in security and economic partnerships on every continent, but especially in Asia and Europe. Getting our own policies right is essential to competing with China and to thriving in the 21st century.

New Framework Needed
If the United States and China cannot find a way to develop a workable consensus, it will pose a systemic risk of monumental proportions—not just to the global economy, but to international order as we know it, and to world peace. Both countries need an international system that functions, because international order is one of those things that is simply too big to fail. And so, the alternative is unacceptable. And that is why I am hopeful that statesmanship will prevail.

We are proceeding down divergent paths, and we are in danger of facing a long winter before we reach what may still be a rather patchy spring. But I believe a spring will come. So the questions are, how long will this winter last, and how much unnecessary dysfunction and pain will be inflicted along the way?

The answer will be determined by the capacity and willingness of leaders in Washington and Beijing to think creatively— and sometimes even disruptively. In 1972, our leaders established a framework for a world beset by Cold War and locked in ideological conflict. At various points, they’ve had to recalibrate. Today’s world looks nothing like the world of the 1970s, or of the 2000s, or even of the years when my friend [People’s Republic of China Vice President] Wang Qishan and I tackled the financial crisis in 2007 and 2008.

We’ve reached another of those consequential moments. And the stakes are higher than ever before. We must craft a new framework that works for today’s world, not the world of the past. And for that, we need statesmanship—wise and strong leadership in Washington and Beijing.

http://www.afsa.org/united-states-and-china-crossroads

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The Global Risks Report 2019

Executive Summary

Is the world sleepwalking into a crisis? Global risks are intensifying but the collective will to tackle them appears to be lacking. Instead, divisions are hardening. The world’s move into a new phase of strongly state-centred politics, noted in last year’s Global Risks Report, continued throughout 2018. The idea of “taking back control”—whether domestically from political rivals or externally from multilateral or supranational organizations—resonates across many countries and many issues. The energy now expended on consolidating or recovering national control risks weakening collective responses to emerging global challenges. We are drifting deeper into global problems from which we will struggle to extricate ourselves.

During 2018, macroeconomic risks moved into sharper focus. Financial market volatility increased and the headwinds facing the global economy intensified. The rate of global growth appears to have peaked: the latest International Monetary Fund (IMF) forecasts point to a gradual slowdown over the next few years.1 This is mainly the result of developments in advanced economies, but projections of a slowdown in China—from 6.6% growth in 2018 to 6.2% this year and 5.8% by 2022—are a source of concern. So too is the global debt burden, which is significantly higher than before the global financial crisis, at around 225% of GDP. In addition, a tightening of global financial conditions has placed particular strain on countries that built up dollar-denominated liabilities while interest rates were low.

Geopolitical and geo-economic tensions are rising among the world’s major powers. These tensions represent the most urgent global risks at present. The world is evolving into a period of divergence following a period of globalization that profoundly altered the global political economy. Reconfiguring the relations of deeply integrated countries is fraught with potential risks, and trade and investment relations among many of the world’s powers were difficult during 2018. Against this backdrop, it is likely to become more difficult to make collective progress on other global challenges—from protecting the environment to responding to the ethical challenges of the Fourth Industrial Revolution. Deepening fissures in the international system suggest that systemic risks may be building. If another global crisis were to hit, would the necessary levels of cooperation and support be forthcoming? Probably, but the tension between the globalization of the world economy and the growing nationalism of world politics is a deepening risk.

Environmental risks continue to dominate the results of our annual Global Risks Perception Survey (GRPS). This year, they accounted for three of the top five risks by likelihood and four by impact. Extreme weather was the risk of greatest concern, but our survey respondents are increasingly worried about environmental policy failure: having fallen in the rankings after Paris, “failure of climate-change mitigation and adaptation” jumped back to number two in terms of impact this year. The results of climate inaction are becoming increasingly clear. The accelerating pace of biodiversity loss is a particular concern. Species abundance is down by 60% since 1970. In the human food chain, biodiversity loss is affecting health and socioeconomic development, with implications for well-being, productivity, and even regional security.

Technology continues to play a profound role in shaping the global risks landscape. Concerns about data fraud and cyber-attacks were prominent again in the GRPS, which also highlighted a number of other technological vulnerabilities: around two-thirds of respondents expect the risks associated with fake news and identity theft to increase in 2019, while three-fifths said the same about loss of privacy to companies and governments. There were further massive data breaches in 2018, new hardware weaknesses were revealed, and research pointed to the potential uses of artificial intelligence to engineer more potent cyber-attacks. Last year also provided further evidence that cyber-attacks pose risks to critical infrastructure, prompting countries to strengthen their screening of cross-border partnerships on national security grounds.

The importance of the various structural changes that are under way should not distract us from the human side of global risks. For many people, this is an increasingly anxious, unhappy and lonely world. Worldwide, mental health problems now affect an estimated 700 million people. Complex transformations—societal, technological and work-related—are having a profound impact on people’s lived experiences. A common theme is psychological stress related to a feeling of lack of control in the face of uncertainty. These issues deserve more attention: declining psychological and emotional well-being is a risk in itself—and one that also affects the wider global risks landscape, notably via impacts on social cohesion and politics.

Another set of risks being amplified by global transformations relate to biological pathogens. Changes in how we live have increased the risk of a devastating outbreak occurring naturally, and emerging technologies are making it increasingly easy for new biological threats to be manufactured and released either deliberately or by accident. The world is badly under-prepared for even modest biological threats, leaving us vulnerable to potentially huge impacts on individual lives, societal well-being, economic activity and national security. Revolutionary new biotechnologies promise miraculous advances, but also create daunting challenges of oversight and control—as demonstrated by claims in 2018 that the world’s first gene-modified babies had been created.

Rapidly growing cities and ongoing effects of climate change are making more people vulnerable to rising sea levels. Two-thirds of the global population is expected to live in cities by 2050 and already an estimated 800 million people live in more than 570 coastal cities vulnerable to a sea-level rise of 0.5 metres by 2050. In a vicious circle, urbanization not only concentrates people and property in areas of potential damage and disruption, it also exacerbates those risks—for example by destroying natural sources of resilience such as coastal mangroves and increasing the strain on groundwater reserves. Intensifying impacts will render an increasing amount of land uninhabitable. There are three main strategies for adapting to rising sea-levels: (1) engineering projects to keep water out, (2) nature-based defences, and (3) people-based strategies, such as moving households and businesses to safer ground or investing in social capital to make flood-risk communities more resilient.

In this year’s Future Shocks section, we focus again on the potential for threshold effects that could trigger dramatic deteriorations and cause cascading risks to crystallize with dizzying speed. Each of the 10 shocks we present is a “what-if” scenario—not a prediction, but a reminder of the need to think creatively about risk and to expect the unexpected. Among the topics covered this year are quantum cryptography, monetary populism, affective computing and the death of human rights. In the Risk Reassessment section, experts share their insights about how to manage risks. John Graham writes about weighing the trade-offs between different risks, and András Tilcsik and Chris Clearfield write about how managers can minimize the risk of systemic failures in their organizations. And in the Hindsight section, we revisit three of the topics covered in previous reports: food security, civil society and infrastructure investment.

http://www3.weforum.org/docs/WEF_Global_Risks_Report_2019.pdf

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Trump’s conflict with China is a real war – both will shed blood for control of capitalism’s monstrous machine

by Slavoj Zizek

The big problem for America is how to justify its imperial role. It needs a permanent threat of war, offering itself as the universal protector of all other states

The trade war between the US and China can only fill us with dread. How will it affect our daily lives? Will it result in a new global recession or even geopolitical chaos?

To orient ourselves in this mess, we should bear in mind some basic facts. The trade conflict with China is just the culmination of a war which began years ago when Donald Trump fired the opening shot aimed at the biggest trading partners of the US by deciding to levy tariffs on the imports of steel and aluminium from the EU, Canada and Mexico.

Trump was playing his own populist version of class warfare: his professed goal was to protect the American working class (are metal workers not one of the emblematic figures of the traditional working class?) from “unfair” European competition, thereby saving American jobs. And now he is doing the same with China.

Trump’s impulsive decisions are not just expressions of his personal quirks, they are reactions to the end of an era in a global economic system. An economic cycle is coming to an end – a cycle which began in the early 1970s, a time when, what Yanis Varoufakis calls the “Global Minotaur”, was born. The monstrous engine that was running the world economy from the early 1970s to 2008.

By the end of the 1960s, the US economy was no longer able to continue the recycling of its surpluses to Europe and Asia: its surpluses had turned into deficits. In 1971, the US government responded to this decline with an audacious strategic move: instead of tackling the nation’s burgeoning deficits, it decided to do the opposite, to boost deficits. Who would pay for them? The rest of the world. How? By means of a permanent transfer of capital that rushed across the two great oceans to finance America’s deficits.

This growing negative trade balance demonstrates that the US became a non-productive predator. In the last decades, it had to suck up a $1bn daily influx from other nations to buy for its consummation and is, as such, the universal Keynesian consumer that keeps the world economy running. (So much for the anti-Keynesian economic ideology that seems to predominate today.) This influx, which is effectively like the tithe paid to Rome in antiquity, or the gifts sacrificed to the Minotaur by the Ancient Greeks, relies on a complex economic mechanism: the US is trusted as the safe and stable centre, so that all others, from the oil-producing Arab countries to western Europe and Japan – and now even China – invest their surplus profits in the US.

Since this trust is primarily ideological and military, not economic, the problem for the US is how to justify its imperial role. It needs a permanent threat of war, offering itself as the universal protector of all other “normal” (that is, not “rogue”) states.

Since 2008, however, this world system has been breaking down. During the Obama years, Paul Bernanke, chair of the Federal Reserve, gave another breath of life to this system. Ruthlessly exploiting the fact that the US dollar is the global currency, he financed imports by printing money fast. Trump has decided to approach the problem in a different way: ignoring the delicate balance of the global system, he has focused on elements which may be presented as “injustice” for the US – gigantic imports reducing domestic jobs, for example.

But what Trump decries as “injustice” is simply part of a system which has profited the US; the US were effectively robbing the world by importing stuff and paying for it by debts and printing money.

Consequently, in his trade wars, Trump cheats: he wants the US to continue to be a global power but refuses to pay even the nominal price for it. He follows his “America first” principle, ruthlessly privileging US interests, while still acting as a global power.

Even if some of the US arguments against China and its trade may appear reasonable, they are undoubtedly one-sided: the US profited from the situation decried by Trump as unjust, and Trump wants to keep profiting also in the new situation. The only way out left for others is on some basic level unite to undermine the central role of the US as a global power secured by its military and financial might. One should be as ruthless as Trump in this struggle. Our predicament can only be stabilised by the collective imposition of a new world order no longer led by the US. The way to beat Trump is not to imitate him with “China first”, “France first,” and so on, but to oppose him globally and treat him as an embarrassing outcast.

This does not mean that the sins of those who oppose the US should be forgiven. It is typical that Trump proclaimed he is not interested in the democratic revolt in Hong Kong, dismissing it as China’s internal affair. While we should support the revolt, we should just be careful that it will not be used as an argument for the US trade war against China – we should always bear in mind that Trump is ultimately on the side of China.

So should we nonetheless be glad that the ongoing trade war is just an economic war? Should we find solace in the hope that it will end with some kind of truce negotiated by managers of our economies?

No. Geopolitical rearrangements which are already discernible here could easily explode into (at least local) real wars. Trade wars are the stuff real wars are made of. Our global situation more and more resembles that of Europe in the years before the First World War. It is just not yet clear where will be our Sarajevo – Ukraine, the South China Sea, or closer to home.

https://www.independent.co.uk/voices/us-china-trade-war-trump-us-economy-mexico-steel-a9046501.html

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What’s at Risk if the U.S. Stumbles Into a Currency War

By Neil Irwin Aug. 7, 2019

https://www.nytimes.com/2019/08/07/upshot/risk-currency-war-china.html

It could wind up undermining the central role the United States has played in the international financial system.

When the United States declared China a currency manipulator on Monday, long-building trade tensions between the world’s two largest economies spread to the combustible realm of currencies — with potentially huge consequences for the global financial system should the escalation continue.

On Wednesday there was just such an escalation. Central banks in India, New Zealand and Thailand cut interest rates, aiming to protect their economies from the fallout of the trade and currency war. And bad numbers on industrial production in Germany heightened fears of a recession in Europe. Money flooded into safe assets, especially United States Treasury bonds.

But the wave of worry around the world has its roots in the increasingly fraught relationship between China and the United States.

Did China allow the value of the renminbi to fall against the dollar simply so it would better match the nation’s economic situation, as the country’s leaders and many international economists argue? Or was it, as President Trump contends, an effort to give Chinese exporters an unfair advantage in trade? If a factory in China makes furniture, for instance, a fall in the renminbi against the dollar gives it an advantage in selling to the United States.

That clash reflects Mr. Trump’s rejection of the consensus of global economic policymakers, which says countries should be free to set monetary policies aimed at generating sustained growth, even if that causes their currency to depreciate. There’s also a general agreement that nations should be free to manage their exchange rates so long as they keep them broadly in line with their economic fundamentals.

The conflict also reflects the president’s singular focus on reducing trade deficits, which he has argued make the United States a loser in the global trade system. But waging a currency war could come at a big cost.

“I worry it further undermines the international framework that has supported decades of faster growth,” said Kristin Forbes, an economist at M.I.T. and a former official of the United States Treasury and the Bank of England. “Exchange rates are the shock absorber in the global economy.” When a nation enters a recession, for example, its currency tends to fall, which helps its export industries and can help lessen the severity of the recession or create a pathway out of it.

There have been international strains over currency valuations for years, all the more so in a world in which all the major economies are coping with sluggish growth. But the newest currency frictions are different.

Up until now, countries have been focused on stimulating their domestic economies. In particular, central banks have cut interest rates and taken other steps to pump money into their financial systems, actions that tend to lower the value of their currency. After all, investing in a currency with lower interest rates is less attractive, all else equal, than in one with higher rates.

But the conventional wisdom among international economists is that this doesn’t count as currency manipulation. It’s not a game in which one country’s win means another’s loss. Lower interest rates should generate more economic activity, which makes the whole world better off.

The Trump administration has introduced a zero-sum approach to global currency policy — envisioning a loser for every winner — that violates the spirit of those rules.

In that sense, the latest moves risk upsetting a relatively stable order, creating unpredictable ripple effects. When currencies swing wildly, entire economic sectors can be crushed even in powerful nations if those sectors find themselves uncompetitive after a swing in global exchange rates.

And it could undermine the central role the United States has played in the international financial system, especially if the accusations of manipulation are followed up with concrete retaliation to try to artificially depress the value of the dollar.

“The dollar being the primary global currency has enormous benefits for the U.S., but with the side effect that when the U.S. tries to depreciate, there are limits on how much it can do that,” said Adam Posen, president of the Peterson Institute for International Economics. “But if the U.S. abuses its privilege too much by bullying, there will eventually be a switch.”

The decision to name China a currency manipulator does not, in and of itself, do much. But it could be followed up with pressure on the International Monetary Fund and other nations to make similar findings and lean on the Chinese to adjust their policies. Or it could lead to direct intervention in foreign exchange markets by the United States Treasury.

This is not the first time President Trump has accused a major trading partner of using currency policy to mistreat the United States.

He assailed the European Central Bank for moving toward monetary stimulus in June — complaining on Twitter that the resulting drop in the value of the euro was “making it unfairly easier for them to compete against the USA.”

The European Central Bank explained its stimulus as an effort to keep Europe from sliding back into recession. When the central bank first undertook its “quantitative easing” policies, it was with encouragement from the Obama administration, which believed a stronger European economy was ultimately good for the United States economy, despite its effect on currencies.

Similarly, the Trump administration’s decision Monday to name China a currency manipulator — for allowing the value of its currency to fall — does not align with how mainstream economists view China’s move.

With the economy slowing in China, in part because of the trade wars, market forces tend to push its currency lower. But the People’s Bank of China has defended the currency from big drops, aiming to prevent capital from flowing out of the country or destabilizing the world economy.

The “manipulation” that took place Monday morning wasn’t artificially depressing the Chinese currency to seize advantage with trade partners, but engaging in less manipulation in order to allow it to fall closer to its market-determined rate.

There is a more nuanced case to be made against Chinese currency policy — that it did intervene for years to push down the value of its currency, ending in the early 2010s, and that Chinese economic might was built on an unfair practice. But the Trump administration’s announcement focuses on the more recent actions, in which different economic rationales apply.

There is also a paradox for President Trump. Because of the dollar’s unique role as the global reserve currency, when panic sets in overseas, money tends to flow into United States Treasury bonds, which are viewed as the safest assets on earth. But that movement tends to prop up the value of the dollar and push overseas currencies lower.

In other words, the more chaos he injects into the global economy by trying to pressure China, Europe and others not to depreciate their currencies, the more upward pressure there will be on the dollar, undermining those efforts.

That is potentially the worst of both worlds. When the dollar rises on currency markets because the United States economy is booming, it may be hard on American export industries, but at least it takes place in the context of strong growth.

But for the dollar to surge because of a global economic troubles, it means exporters suffer at the same time that the overall economy is under pressure. A particularly extreme example of this happened in the fall of 2008, when the United States economy was in free fall and yet the dollar rose because of the global financial crisis.

A habit of the Trump administration has been to link seemingly unrelated items in its dealings with other countries — using tariff threats to try to influence Mexican immigration policy, for example.

If the Trump administration continues down the path of using currency policy to try to bludgeon China over trade, technology and national security issues, it will signal a remarkable expansion into a policy area that has been a source of stability in recent decades.

“It’s dangerous to start a currency war because you don’t know where it will end,” said Eric Winograd, chief United States economist at AllianceBernstein. “We’ve seen with the trade war that it started in one place, and ended up much broader. There’s every risk a currency war will do the same.”

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U.S. Economic Warfare and Likely Foreign Defenses

by Michael Hudson

https://www.counterpunch.org/2019/07/22/u-s-economic-warfare-and-likely-foreign-defenses/

Today’s world is at war on many fronts. The rules of international law and order put in place toward the end of World War II are being broken by U.S. foreign policy escalating its confrontation with countries that refrain from giving its companies control of their economic surpluses. Countries that do not give the United States control of their oil and financial sectors or privatize their key sectors are being isolated by the United States imposing trade sanctions and unilateral tariffs giving special advantages to U.S. producers in violation of free trade agreements with European, Asian and other countries.

This global fracture has an increasingly military cast. U.S. officials justify tariffs and import quotas illegal under WTO rules on “national security” grounds, claiming that the United States can do whatever it wants as the world’s “exceptional” nation. U.S. officials explain that this means that their nation is not obliged to adhere to international agreements or even to its own treaties and promises. This allegedly sovereign right to ignore on its international agreements was made explicit after Bill Clinton and his Secretary of State Madeline Albright broke the promise by President George Bush and Secretary of State James Baker that NATO would not expand eastward after 1991. (“You didn’t get it in writing,” was the U.S. response to the verbal agreements that were made.)

Likewise, the Trump administration repudiated the multilateral Iranian nuclear agreement signed by the Obama administration, and is escalating warfare with its proxy armies in the Near East. U.S. politicians are waging a New Cold War against Russia, China, Iran, and oil-exporting countries that the United States is seeking to isolate if cannot control their governments, central bank and foreign diplomacy.

* Keynote Paper delivered at the 14th Forum of the World Association for Political Economy, July 21, 2019.

The international framework that originally seemed equitable was pro-U.S. from the outset. In 1945 this was seen as a natural result of the fact that the U.S. economy was the least war-damaged and held by far most of the world’s monetary gold. Still, the postwar trade and financial framework was ostensibly set up on fair and equitable international principles. Other countries were expected to recover and grow, creating diplomatic, financial and trade parity with each other.

But the past decade has seen U.S. diplomacy become one-sided in turning the International Monetary Fund (IMF), World Bank, SWIFT bank-clearing system and world trade into an asymmetrically exploitative system. This unilateral U.S.-centered array of institutions is coming to be widely seen not only as unfair, but as blocking the progress of other countries whose growth and prosperity is seen by U.S. foreign policy as a threat to unilateral U.S. hegemony. What began as an ostensibly international order to promote peaceful prosperity has turned increasingly into an extension of U.S. nationalism, predatory rent-extraction and a more dangerous military confrontation.

Deterioration of international diplomacy into a more nakedly explicit pro-U.S. financial, trade and military aggression was implicit in the way in which economic diplomacy was shaped when the United Nations, IMF and World Bank were shaped mainly by U.S. economic strategists. Their economic belligerence is driving countries to withdraw from the global financial and trade order that has been turned into a New Cold War vehicle to impose unilateral U.S. hegemony. Nationalistic reactions are consolidating into new economic and political alliances from Europe to Asia.

We are still mired in the Oil War that escalated in 2003 with the invasion of Iraq, which quickly spread to Libya and Syria. American foreign policy has long been based largely on control of oil. This has led the United States to oppose the Paris accords to stem global warming. Its aim is to give U.S. officials the power to impose energy sanctions forcing other countries to “freeze in the dark” if they do not follow U.S. leadership.

To expand its oil monopoly, America is pressuring Europe to oppose the Nordstream II gas pipeline from Russia, claiming that this would make Germany and other countries dependent on Russia instead of on U.S. liquified natural gas (LNG). Likewise, American oil diplomacy has imposed unilateral sanctions against Iranian oil exports, until such time as a regime change opens up that country’s oil reserves to U.S., French, British and other allied oil majors.

U.S. control of dollarized money and credit is critical to this hegemony. As Congressman Brad Sherman of Los Angeles told a House Financial Services Committee hearing on May 9, 2019: “An awful lot of our international power comes from the fact that the U.S. dollar is the standard unit of international finance and transactions. Clearing through the New York Fed is critical for major oil and other transactions. It is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have against Iran, for example, would become irrelevant.”[1]

The U.S. aim is to keep the dollar as the transactions currency for world trade, savings, central bank reserves and international lending. This monopoly status enables the U.S. Treasury and State Department to disrupt the financial payments system and trade for countries with which the United States is at economic or outright military war.

Russian President Vladimir Putin quickly responded by describing how “the degeneration of the universalist globalization model [is] turning into a parody, a caricature of itself, where common international rules are replaced with the laws… of one country.”[2] That is the trajectory on which this deterioration of formerly open international trade and finance is now moving. It has been building up for a decade. On June 5, 2009, then-Russian President Dmitry Medvedev cited this same disruptive U.S. dynamic at work in the wake of the U.S. junk mortgage and bank fraud crisis.

Those whose job it was to forecast events … were not ready for the depth of the crisis and turned out to be too rigid, unwieldy and slow in their response. The international financial organisations – and I think we need to state this up front and not try to hide it – were not up to their responsibilities, as has been said quite unambiguously at a number of major international events such as the two recent G20 summits of the world’s largest economies.

Furthermore, we have had confirmation that our pre-crisis analysis of global economic trends and the global economic system were correct. The artificially maintained uni-polar system and preservation of monopolies in key global economic sectors are root causes of the crisis. One big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks – these are all factors that led to an overall drop in the quality of regulation and the economic justification of assessments made, including assessments of macroeconomic policy. As a result, there was no avoiding a global crisis.[3]

That crisis is what is now causing today’s break in global trade and payments.

Warfare on many fronts, with Dollarization being the main arena

Dissolution of the Soviet Union 1991 did not bring the disarmament that was widely expected. U.S. leadership celebrated the Soviet demise as signaling the end of foreign opposition to U.S.-sponsored neoliberalism and even as the End of History. NATO expanded to encircle Russia and sponsored “color revolutions” from Georgia to Ukraine, while carving up former Yugoslavia into small statelets. American diplomacy created a foreign legion of Wahabi fundamentalists from Afghanistan to Iran, Iraq, Syria and Libya in support of Saudi Arabian extremism and Israeli expansionism.

The United States is waging war for control of oil against Venezuela, where a military coup failed a few years ago, as did the 2018-19 stunt to recognize an unelected pro-American puppet regime. The Honduran coup under President Obama was more successful in overthrowing an elected president advocating land reform, continuing the tradition dating back to 1954 when the CIA overthrew Guatemala’s Arbenz regime.

U.S. officials bear a special hatred for countries that they have injured, ranging from Guatemala in 1954 to Iran, whose regime it overthrew to install the Shah as military dictator. Claiming to promote “democracy,” U.S. diplomacy has redefined the word to mean pro-American, and opposing land reform, national ownership of raw materials and public subsidy of foreign agriculture or industry as an “undemocratic” attack on “free markets,” meaning markets controlled by U.S. financial interests and absentee owners of land, natural resources and banks.

A major byproduct of warfare has always been refugees, and today’s wave fleeing ISIS, Al Qaeda and other U.S.-backed Near Eastern proxies is flooding Europe. A similar wave is fleeing the dictatorial regimes backed by the United States from Honduras, Ecuador, Colombia and neighboring countries. The refugee crisis has become a major factor leading to the resurgence of nationalist parties throughout Europe and for the white nationalism of Donald Trump in the United States.

Dollarization as the vehicle for U.S. nationalism

The Dollar Standard – U.S. Treasury debt to foreigners held by the world’s central banks – has replaced the gold-exchange standard for the world’s central bank reserves to settle payments imbalances among themselves. This has enabled the United States to uniquely run balance-of-payments deficits for nearly seventy years, despite the fact that these Treasury IOUs have little visible likelihood of being repaid except under arrangements where U.S. rent-seeking and outright financial tribute from other enables it to liquidate its official foreign debt.

The United States is the only nation that can run sustained balance-of-payments deficits without having to sell off its assets or raise interest rates to borrow foreign money. No other national economy in the world can could afford foreign military expenditures on any major scale without losing its exchange value. Without the Treasury-bill standard, the United States would be in this same position along with other nations. That is why Russia, China and other powers that U.S. strategists deem to be strategic rivals and enemies are looking to restore gold’s role as the preferred asset to settle payments imbalances.

The U.S. response is to impose regime change on countries that prefer gold or other foreign currencies to dollars for their exchange reserves. A case in point is the overthrow of Libya’s Omar Kaddafi after he sought to base his nation’s international reserves on gold. His liquidation stands as a military warning to other countries.

Thanks to the fact that payments-surplus economies invest their dollar inflows in U.S. Treasury bonds, the U.S. balance-of-payments deficit finances its domestic budget deficit. This foreign central-bank recycling of U.S. overseas military spending into purchases of U.S. Treasury securities gives the United States a free ride, financing its budget – also mainly military in character – so that it can taxing its own citizens.

Trump is forcing other countries to create an alternative to the Dollar Standard

The fact that Donald Trump’s economic policies are proving ineffective in restoring American manufacturing is creating rising nationalist pressure to exploit foreigners by arbitrary tariffs without regard for international law, and to impose trade sanctions and diplomatic meddling to disrupt regimes that pursue policies that U.S. diplomats do not like.

There is a parallel here with Rome in the late 1st century BC. It stripped its provinces to pay for its military deficit, the grain dole and land redistribution at the expense of Italian cities and Asia Minor. This created foreign opposition to drive Rome out. The U.S. economy is similar to Rome’s: extractive rather than productive, based mainly on land rents and money-interest. As the domestic market is impoverished, U.S. politicians are seeking to take from abroad what no longer is being produced at home.

What is so ironic – and so self-defeating of America’s free global ride – is that Trump’s simplistic aim of lowering the dollar’s exchange rate to make U.S. exports more price-competitive. He imagines commodity trade to be the entire balance of payments, as if there were no military spending, not to mention lending and investment. To lower the dollar’s exchange rate, he is demanding that China’s central bank and those of other countries stop supporting the dollar by recycling the dollars they receive for their exports into holdings of U.S. Treasury securities.

This tunnel vision leaves out of account the fact that the trade balance is not simply a matter of comparative international price levels. The United States has dissipated its supply of spare manufacturing capacity and local suppliers of parts and materials, while much of its industrial engineering and skilled manufacturing labor has retired. An immense shortfall must be filled by new capital investment, education and public infrastructure, whose charges are far above those of other economics.

Trump’s infrastructure ideology is a Public-Private Partnership characterized by high-cost financialization demanding high monopoly rents to cover its interest charges, stock dividends and management fees. This neoliberal policy raises the cost of living for the U.S. labor force, making it uncompetitive. The United States is unable to produce more at any price right now, because its has spent the past half-century dismantling its infrastructure, closing down its part suppliers and outsourcing its industrial technology.

The United States has privatized and financialized infrastructure and basic needs such as public health and medical care, education and transportation that other countries have kept in their public domain to make their economies more cost-efficient by providing essential services at subsidized prices or freely. The United States also has led the practice of debt pyramiding, from housing to corporate finance. This financial engineering and wealth creation by inflating debt-financed real estate and stock market bubbles has made the United States a high-cost economy that cannot compete successfully with well-managed mixed economies.

Unable to recover dominance in manufacturing, the United States is concentrating on rent-extracting sectors that it hopes monopolize, headed by information technology and military production. On the industrial front, it threatens disrupt China and other mixed economies by imposing trade and financial sanctions.

The great gamble is whether these other countries will defend themselves by joining in alliances enabling them to bypass the U.S. economy. American strategists imagine their country to be the world’s essential economy, without whose market other countries must suffer depression. The Trump Administration thinks that There Is No Alternative (TINA) for other countries except for their own financial systems to rely on U.S. dollar credit.

To protect themselves from U.S. sanctions, countries would have to avoid using the dollar, and hence U.S. banks. This would require creation of a non-dollarized financial system for use among themselves, including their own alternative to the SWIFT bank clearing system. Table 1 lists some possible related defenses against U.S. nationalistic diplomacy.

As noted above, what also is ironic in President Trump’s accusation of China and other countries of artificially manipulating their exchange rate against the dollar (by recycling their trade and payments surpluses into Treasury securities to hold down their currency’s dollar valuation) involves dismantling the Treasury-bill standard. The main way that foreign economies have stabilized their exchange rate since 1971 has indeed been to recycle their dollar inflows into U.S. Treasury securities. Letting their currency’s value rise would threaten their export competitiveness against their rivals, although not necessarily benefit the United States.

Ending this practice leaves countries with the main way to protect their currencies from rising against the dollar is to reduce dollar inflows by blocking U.S. lending to domestic borrowers. They may levy floating tariffs proportioned to the dollar’s declining value. The U.S. has a long history since the 1920s of raising its tariffs against currencies that are depreciating: the American Selling Price (ASP) system. Other countries can impose their own floating tariffs against U.S. goods.

Trade dependency as an aim of the World Bank, IMF and US AID

The world today faces a problem much like what it faced on the eve of World War II. Like Germany then, the United States now poses the main threat of war, and equally destructive neoliberal economic regimes imposing austerity, economic shrinkage and depopulation. U.S. diplomats are threatening to destroy regimes and entire economies that seek to remain independent of this system, by trade and financial sanctions backed by direct military force.

Dedollarization will require creation of multilateral alternatives to U.S. “front” institutions such as the World Bank, IMF and other agencies in which the United States holds veto power to block any alternative policies deemed not to let it “win.” U.S. trade policy through the World Bank and U.S. foreign aid agencies aims at promoting dependency on U.S. food exports and other key commodities, while hiring U.S. engineering firms to build up export infrastructure to subsidize U.S. and other natural-resource investors.[4] The financing is mainly in dollars, providing risk-free bonds to U.S. and other financial institutions. The resulting commercial and financial “interdependency” has led to a situation in which a sudden interruption of supply would disrupt foreign economies by causing a breakdown in their chain of payments and production. The effect is to lock client countries into dependency on the U.S. economy and its diplomacy, euphemized as “promoting growth and development.”

U.S. neoliberal policy via the IMF imposes austerity and opposes debt writedowns. Its economic model pretends that debtor countries can pay any volume of dollar debt simply by reducing wages to squeeze more income out of the labor force to pay foreign creditors. This ignores the fact that solving the domestic “budget problem” by taxing local revenue still faces the “transfer problem” of converting it into dollars or other hard currencies in which most international debt is denominated. The result is that the IMF’s “stabilization” programs actually destabilize and impoverish countries forced into following its advice.

IMF loans support pro-U.S. regimes such as Ukraine, and subsidize capital flight by supporting local currencies long enough to enable U.S. client oligarchies to flee their currencies at a pre-devaluation exchange rate for the dollar. When the local currency finally is allowed to collapse, debtor countries are advised to impose anti-labor austerity. This globalizes the class war of capital against labor while keeping debtor countries on a short U.S. financial leash.

U.S. diplomacy is capped by trade sanctions to disrupt economies that break away from U.S. aims. Sanctions are a form of economic sabotage, as lethal as outright military warfare in establishing U.S. control over foreign economies. The threat is to impoverish civilian populations, in the belief that this will lead them to replace their governments with pro-American regimes promising to restore prosperity by selling off their domestic infrastructure to U.S. and other multinational investors.

There are alternatives, on many fronts

Militarily, today’s leading alternative to NATO expansionism is the Shanghai Cooperation Organization (SCO), along with Europe following France’s example under Charles de Gaulle and withdrawing. After all, there is no real threat of military invasion today in Europe. No nation can occupy another without an enormous military draft and such heavy personnel losses that domestic protests would unseat the government waging such a war. The U.S. anti-war movement in the 1960s signaled the end of the military draft, not only in the United States but in nearly all democratic countries. (Israel, Switzerland, Brazil and North Korea are exceptions.)

The enormous spending on armaments for a kind of war unlikely to be fought is not really military, but simply to provide profits to the military industrial complex. The arms are not really to be used. They are simply to be bought, and ultimately scrapped. The danger, of course, is that these not-for-use arms actually might be used, if only to create a need for new profitable production.

Likewise, foreign holdings of dollars are not really to be spent on purchases of U.S. exports or investments. They are like fine-wine collectibles, for saving rather than for drinking. The alternative to such dollarized holdings is to create a mutual use of national currencies, and a domestic bank-clearing payments system as an alternative to SWIFT. Russia, China, Iran and Venezuela already are said to be developing a crypto-currency payments to circumvent U.S. sanctions and hence financial control.

In the World Trade Organization, the United States has tried to claim that any industry receiving public infrastructure or credit subsidy deserves tariff retaliation in order to force privatization. In response to WTO rulings that U.S. tariffs are illegally imposed, the United States “has blocked all new appointments to the seven-member appellate body in protest, leaving it in danger of collapse because it may not have enough judges to allow it to hear new cases.”[5] In the U.S. view, only privatized trade financed by private rather than public banks is “fair” trade.

An alternative to the WTO (or removal of its veto privilege given to the U.S. bloc) is needed to cope with U.S. neoliberal ideology and, most recently, the U.S. travesty claiming “national security” exemption to free-trade treaties, impose tariffs on steel, aluminum, and on European countries that circumvent sanctions on Iran or threaten to buy oil from Russia via the Nordstream II pipeline instead of high-cost liquified “freedom gas” from the United States.

In the realm of development lending, China’s bank along with its Belt and Road initiative is an incipient alternative to the World Bank, whose main role has been to promote foreign dependency on U.S. suppliers. The IMF for its part now functions as an extension of the U.S. Department of Defense to subsidize client regimes such as Ukraine while financially isolating countries not subservient to U.S. diplomacy.

To save debt-strapped economies suffering Greek-style austerity, the world needs to replace neoliberal economic theory with an analytic logic for debt writedowns based on the ability to pay. The guiding principle of the needed development-oriented logic of international law should be that no nation should be obliged to pay foreign creditors by having to sell of the public domain and rent-extraction rights to foreign creditors. The defining character of nationhood should be the fiscal right to tax natural resource rents and financial returns, and to create its own monetary system.

The United States refuses to join the International Criminal Court. To be effective, it needs enforcement power for its judgments and penalties, capped by the ability to bring charges of war crimes in the tradition of the Nuremberg tribunal. U.S. to such a court, combined with its military buildup now threatening World War III, suggests a new alignment of countries akin to the Non-Aligned Nations movement of the 1950s and 1960s. Non-aligned in this case means freedom from U.S. diplomatic control or threats.

Such institutions require a more realistic economic theory and philosophy of operations to replace the neoliberal logic for anti-government privatization, anti-labor austerity, and opposition to domestic budget deficits and debt writedowns. Today’s neoliberal doctrine counts financial late fees and rising housing prices as adding to “real output” (GDP), but deems public investment as deadweight spending, not a contribution to output. The aim of such logic is to convince governments to pay their foreign creditors by selling off their public infrastructure and other assets in the public domain.

Just as the “capacity to pay” principle was the foundation stone of the Bank for International Settlements in 1931, a similar basis is needed to measure today’s ability to pay debts and hence to write down bad loans that have been made without a corresponding ability of debtors to pay. Without such an institution and body of analysis, the IMF’s neoliberal principle of imposing economic depression and falling living standards to pay U.S. and other foreign creditors will impose global poverty.

The above proposals provide an alternative to the U.S. “exceptionalist” refusal to join any international organization that has a say over its affairs. Other countries must be willing to turn the tables and isolate U.S. banks, U.S. exporters, and to avoid using U.S. dollars and routing payments via U.S. banks. To protect their ability to create a countervailing power requires an international court and its sponsoring organization.

Summary

The first existential objective is to avoid the current threat of war by winding down U.S. military interference in foreign countries and removing U.S. military bases as relics of neocolonialism. Their danger to world peace and prosperity threatens a reversion to the pre-World War II colonialism, ruling by client elites along lines similar to the 2014 Ukrainian coup by neo-Nazi groups sponsored by the U.S. State Department and National Endowment for Democracy. Such control recalls the dictators that U.S. diplomacy established throughout Latin America in the 1950s. Today’s ethnic terrorism by U.S.-sponsored Wahabi-Saudi Islam recalls the behavior of Nazi Germany in the 1940s.

Global warming is the second major existentialist threat. Blocking attempts to reverse it is a bedrock of American foreign policy, because it is based on control of oil. So the military, refugee and global warming threats are interconnected.

The U.S. military poses the greatest immediate danger. Today’s warfare is fundamentally changed from what it used to be. Prior to the 1970s, nations conquering others had to invade and occupy them with armies recruited by a military draft. But no democracy in today’s world can revive such a draft without triggering widespread refusal to fight, voting the government out of power. The only way the United States – or other countries – can fight other nations is to bomb them. And as noted above, economic sanctions have as destructive an effect on civilian populations in countries deemed to be U.S. adversaries as overt warfare. The United States can sponsor political coups (as in Honduras and Pinochet’s Chile), but cannot occupy. It is unwilling to rebuild, to say nothing of taking responsibility for the waves of refugees that our bombing and sanctions are causing from Latin America to the Near East.

U.S. ideologues view their nation’s coercive military expansion and political subversion and neoliberal economic policy of privatization and financialization as an irreversible victory signaling the End of History. To the rest of the world it is a threat to human survival.

The American promise is that the victory of neoliberalism is the End of History, offering prosperity to the entire world. But beneath the rhetoric of free choice and free markets is the reality of corruption, subversion, coercion, debt peonage and neofeudalism. The reality is the creation and subsidy of polarized economies bifurcated between a privileged rentier class and its clients, eir debtors and renters. America is to be permitted to monopolize trade in oil and food grains, and high-technology rent-yielding monopolies, living off its dependent customers. Unlike medieval serfdom, people subject to this End of History scenario can choose to live wherever they want. But wherever they live, they must take on a lifetime of debt to obtain access to a home of their own, and rely on U.S.-sponsored control of their basic needs, money and credit by adhering to U.S. financial planning of their economies. This dystopian scenario confirms Rosa Luxemburg’s recognition that the ultimate choice facing nations in today’s world is between socialism and barbarism.

Notes.

1. Billy Bambrough, “Bitcoin Threatens To ‘Take Power’ From The U.S. Federal Reserve,” Forbes, May 15, 2019. https://www.forbes.com/sites/billybambrough/2019/05/15/a-u-s-congressman-is-so-scared-of-bitcoin-and-crypto-he-wants-it-banned/#36b2700b6405. ?

2. Vladimir Putin, keynote address to the Economic Forum, June 5-6 2019. Putin went on to warn of “a policy of completely unlimited economic egoism and a forced breakdown.” This fragmenting of the global economic space “is the road to endless conflict, trade wars and maybe not just trade wars. Figuratively, this is the road to the ultimate fight of all against all.” ?

3. Address to St Petersburg International Economic Forum’s Plenary Session, St Petersburg, Kremlin.ru, June 5, 2009, from Johnson’s Russia List, June 8, 2009, #8, ?

4. https://www.rt.com/business/464013-china-russia-cryptocurrency-dollar-dethrone/. Already in the late 1950s the Forgash Plan proposed a World Bank for Economic Acceleration. Designed by Terence McCarthy and sponsored by Florida Senator Morris Forgash, the bank would have been a more truly development-oriented institution to guide foreign development to create balanced economies self-sufficient in food and other essentials. The proposal was opposed by U.S. interests on the ground that countries pursuing land reform tended to be anti-American. More to the point, they would have avoided trade and financial dependency on U.S. suppliers and banks, and hence on U.S. trade and financial sanctions to prevent them from following policies at odds with U.S. diplomatic demands. ?

5. Don Weinland, “WTO rules against US in tariff dispute with China,” Financial Times, July 17, 2019. ?

[cdrom]

Michael Hudson: De-Dollarizing The American Financial Empire
https://www.nakedcapitalism.com/2019/07/michael-hudson-de-dollarizing-the-american-financial-empire.html

Yves here. Another meaty Michael Hudson interview on Guns and Butter. However, I have to vehemently disagree with the claim made by Bonnie Faulkner at the top of the discussion. No one holds guns to other countries’ heads to make them hold dollars. The reason the dollar is the reserve currency is the US is willing to export jobs via running persistent trade deficits. The US moved away from having rising worker wages as the key metric of sound economic policy in the 1970s, when labor was blamed for stagflation (too powerful unions supposedly hobbling US manufactures, when the performance of Toyota at the famed NUMMI joint venture showed that to be false; formal or informal cost of living adjustments to pay credited with institutionalizing inflation). Recall also that the Democrats had started to abandon labor unions even before that.

Anyone who runs a trade surplus with the US winds up holding dollars. The idea that China holds a lot of dollars because US diplomats browbeat them is absurd. China can hold its dollars as cash, or it can put them in Treasuries and pick up some yield, or hold riskier dollar investments. If it sells its dollars and buys other currencies, it will at the margin drive the dollar down and push its currency up, which would hurt its competitiveness in exports, which contradicts its imperative of keeping employment high and using trade surpluses to help achieve that end.

Most countries as a matter of policy actually do or aspire to running trade surpluses because they get the mirror image: they can achieve higher employment levels than they would if they relied only on domestic demand.

Smaller economies can and regularly do get themselves in trouble by borrowing in dollars because the borrowing rate at the time appeared to be lower than in their own currency. This pretty much always ends in tears because the home currency depreciates, greatly raising the cost of the formerly cheap dollar loan.

However, it is true that having established the dollar as the reserve currency (and further going to considerable lengths to make the world safe for US banks and investment banks), the US is now thuggish in how it uses its influence over the dollar payments system. No major financial institution can afford to be cut off from dollar clearing.

From Guns and Butter, produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit them at gunsandbutter.org to listen to past programs, comment on shows, or join our email list to receive our newsletter that includes recent shows and updates. Email them at [e-mail]. and follow them on Twitter at gandbradio.

The audio of this interview with Michael Hudson is available on: https://soundcloud.com/guns-and-butter-1/de-dollarizing-the-american-financial-empire-dr-michael-hudson-408

I’m Bonnie Faulkner. Today on Guns and Butter, Dr. Michael Hudson. Today’s show: De-Dollarizing the American Financial Empire. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street Financial Analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His most recent books include, And Forgive Them Their Debts … Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year; Killing the Host: How Financial Parasites and Debt Destroy the Global Economy; and J Is for Junk Economics: A Guide to Reality in an Age of Deception. We return again today to a discussion of Dr. Hudson’s seminal 1972 book, Super Imperialism: The Economic Strategy of American Empire, a critique of how the United States exploited foreign economies through the IMF and World Bank. We discuss how the United States has dominated the world economically both as the world’s largest creditor, and then later as the world’s largest debtor, and take a look at the coming demise of dollar domination.

Bonnie Faulkner: Michael Hudson, welcome back.

Michael Hudson: It’s good to be back, Bonnie.

Bonnie Faulkner: Why is President Trump insisting that the Federal Reserve lower interest rates? I thought they were already extremely low. And if they did go lower, what effect would this have?

Michael Hudson: Interest rates are historically low, and they have been kept low in order to try to keep providing cheap money for speculators to buy stocks and bonds to make arbitrage gains. Speculators can borrow at a low rate of interest to buy a stock yielding dividends (and also making capital gains) at a higher rate of return, or by buying a bond such as corporate junk bonds that pay higher interest rates, and keep the difference. In short, low interest rates are a form of financial engineering.

Trump wants interest rates to be low in order to inflate the housing market and the stock market even more, as if that is an index of the real economy, not just the financial sector that is wrapped around the economy of production and consumption. Beyond this domestic concern, Trump imagines that if you keep interest rates lower than those of Europe, the dollar’s exchange rate will decline. He thinks that this will make U.S. exports more competitive with foreign products.

Trump is criticizing the Federal Reserve for not keeping interest rates even lower than those of Europe. He he thinks that if interest rates are low, there will be an outflow of capital from this country to buy foreign stocks and bonds that pay a higher interest rate. This financial outflow will lower the dollar’s exchange rate. He believes that this will increase the chance of rebuilding America’s manufacturing exports.

This is the great neoliberal miscalculation. It also is the basis for IMF models.

How low interest rates lower the dollar’s exchange rate, raising import prices

Trump’s guiding idea is that lowering the dollar’s value will lower the cost of labor to employers. That’s what happens when a currency is devalued. Depreciation doesn’t lower costs that have a common worldwide price. There’s a common price for oil in the world, a common price of raw materials, and pretty much a common price for capital and credit. So the main thing that’s devalued when you push a currency down is the price of labor and its working conditions.

Workers are squeezed when a currency’s exchange rate falls, because they have to pay more for goods they import. If the dollar goes down against the Chinese yen or European currency, Chinese imports are going to cost more in dollars. So will European imports. That is the logic behind “beggar my neighbor” devaluations.

How much more foreign imports will cost depends on how far the dollar goes down. But even if it plunges by 50 percent, even if the dollar were to become a junk currency like the Argentinian or other Latin American currencies, that cannot really increase American manufacturing exports, because not much American labor works in factories anymore. Workers drive cabs and work in the service industry or for medical insurance companies. Even if you give American workers in manufacturing companies all their clothing and food for nothing, they still can’t compete with foreign countries, because their housing costs are so high, their medical insurance is so high and their taxes are so high that they’re priced out of world markets. So it won’t help much if the dollar goes down by 1 percent, 10 percent or even 20 percent. If you don’t have factories going and if you don’t have a transportation system, a power supply, and if our public utilities and infrastructure are being run down, there’s nothing that currency manipulation can do to enable America to quickly rebuild its manufacturing export industries.

American parent companies have already moved their factories abroad. They have given up on America. As long as Trump or his successors refrain from changing that system – as long as he gives tax advantages for companies to move abroad – there’s nothing he can do that will restore industry here. But he’s picked up International Monetary Fund’s junk economics, the neoliberal patter talk that it’s given to Latin America pretending that if a country just lowers its exchange rate more, it will be able to lower its wages and living standards, paying labor less in hard-currency terms until at some point, when its poverty and austerity get deep enough, it will become more competitive.

That hasn’t worked for fifty years in Latin America. It hasn’t worked for other countries either, and it never worked in the United States. The 19th-century American School of Political Economy developed the Economy of High Wages doctrine. (I review this in my book on America’s Protectionist Takeoff: 1815-1914.) They recognized that if you pay labor more, it’s more productive, it can afford a better education and it works better. That’s why high-wage labor can undersell low-wage “pauper” labor. Trump is therefore a century behind the times in picking up the IMF austerity idea that you can just devalue the currency and reduce labor’s wages and living standards in international terms to make the economy more profitable and somehow “work your way out of debt.”

What currency depreciation does do when the dollar is devalued is to enable Wall Street firms to borrow 1% and to buy European currencies and bonds yielding 3 percent or 4 percent or 5 percent, or stocks yielding even more. The guiding idea is to do what Japan did in 1990: have very low interest rates to increase what’s called the carry trade. The carry trade is borrowing at a low interest rate and buying bonds yielding a higher rate, making an arbitrage gain on the interest-rate differential. So Trump is creating an arbitrage opportunity for Wall Street investors. He pretends that this is pro-labor and can rebuild manufacturing. But it only helps hollow out the U.S. economy, sending money to other countries to build themup instead of investing in ourselves. So the effect of what Trump’s doing is the opposite of what he says he’s doing.

Bonnie Faulkner: Exactly. What is the point of driving investment into foreign countries, away from the United States?

Michael Hudson: If you’re an investor, you can make more money by dismantling the U.S. economy. You can borrow at 1 percent and buy a bond or a stock that yields 3 or 4 percent. That’s called arbitrage. It’s a financial free lunch. The effect of this free lunch, as you say, is to build up foreign economies or at least their financial markets while undercutting your own. Finance is cosmopolitan, not patriotic. It doesn’t really care where it makes money. Finance goes wherever the rate of return is highest. That’s the dynamic that has been de-industrializing the United States over the past forty years.

Bonnie Faulkner: From what you’re saying, it sounds like Donald Trump’s policies are leading to doing to the United States what the IMF and World Bank have traditionally done to foreign economies.

Michael Hudson: That’s what happens when you devalue. The financial sector will see that interest rates are going down, so the dollar’s exchange rate also will decline. Investors will move their money (or will borrow) into euros, gold or Japanese yen or Swiss francs whose exchange rate is expected to rise. So you’re offering a financial arbitrage and capital gain for investors who speculate in foreign currencies. You’re also hollowing out the economy here, and squeezing real wage levels and living standards.

Why devaluation will not help re-industrialize the U.S. economy

Bonnie Faulkner: Do you think that Donald Trump understands what he’s doing?

Michael Hudson: I don’t think he understands. I think he has an oversimplified view of how the world works. He thinks that if we devalue the dollar, we can undersell China and Europe. But you can only undersell them if you have car-making factories available. If you don’t have a factory, you’re not going to be able to undersell foreign carmakers no matter how low the dollar goes. And if you don’t have a set of computer manufacturing factories and local suppliers already in the United States, you’re not going to have production capacity able to undersell China. Most of all, you need public infrastructure and affordable housing, education and health care. So Trump’s view is a fantasy. It’s like saying, “If we had some ham, we could have some ham and eggs, if we had some eggs.” It leaves the causes of America’s de-industrialization out of account.

If we had unemployed car makers, computer makers and other manufacturers here – factories that were idle in an economy that was pretty competitive – then devaluation might make some sense. But Americans are not just a bit uncompetitive. The housing costs in America are so high, the medical and health-insurance costs, the taxes and wage withholding on labor and prices for basic infrastructure that there’s no way that we can compete with foreign countries simply by currency manipulation.

Since 1980 the U.S. economy has been made very high-cost. Yet there also has been a huge squeeze on labor, by raising the prices it has to pay for basic needs. Even if wages go up, people can’t afford to live as well as they did thirty years ago. A radical restructuring is needed in order to restore a full-employment industrial economy. You need de-privatization, you have to break up monopolies, you need the kind of economy and economic reform that America had under Franklin Roosevelt in the 1930s. I don’t see that happening.

Bonnie Faulkner: Do you think that Donald Trump was installed as U.S. president to oversee the bankruptcy of the United States and dismantling the U.S. Empire?

Michael Hudson: Nobody installed him; he installed himself. I don’t think most people expected him to win. If you look at the odds that professional bookies and oddsmakers gave from the time he announced his candidacy, most people thought that sleepy Jeb Bush would get the nomination, and that Bush then would lose to Hillary. So there were indeed attempts an attempt to install Hillary or Bush. But nobody tried to install Trump. He made an end run around them, by straight talk, humor and celebrityhood.

He didn’t have advisors that he would listen to, because he’s always been a one-man show. And he doesn’t really know what he’s doing economically. He knows how to cheat people, victimize suppliers, and how to make money in real estate simply by not paying suppliers, and by borrowing from banks and not paying them. But he has no idea that you can’t run an economy this way. Being a real estate mafioso isn’t the same thing as running a whole economy. Trump has no idea and I don’t think anyone knows how to control him, except maybe Fox News.

Wall Street vs. the “real” economy: Which turns out to be more real?

Bonnie Faulkner: What is going on with the ruling class in the United States? Does anybody in its ranks know how to run an economy?

Michael Hudson: The problem is that running an economy to help the people and raise living standards, and even to lower the cost of living and doing business, means not running it to help Wall Street. If someone knows how to run an economy, the financial sector wants to keep them out of any public office. High finance is short-term, not long-term. It plays the hit-and-run game, not the much harder task of creating a framework for tangible economic growth.

You can do one of two things: You can help labor or you can help Wall Street. If running the economy means helping labor and improving living standards by giving better medical care, this is going to be at the expense of the financial sector and short-term corporate profits. So the last thing you want to do is have somebody run the economy for its own prosperity instead of for Wall Street’s purpose.

At issue is who’s going to do the planning. Will it be elected public officials in the government, or Wall Street? Wall Street’s public relations office is the University of Chicago. It claims that a free market is one where rich Wall Street investors and the financial class run an economy. But if you let people vote and democratically elect governments to regulate, that’s called “interference” in a free market. This is the fight that Trump has against China. He wants to tell it to let the banks run China and have a free market. He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise. In effect, he wants Chinese to be as threatened and insecure as American workers. They should get rid of their public transportation. They should get rid of their subsidies. They should let a lot of their companies go bankrupt so that Americans can buy them. They should have the same kind of free market that has wrecked the US economy.

China doesn’t want that kind of a free market, of course. It does have a market economy. It is actually much like the United States was in its 19th-century industrial takeoff, with strong government subsidy.

U.S. changing monetary strategy, from payments-surplus to deficit status

Bonnie Faulkner: In your seminal work from 1972, Super Imperialism: The Economic Strategy of American Empire, you write: “Whereas US domination of the world economy stemmed from 1920 through 1960 from its creditor position, its control since the 1960s has stemmed from is debtor position. Not only have the tables been turned, but US diplomats have found that their leverage as the world’s major debtor economy is fully as strong as that which formerly had reflected its net creditor position.” This sounds counter-intuitive. Could you break it down? Let’s start with 1920 through 1960. How was the United States able to dominate the world economy from its creditor position?

Michael Hudson: The U.S. creditor position really began after World War I, based on the money it lent to the Allies before it joined the war. When the war ended, U.S. diplomats told England and France to pay us for the arms they had bought early on. But in the past, for centuries, the victors usually forgave all the debts among each other once a war was over. For the first time, America insisted that the Allies pay for the military support it had sold them before joining them.

The European Allies were pretty devastated by the war, and they turned to Germany and insisted on reparations that quickly bankrupted Germany. German bankrupted its economy trying to pay England and France, which simply sent it on to pay the United States. Their balance of payments was in deficit, and their currencies weregoing down. American investors saw an opportunity to buy up their industry. Gold was the measure of power, the backing for domestic money and credit and hence capital investment.

America was much more productive, not having suffered war damage here. Between the end of World War II and 1950 when the Korean War broke out, America accumulated over 75 percent of the world’s monetary gold. The United States had heavy agricultural exports, growing industrial exports, and enough money to buy up the leading industries of Europe and Latin America and other countries.

But beginning in 1950 with the Korean War, the U.S. balance of payments moved into deficit for the first time. It got even worse when President Eisenhower decided that America had to support French colonialism in Southeast Asia, in French Indochina – Vietnam and Laos. By the time the Vietnam War escalated in the 1960s, the dollar was running large balance-of-payments deficits. Every week on Wall Street we would watch the gold supply go down, losing gold to countries that weren’t at war, like France and Germany. They were cashing in the excess dollars that were being spent by the U.S. military. By the 1960s it became clear that America was on a trajectory to run out of gold within a decade because of this overseas war spending.

It finally did, by August 1971when President Nixon stopped selling bold on the London exchange and the price was allowed to soar far above $35 an ounce. The U.S. balance-of-payments was still running a deep deficit because of the fighting in Southeast Asia and elsewhere, creating a permanent balance-of-payments deficit. The private sector was just in balance during the 1950s and 1960s. The entire deficit was military.

When America went off gold, people began to wonder what was going to happen. Many predicted an economic doomsday. It was losing its ability to rule the world through gold. But what I realized (and was the first to publish) was that if countries no longer could buy and hold gold in their international reserves, what werethey going to hold? There was only one asset that they could hold: U.S. Government securities, that is, Treasury bonds.

A Treasury bond is a loan to the US Treasury. When a foreign central bank buys a bond, it finances the domestic U.S. budget deficit. So the balance of payments deficit ends up financing the domestic budget deficit.

The result is a circular flow of military spending recycled by foreign central banks. After 1971 the United States continued to spend abroad militarily, and in 1974 the OPEC countries quadrupled the price of oil. At that time the United States told Saudi Arabia that it could charge whatever it wanted for its oil, but it had to recycle all its net dollar earnings. The Saudis were not to buy gold. The Saudis were told that it would be an act of war if they didn’t recycle into the American economy the dollars they received for their oil exports. They were encouraged to buy U.S. Treasury bonds but, could also buy other U.S. bonds and stocks to help push up the stock and bond markets here while supporting the dollar.

The United States kept its own gold stock, while wanting the rest of the world to hold its savings in the form of loans to the United States. So the dollar didn’t go down. Other countries that were receiving dollars simply recycled them to buy U.S. financial securities.

What would have happened if they wouldn’t have done this? Let’s say you’re Germany, France or Japan. If you don’t recycle your dollar receipts back to the U.S. economy, your currency is going to go up. Dollar inflows from export sales are being converted into your currency, increasing its exchange rate. But by buying U.S. bonds or stocks, bid the price of dollars back up against your own currency.

So, when the United States runs a balance-of-payments deficit under conditions where other countries keep their foreign reserves in dollars, the effect is for other countries to keep their currencies’ exchange rates stable – mainly by lending to the U.S. government. That gives the United States a free ride. It can encircle the world with military bases, and the dollars that this costs are returned to the United States.

Imagine writing IOUs when you go out to spend at a store or restaurant – but your IOUs are never going to be collected! The store might say, “We have an IOU from Bonnie Faulkner. Let’s keep it as our savings. Instead of putting it in the bank or asking for payment in real money, we’re just going to keep collecting these IOUs from Bonnie Faulkner.” Corporations call such IOUs and trade credit “receivables.” Now, suppose you went on a spending spree and gave the store a billion dollars’ worth of your IOUs. There’s no way that you could pay off this billion dollars. In that case the stores receiving these IOUs would say, “Well, we really don’t want to foreclose on Bonnie, because we know that she can’t pay. We’d lose the value of receivables on the asset side of our balance sheet – all these IOUs that we’ve been collecting.

That’s essentially what foreign countries are saying about their buildup of dollars. The U.S. position is, in effect, that we are not going to repay any foreign country the dollar debt we owe them. As Treasury Secretary John Connolly said, “It’s our dollars, but your problem.” Other countries have to pay us or else we’ll bomb them. The military dimension to this arrangement is the U.S. position that it would be an act of war if other countries don’t keep spending their export earnings on loans or U.S. stocks and bonds.

That’s what makes the United States the “exceptional country.” The value of our currency is based on other countries’ savings. The money they save has to be held in the form of dollars or securities that we’re never going to repay, even if we could.

This is a huge free ride. You’d think that Donald Trump would want to keep it going. But he claims that China is manipulating its currency by recycling its dollars into loans to the U.S. Treasury. What does he mean by that? China is earning a lot of dollars by exports its goods to the United States. What does it do with these dollars? It tried to do what America did with Europe and South America: It tried to buy American companies. But the United States blocked it from doing this, on specious national security grounds. The government claims that our national security would be threatened if China would buy a chain of filling stations, as it wanted to do in California. The United States thus has a double standard, claiming that it is threatened if China buys any company, but insisting on its right to buy out the commanding heights of foreign economies with its electronic dollar credit.

That leaves China with only one option: It can buy U.S. Treasury bonds, lending its export earnings to the U.S. Treasury.

Trump is now driving other countries out of the dollar orbit

China now realizes that the U.S. Treasury isn’t going to repay. Even if it wanted to recycle its export earnings into Treasury bonds or U.S. stocks and bonds or real estate, Donald Trump now is saying that he doesn’t want China to support the dollar’s exchange rate (and keep its own exchange rate down) by buying U.S. assets. We’re telling China not to do what we’ve told other countries to do for the past forty years: to buy U.S. securities. Trump accuses countries of artificial currency manipulation if they keep their foreign reserves in dollars. So he’s telling them, and specifically China, to get rid of their dollar holdings, not to buy dollars with their export earnings anymore.

So China is buying gold. Russia also is buying gold and much of the world is now in the process of reverting to the gold-exchange standard (meaning that gold is used to settle international payments imbalances, but is not connected to domestic money creation). Countries realize that there’s a great advantage of the gold-exchange standard: There’s only a limited amount of gold in the world’s central banks. This means that any country that wages war is going to run such a large balance-of-payments deficit that it’s going to lose its gold reserves. So reviving the role of gold may prevent any country, including the United States, from going to war and suffering a military deficit.



The irony is that Trump is breaking up America’s financial free ride – its policy of monetary imperialism – by telling counties to stop recycling their dollar inflows. They’ve got to de-dollarize their economies.

The effect is to make these economies independent of the United States. Trump already has announced that we won’t hire Chinese in our IT sectors or let Chinese study subjects at university that might enable them to rival us. So our economies are going to separate.

In effect, Trump has said that if we can’t win in a trade deal, if we can’t make other countries lose and become more dependent on U.S. suppliers and monopoly pricing, then we’re not going to sign an agreement. This stance is driving not only China but Russia and even Europe and other countries all out of the U.S. orbit. The end result is going to be that the United States is going to be isolated, without being able to manufacture like it used to do. It’s dismantled its manufacturing. So how willit get by?

Some population figures were released a week ago showing the middle of America is emptying out. The population is moving from the Midwestern and mountain states to the East and the West coasts and the Gulf Coast. So Trump’s policies are accelerating the de-industrialization of the United States without doing anything to put new productive powers in place, and not even wanting other countries to invest here. The German car companies see Trump putting tariffs on the imported steel they need to build cars in the United States. It built them here to get around America’s tariff barriers against German and other automobiles. But now Trump is not even letting them import the parts that they need to assemble these cars in the non-unionized plants they’ve built in the South.

What can they do? Perhaps they’ll propose a trade with General Motors and Chrysler. The Europeans will get the factories that American companies own in Europe, and give them their American factories in exchange.

This kind of split is occurring without any attempt to make American labor more competitive by lowering its cost of housing, or the price of its health insurance and medical care, or its transportation costs or the infrastructure costs. So America is being left high and dry as a high-priced economy in a nationalistic world, while running a huge balance-of-payments deficit to support its military spending all over the globe.

Bonnie Faulkner: So it sounds like when the United States went off the gold standard, the dollar basically replaced gold as the main asset in which foreign governments could hold their assets. Now you’re saying that when there was no more gold standard, if foreign economies didn’t buy U.S. Treasuries, the price of their currency would rise and make them uncompetitive.

Michael Hudson: Yes. Imagine if Americans would have to pay more and more dollars to buy German cars. There’s going to be a larger demand for German currency, the euro, whose exchange rate would rise. That was happening throughout the 1960s and 1970s, before the euro. The only way that Germany could keep down the value of its mark was to buy something that cost dollars. It didn’t buy American exports, because America already was making and exporting less and less, except for food – and Germany can only eat so much wheat and soybeans. So the only thing that Germany could buy that was priced in dollars were U.S. Treasury bonds. That kept the German mark from rising even more rapidly, and kept the balance of payments in balance.

Japan had a similar problem. The Japanese tried to buy U.S. real estate, but they didn’t have any idea of what made real estate valuable here. They lost a reported billion dollars on buying Rockefeller Center, not realizing that the building was separate from the land value, and the land was owned by Columbia University. The building itself was running at a deficit. Most of the rental value paid was to the owner of the land’s groundrent. The Japanese had no idea of how American real estate worked.

The euro is only a satellite currency of the U.S. dollar

Some Americans worried that the euro might become a rival to the dollar. After all, Europe is not de-industrializing. It is moving forward and producing better cars, airplanes and other exports. So the United States persuaded foreign politicians to cripple the euro by making it an austerity currency, creating so few government bonds that there’s no euro vehicle large enough for foreign countries to keep their foreign reserves in. The United States can create more and more dollar debt by running a budget deficit. We can follow Keynesian policies by running a deficit to employ more labor. But the eurozone refuses to let countries run a budget deficit of more than 3 percent of its GDP. Now running more than 3 percent of their GDP. That level is very marginal compared to the United States. And if you’re trying not to run any deficit at all – and even if you keep it less than 3% – then you’re imposing austerity on your country, keeping your employment down. You’re stifling your internal market, cutting your throat by being unable to create a real rival to the dollar. That’s why Donald Rumsfeld called Europe a dead zone, and why the only alternatives for a rival currency are the Chinese yuan. They’re moving into a gold-based currency area along with Russia, Iran and other members of the Shanghai Cooperation Organization.

Bonnie Faulkner: The European Union not allowing European countries within the eurozone to not run deficits more than 3 percent was basically cutting their own throat. Why would they do such a thing?

Michael Hudson: Because the heads of the Central Bank are fighting a class war. They look at themselves as financial generals in the economic fight against labor, to hurt the working class, lower wages and help their political constituency, the wealthy investing class. Europe always has had a more vicious class war than the United States does. It’s never really emerged from its aristocratic post-feudal system. Its central bankers and universities follow the University of Chicago free-market school, saying that the way to get rich is to make your labor poorer, and to create a government where labor doesn’t have a voice. That’s Europe’s economic philosophy, and it’s why Europe has not matched the growth that China and other countries are experiencing.

Bonnie Faulkner: So it sounds like then the United States has been able to dominate the world economy since 1971 from a debtor position.

Michael Hudson: When it was losing gold, from 1950 to 1971, that wasn’t dominating; that was losing America’s gold supply to France, Germany, Japan and other countries. Only when it stopped the gold-exchange standard and left countries with no alternative for their international savings but to buy U.S. Treasury bonds or other securities was it able to pay for its military spending without losing its power.

Since 1971, world diplomacy has essentially been backed by American military power. It’s not a free market. Military power keeps countries in a financial strait jacket in which the United States can run into debt without having to repay it. Other countries that run payments deficits are not allowed to expand their economies, either to rival the United States or even to improve living standards for their labor force. Only countries outside the U.S. orbit – China, and in principle Russia and some other countries in Asia – are able to increase their living standards and capital investment and technology by being free of this globalized financial class war.

Bonnie Faulkner: In Super Imperialismyou write that, “Pressures to create a New International Economic Order collapsed by the end of the 1970s.” Are you saying that other countries simply gave up and acquiesced to American monetary imperialism? What happened?

Michael Hudson: I’m told that there was wholesale bribery. Officials in the Reagan administration told me that they just paid off foreign officials to support the U.S. position, not a New International Economic Order. U.S. agencies maneuvered within the party politics of European and Near Eastern countries to promote pro-American officials and sideline those who did not agree to act as U.S. satellites. A lot of money was involved in this meddling.

So the United Stateshas corrupted democratic politics throughout Europe and the Near East, and much of Asia. That has succeeded in sterilizing foreign independence in the United States. Meanwhile, Thatcher’s and Reagan’s neoliberal ideas were promoted instead of the kind of mixed economy that Roosevelt and social democracy had been pressing for fifty years.



Who will plan economies: Financial managers, or democratic governments?

Bonnie Faulkner: If there were pressures to create a New International Economic Order in the 1970s, what was this new order looking to achieve?



Michael Hudson: Other countries wanted to do for their economies what the United States has long done for its own economy: to use their governments’ deficit spending to build up their infrastructure, raise living standards, create housing and promote progressive taxation that would prevent a rentierclass, a landlord and financial class from taking over economic management. In the financial field, they wanted governments to create their own money, to promote their own development, just like the United States does. The role of neoliberalism was the opposite: it was to promote the financial and real estate sector and monopolies to take economic management away from government.



So the real question from the 1980s on was about who would be the basic planning center of society. Would it be the financial sector – the banks and bondholders, whose interest is really the One Percent that own most of the banks’ bonds and stocks? Or, is it going to be governments trying to subsidize the economy to help the 99 Percent grow and prosper? That was the social democratic view opposed by Thatcherism and Reaganism.



The international drive to de-dollarize

Bonnie Faulkner: Was this pressure that blocked a New International Economic Order brought on by the United States going off the gold-exchange standard?

Michael Hudson: No. It was a reaction against the U.S. policy of siphoning off the commanding heights of foreign economies. The United States wants to control their raw-materials exports, especially their oil and gas. It wants to control their financial system, so that all of their economic gains will go to foreign investors, mainly U.S. investors. It wants to turn other economies into service economies to the United States, and to make them into a kind of super-NATO military alliance that will oppose any country that does not want to be part of the U.S.-centered unilateral global order.

Bonnie Faulkner: How does today’s monetary imperialism – super imperialism – differ from the imperialism of the past?

Michael Hudson: It’s a higher stage of imperialism. The old imperialism was colonialism. You would come in and use military power to install a client ruling class. But each country would have its own currency. What has made imperialism “super” is that America doesn’t have to colonize another country. It doesn’t have to invade a country or actually go to war with it. All it needs is to have the country invest its savings, its export earnings in loans to the United States Government. This enables the United States to keep its interest rates low and enable American investors to borrow from American banks at a low rate to buy up foreign industry and agriculture that’s yielding 10 percent, 15 percent or more. So American investors realize that despite the balance-of-payments deficit, they can borrow back these dollars at such a low rate from foreign countries – paying only 1 percent to 3 percent on the Treasury bonds they hold – while pumping dollars into foreign economies by buying up their industry and agriculture and infrastructure and public utilities, making large capital gains. The hope is that and soon, we’ll earn our way out of debt by this free ride arrangement.



Imperialism is getting something for nothing. It is a strategy to obtain other countries’ surplus without playing a productive role, but by creating an extractive rentiersystem. An imperialist power obliges other countries to pay tribute. Of course, America doesn’t come right out and tell other countries, “You have to pay us tribute,” like Roman emperors told the provinces they governed. U.S. diplomats simply insist that other countries invest their balance-of-payments inflows and official central-bank savings in US dollars, especially U.S. Treasury IOUs. This Treasury-bill standard turns the global monetary and financial system into a tributary system.

That is what pays the costs of U.S. military spending, including its 800 military bases throughout the world, and its foreign legion of Isis, Al Qaeda fighters and “color revolutions” to destabilize countries that don’t adhere to the dollar-centered global economic system.

Bonnie Faulkner: You write: “Today it would be necessary for Europe and Asia to design an artificial, politically created alternative to the dollar as an international store of value. This promises to become the crux of international political tensions for the next generation.” How does the world break out of this double-standard dollar domination?

Michael Hudson: It’s already coming about. And Trump is a great catalyst speeding departing guests. China and Russia are reducing their dollar holdings. They don’t want to hold American Treasury bonds, because if America goes to war with them, it will do to them what it did to Iran. It will just keep all the money, not pay back the investment China has kept in U.S. banks and the Treasury. So they’re getting rid of the dollars that they hold. They’re buying gold, and are moving as quickly as they can to be independent of any reliance on U.S. exports. They are building up their military, so that if the United States tries to threaten them, they can defend themselves. The world is fracturing.

Bonnie Faulkner: What are foreign countries like China and Russia using to buy gold? Are they buying it with dollars?

Michael Hudson: Yes. They earn dollars or euros from what they’re exporting. This money goes into the central bank of China, because Chinese exporters want domestic yuan to pay their own workers and suppliers. So they go to the Bank of China and they exchange their dollars for yuan. The Bank of China, the central bank, then decides what to do with this foreign currency. They may go into the open market and buy gold. Or, they may spend it in foreign countries, on the Belt and Road Initiative to build a railway and steamship infrastructure and port development to help China’s exporters integrate their economy with others and ultimately with Europe, replacing the United States as customer and supplier. They see the United States as a dying economy.

Bonnie Faulkner: Can the Chinese build up their Belt and Road infrastructure projects with dollars?

Michael Hudson: No, they are getting rid of dollars. They already are receiving such a large surplus each year that they only use the dollars to buy gold or some goods, such as Boeing airplanes, but mostly food and raw materials. When China buys iron from Australia, for instance, they sell dollars from their foreign-exchange reserves and buy Australian currency to pay Australians for the iron ore that they import. They use dollars to pay other countries that are still part of the dollar area and still willing to keep adding these dollars to their official monetary reserves instead of holding gold.

Bonnie Faulkner: Well, it is kind of surprising, Michael, that countries haven’t started doing this a lot sooner.

Michael Hudson: There has been political pressure not to withdraw from the dollar-debt system. If countries act independently, they risk being overthrown. It takes a strong government to resist American interference and dirty tricks to put its own country first instead of following the U.S. advisors and agents who pay them to serve the U.S. economy rather than their own, or to resist brainwashing by University of Chicago’s junk economics.

Bonnie Faulkner: How far along is the dollar’s demise as the world’s reserve currency?

Michael Hudson: It’s already slowing. Trump is doing everything he can to accelerate it, by threatening that if foreign countries continue to recycle their export earnings into dollars (raising the dollar’s exchange rate), we’ll accuse them of manipulating their currency. So he would like to end it all by the end of his second term in 2024.

Bonnie Faulkner: What would the United States look like if the dollar is no longer the world’s reserve currency?

Michael Hudson: If it continues to let Wall Street do the economic planning, the economy will look like that of Argentina.

Bonnie Faulkner: And what does Argentina look like?

Michael Hudson: A narrow oligarchy at the top, keeping labor at the bottom, taking away labor’s rights to unionize – an economy whose financial and military sectors have won the class war.

Bonnie Faulkner: China, with its Belt and Road infrastructure project, is now buying gold on the open market, as are a number of other countries. Has the Western banking system penetrated China? And if so, how would you characterize China’s banking system?

Michael Hudson: There’s an attempt by the United States to penetrate China. In the recent trade agreements China did permit U.S. banks to create their own credit. I’m not sure that this is going to really take off, now that Trump is accelerating the trade war. But basically, in America you have private banks extending credit to corporations. In China you have the government banks extending the loans. That saves China from having a financial crisis in the way that the United States does.

About 12 percent of American companies are said to be zombie companies. They’re already insolvent, not able to make a profit after paying their heavy debt service. But banks are still giving them enough credit to stay in business, so they won’t have to go bankrupt and create a crisis. China doesn’t have that problem, because when Chinese industry and factories are not able to pay, the public Bank of China can simply forgive the debt. Its choice is clear: Either it can let companies go bankrupt and be sold at a low price to some buyer, mainly an American; or, it can wipe the bad debts off the books.

If China had been crazy enough to have student loans and leave its graduates impoverished instead of providing free universities, China’s central bank could simply write off the student loans. No investors would lose, because the banks are owned by the government. Its position is, “If you’re a factory, we don’t want you to have to close down and unemploy your labor. We’ll just write down the debt. And if your employees are having a really hard time, we’ll just write down their debts, so that they can spend their money on goods and services to help expand our internal market.”



America’s banks are owned by the stockholders and bondholders, who would never let Chase Manhattan or Citibank or Wells Fargo just forgive their various categories of loans. That’s why public banking is so much more efficient from an economy-wide level than private banks. It’s why banking should be a public utility, not privatized.



Bonnie Faulkner: Can you explain further how writing down debts is good for the economy?

Michael Hudson: Well, think of the alternative to writing down debts. If you don’t write down America’s student debts, the graduates are going to have to pay so much of the student debt service (now to the government) that they’re not going to have enough money to be able to buy a house, they won’t have enough money to get married, they won’t have enough money to buy goods and services. It means that most people who can buy houses are graduates with trust funds – students whose parents are rich enough that they didn’t have to take out a student loan to pay for their children’s education. These hereditary families are rich enough to buy them their own apartment.



That’s why the American economy is polarizing between people who inherit enough money to be able to have their own housing and budgets free of student loans and other debts, compared to families that are debt strapped and running deeper into debt and without much savings. This financial bifurcation is making us poorer. Yet neoliberal economic theory sees this as a competitive advantage. For them, and for employers, poverty is not a problem to be solved; it is the solution to their own aim of profitability.

Bonnie Faulkner: So is this whole privatization scheme, particularly the privatization of the banking system and privatizing a lot of infrastructure what’s bankrupting the United States?

Michael Hudson: Yes, just as it’s bankrupted England and other countries that followed Thatcherism or the neo-liberal philosophy since about 1980.

Bonnie Faulkner: Michael Hudson, thank you again.

Michael Hudson: It’s always a pleasure to have these discussions.

Bonnie Faulkner: I’ve been speaking with Dr. Michael Hudson. Today’s show has been: De-Dollarizing the American Financial Empire. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend, a Wall Street Financial Analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972 book, Super Imperialism: The Economic Strategy of American Empire, the subject of today’s broadcast, is posted in PDF format on his website at michael-hudson.com. He is also author of Trade, Development and Foreign Debt, which is the academic sister volume to Super Imperialism. Dr. Hudson acts as an economic advisor to governments worldwide on finance and tax law. Visit his website at michael-hudson.com.

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The Dollar's Fate

By PAUL KENNEDY AUG. 28, 2009



There is a most interesting debate going on at present about the longer-term fate of the U.S. dollar as the supreme reserve currency for foreign-exchange transactions and, more importantly, for the currency holdings of national governments, global companies and the producers of oil, gas and other raw materials.

This attracted attention at the time of the G-20 meeting in London this past April, when the International Monetary Fund received a fresh allocation of $250 billion in special drawing rights (SDRs).

Two months later, the issue came up again at Yekaterinburg, Russia, where the meeting of the BRICs — Brazil, Russia, India and China — suggested to commentators that a coalition of rising states might pull Uncle Sam down to size, in part by shifting their currency holdings from the dollar into these I.M.F. units of account.

A generous interpretation of all of this talk is that it actually is rather better for the world to have its monetary exchanges based upon some international “spread” of currencies rather than upon a single one that, if it toppled due to domestic mismanagement, could bring ruin to many innocent players. Had not the great economist John Maynard Keynes proposed this with the creation of the “bancor” in 1944, to head off a dollar-denominated world that would in the end meet its fate of carrying too much on its shoulders?

This would have been good for the international community and, actually, good for America. Why should the Weary Titan have to stagger under the too-vast weight of its single-currency burden? But Washington vetoed Keynes’ scheme. It’s nice to feel you are Top Dog. Besides, if you possess the world’s leading foreign currency, you can run enormous trade and current-account deficits without being punished for it.
Continue reading the main story


The nastier interpretation of this move toward ending the dollar’s preeminence is, let there be no doubt, an anti-American one. It seems to be in the nature of things that the leading power in world affairs is always resented by countries further down the totem pole, even when that hegemon is fairly successful at distributing what economists term “public goods.”

If, therefore, the rising economies of Brazil, Russia, India and China decide to have their own get-together, it is scarcely surprising that they would discuss the international trading and financial system, and how to become less dependent on America’s capacity (through sub-prime mortgages, lousy banks, currency dominance) to wreak damage upon it.

To some, a weakened dollar might also be good as a blow to U.S. arrogance, and a reminder that even top dogs can be tripped up. Removing the dollar’s “unfair” advantage as the primary reserve currency has always seemed agreeable to French intellectuals and, the record shows, to French presidents from de Gaulle to Sarkozy.

So why not, then, push for a more equitable “basket of currencies” to grease the world’s commercial exchanges or, as a variant of that, try to arrange trade through the medium of the I.M.F.’s special drawing rights?

It turns out that there all sorts of reasons why those SDRs cannot at present function as a common currency — that is, as something you would price a Toyota car in, or as a wad of bills you could withdraw from a cash machine. Their function is intergovernmental by nature and not at all like, say, Barclay’s foreign-currency departments.

Every weekday, get thought-provoking commentary from Op-Ed columnists, The Times editorial board and contributing writers from around the world.
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This was well explained recently by the financial writer Swaminathan S. Anklesaria Aiyar of the Cato Institute, in Washington (see www.cato.org/pub_display.php?pub_id=10331). It should be noted that Aiyar is not like certain nationalist American commentators on this topic who seem to regard a reduction in the dollar’s world role as something like a threat to one’s masculinity.

In fact, Aiyar cold-bloodedly argues that the dollar’s relative fall will much more likely come as a result of the continued growth of China’s G.D.P. and the future arrival of the yuan as a fully convertible currency — and not as a recourse by the governments of the world to some artificial I.M.F. instrument like the special drawing rights. With the yuan joining the euro, the yen and the dollar as the four biggest foreign currencies by far, there will be even less pressure and logic for substitution of the traditional means of money exchange.

Just a short time before reading Aiyar, my eye was caught by a rather extraordinary article, “The World Supremacy of the Dollar at the Rendering (1917-2008),” by the superb Italian scholar Antonio Mosconi of the Einstein Centre for International Studies (CESI). The title itself is so intriguingly biblical that I immediately wanted to know what it said.

For those with less time on their hands than university professors, it said this: The U.S dollar has lived two lives, the first as the currency of a powerful creditor country from the 1920s to the 1960s, the second as the currency of an “empire of debt” from the 1970s until today, with much more international indebtedness to come, simply from the wretched fire sale of Treasury bonds every week.

It is impossible to summarize in a few sentences Mosconi’s devastating and elegant description of the U.S. government’s exploitation of its domestic paper-printing capacity upon the international fiscal scene, but his general conclusion is blunt: “This crisis is not like the others, but it is the last convulsion of the international role of the dollar.” At some time in the future, much of the world will take steps to avoid having its fate rest upon the autistic decisions of the U.S. Treasury and the Federal Reserve Bank. And then will come the rendering….

Well, we shall see. Given the nervousness of world markets at present, it is as possible that we could see an improvement in the dollar’s exchange value as watch a sudden slump.

Overall, though, these academic papers make some basic sense. We live in a world right now where one single country, possessing only about 5 percent of the earth’s population, has roughly 20 percent of its G.D.P., spends almost 50 percent of its total defense expenditures, and freely prints bills that account for 65-70 percent of global foreign-currency reserves.

If one believes in the economists’ theory of “convergence” — that is, the coming closer together of the product and income of companies, regions and countries — then the conclusion is clear: As China, India, South Korea, Brazil, Mexico and Indonesia all “catch up,” the American share of things will relatively shrink. Sooner or later — and this debate really is about “sooner” or “later,” not about “if” — we are going to witness another major shift in the global balances of power.

Even in the shorter term, I guess I would be looking a little more keenly at the current distribution of my portfolios, just to ensure that when I had to come to “render my accounts,” I would not look awfully out of date. And, as an international author, I am happy to take my fees and royalties in many currencies, just to be on the safe side.

Paul Kennedy is Dilworth Professor of History and director of International Security Studies at Yale University. His books include “The Rise and Fall of the Great Powers.”

Other Reading:
https://www.cnas.org/publications/reports/leveraging-history

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How Advanced Robotics Will Impact Job Markets

by Niall McCarthy,Jul 3, 2019

Robots are set to have a major impact on workforces around the world over the coming years with jobs involving routine manual activity most at risk from automation. In order to gauge how the adoption of advanced robotics will affect the labor market, the Boston Consulting Group carried out a survey of executives and managers from 1,314 global companies in early 2019.

The research found that 67 percent of Chinese companies are expecting a reduction in the number of employees due to automation, along with 60 percent in Poland and 57 percent in Japan. Some companies are more at risk than others with only 34 percent of organizations in Italy expecting reductions by comparison.

https://www.statista.com/chart/18576/share-of-companies-expecting-employee-reductions-due-to-robotics/

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How Iran Will Determine If The US Dollar Remains The World's Reserve Currency

For almost two centuries, Sterling reigned supreme as the world's reserve currency, propping up the vast British Empire which was the world's superpower during the 19th century and the early 20th. Then, in the span of just a few months, everything changed and the US Dollar took over after a series of dramatic events.

For those unfamiliar with this historic transformation, Clarmond's Mustafa Zaidi and Chris Andrew describe the series of events in which Iran and its oil reserves proved to be the final nail in the coffin of sterling and the British Empire. However, what is far more interesting, is their suggestion that the current tensions between Washington and Tehran, and what happens to Iranian gas, could also be the event that results in the end of the dollar's own reserve status.

Why? Read on in Clarmond's observation on "Self Deception and Pride."

Wilting in the muggy summer of 1945 in Washington DC, an ailing Lord Keynes messaged London - his mission to procure a $5b grant to avoid a ‘financial Dunkirk’ had failed.

Instead the Americans had offered a $3.5b loan loaded high with conditions. “We are in Shylock’s hands” muttered Ernie Bevin, the Labour Foreign Minister. The American demands were put forward by a former cotton king (Will Clayton) a future Chief Justice (Fred Vinson) and crafted by the President of Chase Bank (Winthrop Aldrich). There were three immovable requirements for the loan. First an end to Imperial Preference in trade, secondly the floatation of Sterling within a year, and thirdly Britain signing up to the Bretton Woods system.

The American objective was to put American industry and finance at the centre of the world. This meant dismantling the sterling free-trade market and destroying sterling’s status as a settlement and reserve currency. During WWII Britain had already traded away to the US its naval bases and its world-leading technology; now its American ally was now gunning for the Empire’s trade markets and currency.

New Jerusalem

The Labour Atlee government needed US dollars to deliver its promise of a ‘New Jerusalem’ - full employment, the national health service and social welfare. In just five days of debate, Atlee’s government agreed to all the loan’s conditions. Ironically, Labour was agreeing to free trade overseas yet was busily nationalising domestic industry. It sacrificed its trade empire and sterling’s global dominance for its vision of a post-war utopia.

A year later, sterling was floated. It last only a disastrous 37 days before being controlled again; two years later it was devalued by 30%. As Keynes commented previously this exercise had been an odd mixture of ‘self deception and pride’.

Sterling Oil…

With the loss of India, Bevin now turned to the Middle East where access to sterling-denominated oil from Iran kept Britain’s balance of payments afloat. The UK could still pay for Iranian oil in sterling and thus preserve its precious dollars.

But American oil partnerships in Venezuela and Arabia, based on a 50/50 US/local ownership rule, made Britain’s 70/30 structure in Iran untenable. Iranian nationalists now started to demand, and ultimately obtain, full control of their natural resource.

With the nationalisation of the AIOC (Anglo Iranian Oil Company), Britain was deprived of sterling oil, and thus became utterly dependent on the Americans to earn enough dollars to pay for their energy. Immediately this started a rapid exodus from holding sterling as a settlement currency and reserve. Iranian oil joined its other dollar-denominated brethren.

Fast forward 70 years and once again Iran stands at the fulcrum of how the energy source of the future is to be priced.

Persian deals

Britain’s loss of sterling- denominated oil was the final nail in the coffin of sterling being a global currency. Its collapse was imperceptible and then a precipice.

As of today the US finds itself in a similar position as it remains to be seen what currency natural gas will be priced in. The world is transitioning from oil to gas, as, 70 years ago it had transitioned from coal to oil; once again Iran holds the key for this critical resource.

Today, natural gas is priced in US dollars in America, in euros for Russian gas in Europe, in renminbis for Russian gas in China, and US dollars for Qatari gas. It shall be the pricing of Iran’s massive reserve of gas that will determine the future global currency denominator of this energy source. Or, to put it another way, the US$’s continuing position as the global reserve currency may be decided in how Washington deals with Tehran. War serves neither the dollar’s nor the Donald’s future longevity. America must find a way to have dollar-denominated Iranian natural gas.

Don’t Tread on Me

Unlike post WWII Britain, America does not face an overwhelming competitor. But America seems to be in an Atlee-esque conundrum with domestic issues overriding international obligations. America’s ‘New Jerusalem’ is captured on red baseball caps… ‘Make America Great Again’. And this aspiration has a price - a peaceful withdrawal from global commitments - no Persian misadventures.

https://www.zerohedge.com/news/2019-07-04/how-iran-will-determine-if-us-dollar-remains-worlds-reserve-currency

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Investing for New Cold War

By Louis-Vincent Gave July 5, 2019



“We’re moving from a world that was constantly globalizing to one breaking up into three different empires, each with their own currency, reference bond market, supply chains. There are massive investment implications.”

–LOUIS GAVE

INTRODUCTION

As is often the case in the current news environment, the endless headlines surrounding the relations between the United States and China overshadow the substance of underlying policy and provide little added value to the public. While this may make for good political theatre, it leaves many struggling to grasp what has been developing not just over the past year, but quietly for the past decade. In this week's EVA, Evergreen Gavekal partner Louis Gave offers thought-provoking insights on the complex “trade war” being staged by the two countries. Louis - and the venerable Charles Gave, with his 50 years of investment experience - argue there are far bigger implications for the ongoing battle than just the balance of imports and exports. The following examines the events that have led us to this point, as well as the options that may be exhausted going forward.
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Of perhaps even greater value to our loyal readers, they shed light on the consequences of the structural changes occurring in global trade and how that shapes portfolio management decisions. What was very recently a world dominated by the narrative of globalization, allowing for many investment opportunities—especially in technology—we have since seen that storyline experience massive decoupling. As Bob Dylan said, “the times, they are a-changin’”—yet the Gaves wonder why investors have failed to change their investments with the times. Whether it be due to a lack of awareness regarding the two nations’ agendas, or uncertainty of how these changes impact the broader economy, or simply a complacency born of a decade-long bull market, investors are at risk of getting caught flat-footed by a reversal of one of the main drivers of the global economy since the end of WWII.

The wisdom in this piece gives much-needed clarity to those looking beyond the noise of the daily news cycle, and who are instead seeking to comprehend the power struggle between the world’s two behemoths from a big-picture perspective. Do enjoy.
INVESTING FOR A NEW COLD WAR

By Louis-Vincent Gave

Over Christmas, Charles and I hunkered down to write our latest book Clash Of Empires: Currencies and Power in a Multipolar World. In recent months, we have both met with many clients and discussed its core thesis that globalization is ending and the world is breaking into three separate economic zones with their own (i) trade and reserve currency, (ii) bond market of reference and, perhaps most importantly, (iii) dedicated supply chains. In short, 15 years after we described a new era of globalization in Our Brave New World that period may be drawing to a close. As such, recent discussions with clients have typically gone something like this:

Charles/Louis: “Do you believe that globalization was one of the most important macro trends of the past couple of decades?”

Most clients: “Absolutely.”

Charles/Louis: “Do you believe that globalization is coming to an end?”

Most clients: “It sure looks that way.”

Charles/Louis: “What are you doing about this in your portfolio?”

Most clients: “So far, nothing.”

The aim of this paper is to tackle the quandary thus highlighted.
The New Cold War

Given the back-and-forth between China and the US over the past year (trade wars, Huawei, threats to Hong Kong’s special status) President Xi Jinping has likely concluded that “just because you’re paranoid it doesn’t mean they aren’t after you”. Even if Xi and President Donald Trump exit their G20 meetings singing Kumbaya, China is likely to keep planning for a long, drawn-out cold war with the US. Given the bipartisan, anti-China rhetoric emanating from Washington DC, Beijing has to conclude that its key relationship has changed.

The Nixonian policy of “bringing in China from the Cold” has now run its course. From Beijing’s perspective, the US’s new China policy seems to be containment - technologically, economically and geographically.

Thus, even while hoping for the best, any forward-thinking Chinese leader must now plan for the worst. This means dealing with China’s most glaring weaknesses of which there are three; namely, its dependence on overseas supplies of (i) technology/semiconductors, (ii) energy and (iii) US dollars.
Technology/Semiconductor dependence

The first job of any empire is to control key axes of communications (all roads lead to Rome, and all that). In this regard, the US was as likely to yield a key part of the world’s critical telecom infrastructure to Chinese corporates as it was to give up control of the world’s sea-lanes. After all, the valuable “goods” of tomorrow are more likely to be digital information passing through telecom switches than actual goods being moved on a ship.

Thus, when Australia and New Zealand a year ago announced that they would ban Huawei from building their 5G networks, it was possible to find a positive take on the headline: as two key US allies in the Pacific reject Chinese technology, the US security establishment might relax about the unfolding Chinese telecom breakthroughs. Unfortunately, perfidious Albion’s decision to embrace Huawei changed the dynamic. It’s almost as if Britain announced: “we will use Huawei” and the US security establishment replied, in one voice, “The hell you will. We’re shutting it down.”

China’s vulnerability stems from semiconductors being its biggest import item (about US$260bn a year against energy’s US$170bn) and that US semiproducers hold most of the world’s important patents. This is a theme that colleagues Dan Wang and Matt Forney at Gavekal-Fathom China have spent the past couple of years writing about. And suffice to say that the US deciding to “weaponize” semiconductor exports leaves Chinese policymakers with the following choices.

Fold and accept that Huawei, along with any other Chinese tech company, will have to accept being also-rans.

Pour money and human resources into reducing the technological gap with the US in semiconductors.

This second choice brings us to a remark made by an old friend Ajay Kapur (strategist at BofAML) that only countries that spend lots of money on their defence sectors have a thriving tech sector. Of course, spending heavily on weapons does not automatically trigger technological progress (if so, Saudi Arabia would have its own Silicon Valley). But it does seem to be a necessary, although not sufficient, condition for breakthroughs.
All about the military

Back in the days when France and Britain had proper military budgets, France invented the Minitel, while Alcatel and Marconi were telecom giants. Today, most tech breakthroughs seem to come from the US (which spends more on defense than the next ten countries combined), Israel (a big military spender as a share of GDP), South Korea, and perhaps even Taiwan. Thus, the first consequence of the unfolding “tech war” may be that China cranks up its military budgets, including large sums going into military “research”.

This doesn’t mean that China will “crack the semi code”. But it will throw both money and people at the problem. Twenty years ago, China produced less than a million university graduates a year, with roughly half in the sciences. Today, the ratio remains the same, but this summer more than eight million university students will graduate in China. It now has more graduate students than it had undergrads a generation ago. Now, scientific breakthroughs are not a numbers’ game, but numbers do help!

For US tech firms, this looks like the worst of both worlds: on the one hand, the US government is telling them to kiss goodbye the fast-growing Chinese market. On the other hand, China’s government is likely to heavily support new competitors challenging the US producers. Such competitors do not have to worry about making money, or even achieving positive returns on invested capital as the reason for being is first and foremost national security.

Recent weeks have seen a number of US tech firms announce that their sales outlook is darkening. Unsurprisingly, it seems that uncertain CEOs are choosing to sit on their hands until visibility improves—a development that may put the impressive outperformance of tech stocks under pressure.

Looking past current tensions, US tech stocks are threatened by the US-China standoff becoming a full-scale cold war. First, this would devastate supply chains, with major consequences for productivity and profitability. The second, and more alarming prospect, is that the breakdown in relations worsens to an extent that China’s policymakers conclude they have no interest in respecting intellectual property rights. After all, if we move into a world where Chinese exports into the US, and other developed world countries, become constrained, China may decide to forgo those markets. It could instead focus on reverse-engineering Western products like jet engines and medical devices with a view to selling them into emerging markets.

Such a possibility brings me back to themes outlined in Our Brave New World. Back in 2005, we argued that in a “globalizing” world, intellectual property would become ever more valuable. But, of course, for such a construct to sustain value, governments would have to agree to protect it.

Over the past decade, financial markets have aggressively re-rated sectors like tech and healthcare which are rich in intellectual property just as “asset-heavy” sectors like energy and materials have underperformed (see chart overleaf). And just as the valuation gaps between the “IP heavy” MSCI Growth index, and the “asset heavy” MSCI Value index continues to widen, the US has decided to turn tech into the battlefield of the China-US cold war.

Charles’s family hails from Alsace, the French region that witnessed the 1870 Franco-Prussian war and epic battles in both WW1 and WW2. More than any region, Alsace was the battleground on which Franco-German rivalries played out for 75 years. And as anyone from Alsace will tell you, being the battleground is no prize. Once battles are over, one is left with ruins and, if lucky, one’s eyes to cry with. And this brings me to the US decision to make tech the battlefield on which the unfolding cold war will be fought.

This decision has been driven by the US holding a big comparative advantage in technology. But by picking this battlefield, could the US be replicating the French mistake at Dien Bien Phu? Back in 1954, the French were convinced they held superior troops, superior equipment and superior officers to the guerrilla-driven Vietminh (very unlike the French to feel superior). All they needed was to force the Vietminh into a proper, open battle and the Indochina war would come to an end. France picked its battlefield, the battle took place, and the war in Indochina did end—at least for the French, though not with the outcome the French general staff had expected.
Picking tech as a battlefield - a weaker dollar?

Amazingly for an economy in its 10th year of expansion, with record-low unemployment and record high asset prices, the US budget deficit rose by 39% in the first eight months of this fiscal year. It’s likely that for 2019, the deficit will be south of 5% of GDP. And despite the energy sector registering big productivity gains that have put the US on the cusp of being a net energy exporter, the US current account balance remains in the red. As a result, the US “twin deficits” remain south of 5% of GDP, a level which, for most countries usually means a weaker currency—unless one can attract foreign capital in a constant manner to plug those massive deficits.

Historically, the US has been good at attracting foreign capital. By promising to treat foreigners on a par with Americans, by maintaining an independent judiciary and defending property rights, it has been a safe-haven destination for at least a century. Indeed, it remains, the ultimate “risk-free” destination, unless you happen to be Iranian or Venezuelan.

The US’s haven status got a boost from European policymakers’ decision to impose the euro on a perfectly well functioning set of heterogeneous markets. It was also helped by so much wealth creation in recent decades coming from countries like China, Russia, Brazil and Mexico, where elites have sought to diversify their wealth away from domestic markets and currencies. In short, the US could run massive twin deficits and the dollar would remain the choice destination for asset allocators.
The changing rates environment

Having said that, there were probably still two factors which did help the US dollar stay strong in the face of large twin deficits: positive interest rate differentials, and the outperformance of tech.

The first is obvious enough. With Europe and Japan embracing negative interest rate policies, pension funds, insurance companies and even private savers have been forced to look abroad when seeking even a modicum of positive carry. Fortunately for them, such carry could still be found by investing in long-dated US government bonds and hedging the currency risk. In fact, up until recently, buying treasuries and hedging the US dollar risk typically delivered at least 100bp more in carry than the outright ownership of German bunds, French OATs or Japanese government bonds.

But as we write, this is no longer the case. As a result, European and Japanese yield-seeking institutions are left with a couple of obvious options:

Look elsewhere for positive carry, probably in more risky markets.

Remove currency hedges from treasury holdings and run the dollar risk.

There is no more free lunch as European and Japanese institutions must now choose between greater signature risk or currency risk. Anecdotal evidence points to them going for the latter. After all, the general view has been that the US dollar could only rise, thanks in part to Fed hawkishness and the US’s strong economic growth. However, as US economic data starts to soften, as the Fed gets more dovish, and as the fiscal deficit shows no sign of abating, “long-US dollar” positions may become harder to justify. It should be noted that the DXY has not held new highs despite bad news-flow for the euro (Italian crisis, yellow vests, Deutsche Bank, the tariff threat to German autos), the pound sterling (Brexit), commodity currencies and even the yen.

Beyond interest rate differentials, the second main reason foreigners likely deployed capital in the US over recent years is that the US had a sector that almost everyone else lacked, namely, technology. After all, a European investor looking at Procter & Gamble could just as easily buy Unilever. Total or BP can compete for capital with Exxon or Chevron. BMW or Daimler with Ford or GM. But who in the developed world’s equity markets can compete with the lure of Google, Facebook, Apple, Microsoft or Amazon? Perhaps the utter domination of US tech has not only triggered the massive outperformance of US equity markets, but has also helped keep the dollar high in spite of the US’s sustained twin deficits.

It could be argued that as money keeps pouring into US funds running venture capital and private-equity strategies as well as exchange-traded funds, then there is good reason for the dollar to stay strong. Yet as investors adjust to the technology sector being the new battleground of the unfolding cold war, a possibility that will hurt tech valuations, will foreigners keep pouring money into US tech? Take Saudi Arabia’s Mohammad Bin Salman Al Saud as an example: having taken a bath on Uber and a cold shower on Tesla, will the Saudi crown prince now decide that art investing makes more sense?
The second Chinese weakness - oil

Looking through the list of China’s key imports, oil is the next item that follows semiconductors. And a few weeks ago, with John Bolton and Mike Pompeo advocating regime change in Venezuela and Iran, it must have looked—at least from China’s perspective—like the US was trying to engineer a spike in the oil price. After all, what better way to create a balance of payments problem in China? First, block Chinese exports to the US, thereby triggering a collapse in China’s dollar earnings. Second, cause a surge in China’s import costs through a higher oil price.

Until a few years ago, such a move would have been too costly for the US to contemplate. However, as it becomes self-sufficient in energy, a high oil price no longer means sending vast sums to Mexico, Venezuela, Canada or elsewhere. Instead, it means that money flows from the (blue States) North East and California down to (red states) Texas, Oklahoma, Louisiana, North Dakota and Alaska.

Fortunately, Trump remembered that he was not elected to see US soldiers bogged down in more foreign theaters and reined in Bolton, Pompeo and other hawks in his administration. But, as far as China is concerned, the energy threat remains real and will push China to seek better long term solutions. These will likely include:

Continued push towards greater electrification of China’s buses and cars.

More investments in domestic energy production and optimization of the grid. This will include wind, solar, nuclear, hydro and clean coal.

Signing as many long term energy supply deals as possible.

This brings us to the recent love-in between Presidents Vladimir Putin and Xi Jinping, the 13th official pow-pow between the two heads of state in the past six years. This saw Xi declare that Putin was his “best friend”. And as he did, you could almost see Putin thinking “I am very happy to be your best friend. Here is my friendship bill!”. In short, the more that US-China tensions rack up, the more important Russia becomes to China. This may help explain why, so far this year, the Russian ruble is the world’s best performing currency.

The Russian bond market is among the world’s best performing markets, with 10-year yields having dropped some 110bp (in spite of a lackluster oil price). At the same time, the Russian equity market has outperformed all others with a 27% year-to-date rise in US dollar terms.

The third Chinese weakness - US dollar dependency

Following Trump’s May 5 tweet storm announcing that a trade pact with China was no longer an option, the renminbi promptly fell by -1.5%. Consensus opinion was that without a trade deal, Chinese growth would suffer. From there, Chinese policymakers would have little choice but to throw more stimulus into their economy, which would amount to adding more bad debt to an already large pile. Such an outcome would hardly be a positive development for the currency.

However, Chinese officials then came out and warned speculators that the renminbi would not be allowed to weaken much, if at all. This gave markets the sense that a line of sorts was being drawn, either at the RMB7 to the dollar level, or, at the very least, at the 92 level for the renminbi’s CEFTS basket.

These warnings were given more heft when Xi traveled to the site of the launch of the Long March and promised China some tough times ahead. It wasn’t quite a Churchillian promise of “blood, sweat and tears”, but nor did it give great comfort to those hoping for another wave of stimulus. Clearly, the Chinese equity market is more into gentle strolls then long marches!

This begs the question of why President Xi would make such a show of refusing the “easy path” of greater monetary stimulus, and possible currency devaluation. One obvious answer is that devaluing the renminbi could cause even more problems. First, it would anger Trump and likely make a compromise even harder to reach. Second, it may spur capital outflows. But perhaps most importantly, it would set back China’s long term goal of de-dollarizing Asian trade, and her own commodity imports.

Indeed, on the basis that China is run by control-freaks, why did it spend the past decade gradually liberalizing the country’s exchange rate and fixed income markets and so cede control of two most important prices in any economy? The answer is obvious enough: following the 2008 crisis, China’s leaders understood that depending on the US dollar for trade finance left it at the behest of American banks to keep providing the financing.

This was an uncomfortable situation back in 2009. But what is it like in 2019? Will the past year or so have re-enforced or lessened Xi’s desire to reduce China’s dependency on the US dollar? To ask the question is to answer it. And of course, to de-dollarize her trade, China needs to ensure that the renminbi remains a “strong currency”. Otherwise, the renminbi will be seen as an EM currency like any and China would remain an economic vassal of the US.
Conclusion

Assuming that the US-China standoff is not merely a trade war but the start of a new cold war then the shift in the US-China relationship will cast a long shadow over financial markets. As reviewed above, the new cold war could end up being:

Bearish for US technology stocks

Bearish for the US dollar

Bullish for Russia

Bearish for Chinese growth

Bullish for renminbi bonds

In short, for a world that may be going through a dramatic shift, one wants to be long the assets that no-one today owns, like Chinese and Russian bonds, and underweight those that everyone and their dogs are overweight like the US dollar and US technology stocks.

https://blog.evergreengavekal.com/investing-for-a-new-cold-war/?pdf=9472

[cdrom]

The American Retreat, Part III: the Korean Peninsula

5 July 2019 by Peter Zeihan

Not one to collect moss, Donald Trump shot directly from the G20 summit to South Korea July 1 where he nearly skipped the pro-forma niceties with the South Koreans for a tete-a-tete with North Korean dictator Kim Jong Un. Not only did the meeting happen in the DMZ itself, Trump became the first sitting American leader ever to cross into North Korean territory proper. The bulk of the talking heads in the American foreign policy community had a series of minor strokes at the sort of friendly PR Trump laid out for a guy who remains one of the most violently repressive leaders on the planet. They’ve got a point.

In (partial) contrast, I’m one of the people who was cautiously optimistic when the White House announced Trump would be meeting face-to-face with Kim both last year and this week. My feelings are less because I had high confidence in Trump personally or the new approach of engagement in general, and more because nothing else in the past seventy years had worked so why not try something new?

There were two things about the American-NorK summit that caught my eye.

First, personnel.

Trump is a bit hard on his staff. He’s impulsive, rude, belittling, and he becomes supremely bored and more than a bit aggroed when folks start presenting him with… information. He particularly loathes the sorts of details that accompany a contextual briefing. (I’m certain he would despise my work, for example.)

His cabinet, therefore, tends to fall into four general buckets. First, the blindingly incompetent (think HUD Secretary Ben Carson). Second, the sycophants (think Secretary of State Mike Pompeo). Third, those in charge of departments Trump just doesn’t care about (think Education Secretary Betsy DeVos). And fourth, those precious few who know how to say just the right thing to their boss so he gives them real leeway on real issues.

Of this last category only two staffers remain. The first is U.S. Trade Representative Robert Lighthizer. This newsletter is about harder security issues than are on Lighthizer’s remit, but if you’d like a bit of refresher you can review my thoughts on the current USTR here and here.

The second is National Security Advisor John Bolton.

When I read about how many people dislike John Bolton, I’m reminded a bit about Ronald Reagan – even those who hated Reagan’s policies admitted Reagan was pretty damned effective at getting his way. John Bolton is capable and competent in that vein and he lives and breathes all things foreign policy. Which most certainly does not mean he is an easy man to work with. Most who have had the dubious pleasure would never call him a prick because that would insult pricks everywhere. He is brash, aggressive, rude, and has little regard for things like diplomacy, tradition, alliances, institutions, or human rights. (Which come to think of it, is probably why he’s lasted as long on TeamTrump as he has.)

Two of Bolton’s pet projects are that he believes the Iranian and North Korean governments should be overthrown, preferably by force. And as the National Security Advisor he has the ability to shout that into Trump’s face (Bolton’s not the ear-whispering type) at every opportunity.

He’s had lots of opportunities of late.

Relations with Iran have been getting steadily sharper for months, what with the Americans laying on the sanctions thick while the Iranians have once again spun-up their nuclear program. Similarly, relations with North Korea aren’t exactly peachy, what with the North Koreans continuing to proceed with their own nuclear program in violation of clear American preferences. Bolton has repeatedly and forcefully advised Trump that the best counter to the Iranian and NorK positions involves ammunition.

Bolton has not gotten his way. A few days ago the Iranians shot down a large American surveillance drone. Bolton led the charge within the administration to retaliate with strikes on Iranian military facilities. Trump called off the strikes at the last minute.

But it is on North Korea that issues are proceeding in a new direction. Trump didn’t even let Bolton tag along to a summit with a foreign leader. Instead Trump sent Bolton off elsewhere.

It is one thing to overrule an advisor. After all, Trump is the president and it is his prerogative that matters, not Bolton’s. But to banish the only competent foreign policy hand in your administration to literally Mongolia (seriously folks, I cannot make this shit up!) is something entirely different.
National Security Advisor John Bolton, center, during a visit to Mongolia

’ve never been worried that Trump would start a war. Despite his trademark fire-breathing rhetoric, Trump has time and time again shown that upon reflection he’d rather de-escalate hostilities. But no matter what I feel about Bolton personally or professionally, I think it is an eminently good idea for at least one person in an administration to be able to locate Canada on a map. It appears Trump may be ushering out that one person.

The second issue is more… wishy washy, but has far grander implications than any mere personnel shift.

Even if Trump believes and trusts everything Kim says and Kim believes and trusts everything Trump says, the straight-up denuclearization of North Korea was never really on the table. North Korea lives in a tough neighborhood. Prickly (nuclear-armed) Russia to the north, nationalist (nuclear-armed) China to the west. Resurging (nuclear-capable-in-a-long-weekend) Japan to the east. And anxious (nuclear-capable-in-a-month) South Korea to the south. For the North Koreans these days, the American strategic preferences as regards the Korean Peninsula isn’t much more than a supportive footnote further justifying a program already viewed as core to national survival.

That seems to be reflected in Trump’s Korea policy. If the Americans are to step back from the world writ large, it is impossible for them to continue keeping the five-way strategic competition among Taiwan, China, South Korea, North Korea and Japan locked in ice much longer. There is something to be said for establishing a regional balance of power …and then simply leaving. To that end the handshake “deal” struck at the first Trump-Kim summit last year appeared to be that North Korea could keep their nukes so long as they forgo the developing of an intercontinental missile system. Put bluntly, North Korea’s nuclear program was being drop-kicked from being America’s problem to North Korea’s neighbors’. Kind of a dick move, but hey, geopolitics isn’t often about hand-holding.

The problem with this strategy – and the reason I’m hesitant to put my personal stamp of approval on it – is what happens next? Any Korean Peninsula without active American involvement is one in which the South Koreans have no choice but to go nuclear (just as any East Asia without American involvement is one in which both the Japanese and Taiwanese have no choice but to go nuclear.)

The American retreat will unlock a series of regional grievances that have been on hold for decades, but with the technologies of the now. An Asia without America is going to be a bit of a free-for-all, but that doesn’t mean someone won’t emerge on top.

My bet is entirely on Japan. The Japanese economy is the only one (aside from North Korea) that is not dependent upon international stability for its functioning. Put simply, everyone in Asia faces challenges as the world’s economic and strategic norms disintegrate, but for Northeast Asia, Japan’s challenges are the least extreme and Japan’s capabilities are the most advanced.

Fast forward less than a decade and Japan emerges from the post-Order maelstrom as Asia’s first power.

At that point Japan will not only have broken Chinese power, but will have massively added to what is already the world’s second-most capable expeditionary navy andit will be nuclear armed. A future America-Japanese dust-up is not inevitable, but history (strongly) suggests the future’s two most powerful naval forces will stumble across a few spots in the Greater Pacific where they rub each other the wrong way.

I’m fully willing to admit that the current East Asian balance of power is far from sustainable, but that hardly means I’m looking forward a Japanese-Asian Co-Prosperity Sphere with a nuclear chaser.

[cdrom]

A Return to Tiananmen, Part II: The Ending of Hong Kong

4 July 2019 by Peter Zeihan

Hong Kong has been one of the most important economic locations on the planet for over a century.

China has always had problems holding together, but it has also always been a land of opportunity for outsiders who held a logistical and technological edge. Few powers in history have held a sharper edge than the British Empire. Hong Kong sits at the mouth of the Pearl River Delta, and in dominating HK the Brits were able to exploit the cheap labor of the lower basin, while also controlling any exports from the broader Pearl. It was a strategy the Brits had used to great success in locations as diverse as Suez, Calais, the Gambia, Durban, Charleston, and New York City.

As Mao’s de facto alliance with the Americans took form in the 1970s, British Hong Kong became internationalized. The Hong Kongers would use foreign tech and capital – repeating a pattern that stretched back literally a millennium – to create products for export.

In the late 1980s then-British Prime Minister Margaret Thatcher negotiated the transfer of Hong Kong to the Chinese mainland and a new chapter began. Hong Kong shifted from being a manufacturing base to being a financial and logistical hub. The same foreign tech and cash came in, but HK used its already-sophisticated managerial skills to funnel it into the lower Pearl.

That’s the economics. Here’s the politics:

It is not an oversimplification to say the Chinese Communist Party is obsessed with national unity. The “country” of China has historically not held together well, and Hong Kong was no expectation. For most of Chinese history, the southern coastal cities from Shanghai south to Hong Kong were integrated more with the wider world than with their own countrymen. But with the Order’s advance in the late 1940s, the imperial age ended and Maoist China was able to establish control over the entire coast… aside from Hong Kong. The handover from London to Beijing in the 1990s brought Hong Kong into the fold as well.

But there was a poison pill.

The British ran Hong Kong like the imperial territory it was. While the Americans forced the Brits to divest nearly all their empire, the Americans made an exception when it came to Hong Kong. It would have been ludicrous to squander the intelligence opportunities of having British control of such a rich and strategically located bit of allied territory. But when it became obvious to Thatcher that handover was inevitable, the Brits started democratizing Hong Kong. In the aftermath of the June 1989 Tiananmen massacre, the effort intensified. When the handover finally occurred in July 1997, Hong Kong was a full-fledged democracy (albeit one who obviously had no say as to which country it would be associated with).

Thatcher hardwired into the handover treaty a looooong political transition period. While Hong Kong would immediately and officially become “Chinese” territory in 1997, its political system would remain largely self-governing for another half-century. An island of democracy in a sea of authoritarianism. The Chinese call it One Nation, Two Systems.

Say what you will about Thatcher, she was very good at monkeywrenches.

So long as the Chinese economy performed well, Two Systems was an annoyance Beijing was willing to tolerate. But things have changed:

First, the Chinese export-led system has peaked. Global demographics have turned negative and global consumption can no longer absorb exports on the scale China can churn out.

Second, the Chinese financial system is in dire straits. Lending in China isn’t like lending in most places where you… well… have to pay back the loan. In China the government banks funnel cheap credit to firms who guarantee high employment, and to hell with profitability. The goal is to keep everyone in a job so they don’t protest. A side effect of this policy generates scads of subpar quality products that no one needs. China then dumps those products on the international market. Not only can the global market no longer absorb all the Chinese stuff, the financial model has pushed to the point that there are so many debt bombs on the foundations of so many sub-sectors that it would make the bad actors of the US financial crisis blush.

Third, Chinese demographics have peaked. Replacing global demand with Chinese demand was never really an option, and in 2019 it became obvious that Chinese demand was plateauing. Automotive sales – typically the purest indicator of customer demand – have dropped more than most countries do during heavy recessions. Blame the One Child policy – China is running out of twentysomethings. That’s driving labor costs up at the same time it is driving consumption down.

Fourth, the friendly geopolitical environment that China has thrived under – that all-important American-led Order – is in its final days. Much of what has brought China rapid economic development – foreign technology and capital, bottomless global markets, endless raw material imports – is ending. With local markets insufficient to replace global markets, the Chinese hold an economy designed for the 1990s that has no place in today’s world.

Fifth, the Americans are formally and directly targeting Chinese industrial and trade policy. U.S. Trade Representative Robert Lighthizer has already dusted off plans to triple the total American tariff load on China as soon as he gets the go-ahead from his boss. There may be a bit of an American-Chinese trade truce in place, but I doubt it will last much longer than the last two (which each lasted about 75 days).

Sixth, an oil crisis is brewing in the Persian Gulf. Should the Americans do anything to impinge upon Persian Gulf oil flows – and “anything” includes leaving – China faces an energy crisis far worse than what the Americans struggled through in the late 1970s and early 1980s. Some two-thirds of China’s oil is imported, with over half of that coming from the Gulf. China’s navy is utterly incapable of convoying what it needs should convoys become necessary.

The Chinese leadership is fully aware of all these concerns and is fully aware that the Chinese ship of state can no longer sail in its current direction. President Xi Jinping – rightly – fears for the future of the unified Chinese state. To that end Xi spent the bulk of his six years in office to date eliminating anyone in the Communist Party who was willing to defy him under the guise of an anti-corruption purge. The effort was done with more than a bit of side-eye to smashing any sort of regional autonomy. Now’s he’s working on new tech-heavy programs designed to purge dissent throughout wider society. The jury is still out on how successful that will be, but it points to the it’s-not-paranoia-if-they’re-really-out-to-get-you feel of the Party at the moment.

Enter the Hong Kong protests of recent weeks.

Part and parcel to Xi’s efforts to preserve national unity is to lock down Hong Kong. In partial violation of the Two Systems policy, Xi pushed an “extradition law” on the Hong Kong government which would enable any mainland Chinese judicial entity – all of which are arms of the Chinese Communist Party – to issue arrest warrants for any Hong Kong citizen. China’s security services already kidnap Hong Kongers and smuggle them back to the mainland as they need to, but with the new law any local magistrate could force the abduction of anyone in broad daylight. (Such legal authority already exists within mainland China for everyone else.)

The Hong Kongers, realizing the extradition law’s adoption would mean the end of their special status some three decades early, have resisted. And protested.

The timing is far from coincidental. Beijing is ratcheting down on Hong Kong because it fears for the unity of the Chinese state as a whole. Hong Kong is resisting because it doesn’t want to be part of the Chinese state. The primary rationale for Xi’s new law is to keep the country together. The Hong Kongers’ rebellion is largely because of the new law. And now the phrase “Hong Kong is not China” keeps popping up in the protests.

Something’s gotta give, and it isn’t going to be Beijing.

The question, as it seems to be with everything, is timing. Much of the Chinese government’s actions these days – as regards Trump and trade talks, or Japan and territorial disputes, or Iran and oil – seems to be about buying time, but that time may be running out. On July 1, a group of Hong Kong protestors stormed the local legislative assembly with a degree of intensity that was new for the protests. This was less families-with-children-in-strollers and more clubs-and-pipes-of-the-Antifa-type. In the aftermath some of the graffiti caught my attention: “It was you who told me peaceful marches did not work.”
Hong Kong, People’s Republic of China

I don’t have the insight to know who spawned this particular action of vandalism.

Was it the leaders of what have so far been a hyper-organized protest movement? Are they testing the waters for a new push?

Was it some imported anarchists who just love a good riot?

Was it a false flag operation launched from the mainland to justify a crackdown?

Was Beijing aware the storming was imminent, and yet did nothing so that the radicals would provide a justification for their own destruction?

I don’t know. And unfortunately, it doesn’t really matter. Whoever thought that ransacking the assembly building was a good idea has crossed the Rubicon. Whether you view the true power in China as President Xi, the government in Beijing, or the Chinese Communist Party, it cannot tolerate this sort of action in Hong Kong – especially at this time. No matter what your view of Chinese history is, no matter what your view on Xi’s personal vindictiveness might be, the Hong Kong protests have become a threat to national unity. A new crackdown is imminent.

The scale of what’s about to happen is difficult to grasp:

At their peak, the Tiananmen protests involved 300,000 people, mostly students. The Chinese government sent in nearly as many troops to crush the movement. Fatality reports varied wildly from zero (the number Beijing proffered) to 10,000 (the estimate of the British embassy).

In Hong Kong, the protestors have regularly managed to get a million people out in the streets, a figure that has swelled to two million on several occasions. They aren’t just young people. They are families. Retirees. Bankers. Lots of people who normally never protest. I’ve not seen anything like this since the broad-spectrum Iranian protests that dislodged the Shah back in 1979. It is a huge proportion of Hong Kong’s total population (less than 7.5 million).

Ending the protests means nothing less than a full military invasion and occupation of the island. And unlike the Tiananmen massacre where reports of the military operation made it out piecemeal, in today’s social media age Hong Kong’s fall will be broadcast live for the world to see. It will be like Japan’s 2001 Sendai earthquake, but with a wall of tanks instead of a wall of water.

This all feels… momentous but I can’t quite put my finger on the implications. I’m a context guy and for this I just don’t have any. I cannot think of a military crackdown in a first-world economy in modern times. In the United States the last one was the Kent State shooting in 1970, but that was only a few hundred students and 67 bullets. Paris in 1968 got pretty messy, but the violence there was…what, threeorders of magnitude less than what’s imminent in Hong Kong. I’ve got to go back to the riots in Europe in the 1930s at the height of the Depression. The norms of our age are breaking apart and we’ve not yet developed the frames of reference to process what’s coming.

For the immediate future, the bottom line is that while Hong Kong lacks the size and reach and means to export its protest movement to the mainland, the CCP certainly has the size and reach and means to export its forces to Hong Kong. China’s information control systems are sufficient – and the grip of the CCP strong enough – to prevent meaningful contamination of the mainland political system. The protests will not only fail, they signal the end of Hong Kong.

Hong Kong is about to become an absolutely horrible place to be. The degree of Chinese… reconstruction of the island will be on par with the cultural genocide already being imposed upon the Uyghurs of China’s western Xinjiang region. It won’t last a week or a month or a year. We’re looking at something that will last at least a decade.

That will have deep implications for anyone doing business in the country.

At a minimum every ongoing reservation about operating in China is about to get a hard underline. Foreign business magnates like Tim Cook have so far been able to ignore the ethical implications of their firms’ China dependency. It is difficult to see that continuing in light of what’s about to occur.

And it isn’t simply about ethics. Many of the financiers that make Hong Kong work are Chinese citizens. Whether Bank of America or whoever is willing to stay in a place where their workers disappear is… questionable. But it doesn’t end there. It’s not just Chinese citizens; the extradition law also applies to foreigners. These companies are used to working in China, so it’s not that the Chinese system is so scary that they can’t stomach the country. It’s that none of these companies have tried to operate in China during an active crackdown.

The coming violence and occupation will utterly remove Hong Kong from the global network of logistical and financial hubs. Hong Kong has been China’s primary entry point, China’s primary export point, and most capable financial center. Its end takes the gem out of the Chinese crown, as it were. For the past thirty years, China has provided foreign investors with scale, cheap labor, security and local expertise. The ending of Hong Kong damages all that and more.

[cdrom]

A Return to Tiananmen, Part I: The Evolution of China

4 July 2019 by Peter Zeihan

I recently had the opportunity to be in New Zealand and Australia for a few days. Being on the opposite side of the planet is a bit magical – and I’m not talking about the people, culture, topography, food or alcohol. It’s the fact that the Australasian countries are more than a half-day ahead of the U.S. news cycle. As a forecaster the idea that my day begins fifteen hours earlier in Sydney than back in the States gives me the sort of giddy excitement that I’m sure bubbles up from new companions of Doctor Who.

In part it is because all the inanity of American media’s ongoing obsession with the less important dramas consuming Congress and TeamTrump are (thankfully) muted, while all things Asian are loud and proud. I’d like to think that I would have noticed what’s going on in China regardless, but Down Under it is absolutely unavoidable. Events are pushing rapidly toward the cataclysmic, and how they unfold in the next few weeks will determine much about how China evolves – or devolves – for the decade to come.

There’s quite a bit of backstory for this one. Chinese history is less a straight path from here to there and more a tangle of knotted social, cultural, technological, economic, political and strategic threads. As such this newsletter will read a bit like a mosaic. There’s a lot going on and a lot of long-term trends all coming to a head at the same time. That, and I get a sort of perverse satisfaction writing things that I know will be blocked in other countries. Anywho, buckle up.

In recent decades the primary source of legitimacy for the Chinese Communist Party has been the delivery of steadily improving job security, growing wages and all the things that go along with economic growth… but such wasn’t always the case. Pre-1970 legitimacy flowed from the delivering of beatings. Anyone who challenged state rule could look forward to being beaten into submission, assuming they weren’t summarily imprisoned and/or executed.

But in 1972 that bleeding heart liberal Richard Nixon travelled to China and struck a deal: America would admit China into its global Order of security and trade on the condition that China solidify its recent split with the Soviet Union. The Sino-American rapprochement reworked the Cold War and was one of the phalanx of factors that ultimately crushed the Soviet Union.

For the CCP, the decision was not one to be made lightly, and not simply because the Soviet Union had a lot of nuclear weapons and the Russians tend towards historical umbrage as a leading motivator. Chinese history is not a tale of wealth and unity, but instead of chaos and privation. The Chinese heartland in the north is too big to be easily consolidated, and too exposed to the outside world to be easily defended. While the Brits were able to become British in the relative isolation of their island, and the Russians were able to steadily expand their writ throughout the lightly populated Eurasian steppe, Chinese history is a tale of warlords and collapsed imperial systems that just couldn’t make it stick.

It’s a simple issue of geography. China is mammoth in size, but it lacks the sort of internal riverine transport network that would enable pre-industrial Chinese authority to reliably project power to its own periphery. Combine poor transport options with high population densities and China suffers from a center that cannot impose its will on its outlands on its worst days, and outlands that cannot become strong enough to fully resist central control on their best days. The whole place spins apart and crashes together with regularity – and that even before one considers the predations of outsiders. For the millennia of Chinese history, the “country” of China has really only held together as a unified political entity for about three centuries, and half of that was under Mongol occupation.

Half of what’s left is during the American-led Order since the end of WWII. Part and parcel of the Order’s system was the elimination of empires. For the Chinese who had been under the boot of the Japanese and Europeans during their “century of humiliation,” this was a critical factor. Once the Chinese civil war ended with Chiang Kai-shek’s retreat to Taiwan, Mao Zedong was able to finally consolidate control of all of China under a single government.

While the strategic implications of the CCP’s 1970s decision to formally join the American-led Order were robust, the decision was still beyond risky. It meant purposefully flooding the country with mammoth economic and technological changes. It subjected poor-but-unified Maoist China to nearly everything that had in ages past wrecked China: outside influence, shifting economic norms, new ideas, internal migration.

In the years that followed, the Communist Party fundamentally reworked its economic system to take full advantage of their new global access. It wasn’t exactly swords-to-plowshares, but it certainly included rapid development and industrialization of the Chinese coast.

This transformation required a different sort of educational system. Or more accurately, it required an educational system worthy of the name: less blind ideology and Mao-chants and more math and management skills. The effort of achieving mass literacy had many effects and side effects, but one aspect is something Americans can identify with intimately:

Chinese parents didn’t want their kids eking out a meagre existence on subsistence farms, but instead wanted them to earn advanced degrees, wear suits and work in climate-controlled offices. China’s changing economic life may have required a more educated workforce, but just as American parents’ predilections oversupplied the American job market with white collar workers, so too did the preferences of Chinese parents. By the late 1980s it had become apparent that many of China’s twentysomethings were trained for the wrong things.

So they did what twentysomethings do: they complained about it. At a party. All at once. All in the same place. In Tiananmen Square. In 1989.

The Tiananmen protests were not about democracy, or at least not at first. They were about an entire generation who had known nothing but upwardly rising standards of living for their entire lives, who suddenly discovered the world wasn’t going to be quite as packed with golden eggs as state propaganda had promised.

The economic changes wrought by China’s post-Nixon opening pushed the CCP well out of their comfort zone. The protests, in a manner of speaking, pushed the CCP back into its comfort zone. The club returned, the CCP deployed tanks to Tiananmen, killing thousands of Chinese young people.

It is about to happen all over again.

[cdrom]

The American Retreat, Part II: Soldiers of Fortune

3 July 2019 by Peter Zeihan

President Donald Trump has a knack for making Prime Ministers and Presidents hope to remain unnoticed. It’s a stunning ability given that national leaders aren’t exactly wallflowers. The past few days have seen a flurry of news releases indicating the Trump administration has turned its focus to Japanese Prime Minister Shinzo Abe. Specifically, the DC community is abuzz with leaks out of the White House that Trump is considering abrogating the American-Japanese security alliance. Trump has long made his displeasure with the alliance public, noting (correctly) that the treaty calls upon the United States to come to Japan’s defense but not vice versa.

Yet the reason for the one-sided relationship isn’t random. Japanese actions during World War II include such atrocities as the enslavement of Korea, the rape of Nanking, the Bataan Death March. Add in the sort of ultra-nationalism that could generate the industrialized suicide attacks of the kamikaze and the Americans of the late 1940s had zero problem forcing the Japanese – formally – to give up the right to wage war at all.

The Japanese loved that. And to understand why not having an independent security policy can be a good thing, we need to take a step back.

The littoral waters of the East Asian Rim are different from the great wide opens of the global ocean. The South China Sea, East China Sea and Sea of Japan are starkly contained with the Asian landmass on one side and a line of archipelagos on the other. The topographies of the lands they border are defined by internal barriers, mostly mountains, that not only factionalize the great regional ethnicities of the Japanese, Koreans, Philippines, Indonesians, and Chinese from themselves, but also from one another. Such separations made pre-industrial integration within, much less among, these groups paltry.

The mid-19th Century, however, was a turning point. Deep sea ships and military technology had improved to the point that the Europeans and Americans could pop over for a quick forced port opening party and be back home before anyone got too rowdy. The Opium Wars and the arrival of Commodore Mathew Perry of the US Navy were parallel events that had widely disparate impacts in China and Japan. While China continued to disintegrate politically and would largely continue to disintegrate right up into the mid-20th century, Japan ultimately unified under the Meiji Reformation and set about to adopt as many of the outsiders’ technologies as possible in order to industrialize in its own right.

Yet Japan had zero of the resources necessary to drive that industrialization, so from the beginning industrializing Japan had no choice but to be an empire. Those same disconnected geographies bracketed by those same isolated seas never had a chance. Japan’s naval acumen – now backed by firearms and steam ships – quickly dominated those seas and shortly thereafter all the coasts of East Asia.

The Japanese were not kind rulers. The Empire’s need for resource extraction all but required the slave labor of its conquered subjects. With a sense of dark irony that was apparently lost on its founders, the Greater East Asia Co-Prosperity Sphere became the vehicle for Japanese imperial expansion.

Japan’s defeat at America’s hands in 1945 ended the raping and pillaging, but it would be the grossest understatement to say that mistrust remains. The Japanese knew that without their empire they could not be industrialized, and without industrialization they could not be unified. They believed their defeat would be their end.

But the Americans tend to surprise. Instead of officiating the end of Japan, the Americans offered to pay the Japanese to be on America’s side in the Cold War. The Americans would protect all global shipping and open their market to their allies. Everything the Japanese fought for in the war would be granted for free. All the Japanese had to do was join the Americans against the Soviets.

This confluence of American strategic needs and East Asia’s regional geography led to the greatest trade expansion in history. Instead of trade being a highly militarized affair, trade routes became fragile, spindly things spread out over the world. But there are few locations where that fragility is as clear as the series of seas that connect the East Asian powerhouses. These same seas that before enabled first outside powers and later the Japanese to dominate East Asia are now the roads to prosperity. Ports and inland infrastructure began the long arduous process of connecting nearly half of the global population and making their labor accessible to the wider world. For all intents and purposes, the region has the most prosperous, economically advantageous “inland” waterway of anywhere in the world. It didn’t matter that no one in the East Asian littoral liked or trusted the Japanese. The Americans kept the peace, and the peace enabled growth that paid for a lot.

The system lasted for decades, until the Americans won the Cold War and got… bored.

Trump’s musings on the nature of Japanese alliance are not a cry in the wilderness, but the manifestation of disenchantment with the world from across the entire American political spectrum. The tenor and specifics of Trump’s foreign policies may change with his successor, but the general thrust of disengagement has been building since 1992.

One way or another, the Americans are leaving Asia, and not simply because of a change in strategic vision. There is also the issue of capability:

During the Cold War the Americans boasted a 500 or 600 ship navy with 6 or 7 supercarrier groups. That’s the sort of force required to control the global oceans and still have enough punch to hit a tough target here or there on any continent of Washington’s choosing. Now, however, the US Navy is “only” 300 ships, but with 11 supercarrier groups. This is a Navy that can project force anywhere in the world with stunning efficiency. It is a military that was designed to show up on your doorstep with a tank, Bugs Bunny style. It is the most powerful military the world has ever seen. What it lacks, however, are the large number of small ships required to provide the necessary global coverage to protect all maritime commerce. It is a Navy operationalized not for continuity, but instead for disruption. Not for Order, but for Disorder.

Bluntly stated, the Americans are getting out of the global management business. The Japanese cannot help but take notice.

Those littoral seas that have become some of the richest zones on the planet? Screwed. It is the American security commitment that makes all of it possible. At best the Americans will sail away and leave the region to its own devices, and history has zero favorable anecdotes as to how the locals can make it work. At worst the Americans will start a few dumpster fires as their often-shifting mood dictates.

Yet for Japan, therein lies a once-in-a-century opportunity.

Of the East Asian states, Japan is the only one (aside from North Korea) that is notdependent upon international stability for its functioning; the Japanese long ago de-sourced the portions of their industrial based linked to exports to the countries that purchase their products. Japan is the only Asian country with a true blue-water navy. Japan is the only Asian country with a power sector that uses diversified imports rather than being focused on a single imported fuel. Japan is the only Asian country that faces no strategic complications in importing or exporting to the Western Hemisphere. Japan’s population may be aging rapidly, but not as rapidly as either South Korea or China, and unlike its neighbors, Japan already has twenty years of experience in countering aging populations with technological patches.

Everyone in Asia faces challenges as the world’s economic and strategic norms disintegrate, but for Northeast Asia, Japan’s challenges are the least extreme and Japan’s capabilities are the most advanced.

And there is one other itty-bitty advantage the Japanese have. At least for now, the Americans like the Japanese. Especially Donald Trump.

When Abe made his first trip to visit Trump he did all the right things. He showered Trump with praise, brought him gold-plated golf clubs, allowed himself to be soundly defeated over the course of 18 holes. Japan’s combination of relative insulation from the rising global chaos and a positive relationship with the global superpower provides Tokyo with an opportunity most countries do not have. The possibility of purchasing the American largess that once was available for free.

Put simply, if the Americans are going to remain constructively engaged in East Asia, it will be because they are being compensated appropriately. America has the ships, Uber has the business model. The Americans are happy to pick up the slack with the right surge pricing in a strained geopolitical environment. The United States has done this before, choosing to be the last minute relief in the European wars of the 20th Century – first with Cash-Carry, second with Lend-Lease, and finally with the Army – and in the process going from a net debtor with a so-so navy to the undisputed financial, military, and economic powerhouse. It turned out to be a pretty sound business plan.

And as coincidence would have it, the next country on America’s trade renegotiation list is none other than Japan. Think of what is about to happen like the global Order in reverse. Instead of Americans paying everyone to be on America’s side in an American security fight, Japan has to pay America to keep America involved in Japan’s security fight. As such we don’t expect the trade talks to be all that onerous.

Japan’s security needs trump its economic needs. So far, Abe has gone to great lengths to stay on Trump’s good side. He has largely acquiesced to the demands of the administration, which include steel and aluminum tariffs and a series of oh so fun looking buddy montages between Trump and Abe. We know that Japan will stomach a lot because from the Japanese point of view the talks aren’t actually about trade. That means the Americans will largely get their way on the economic issues they care about most – agriculture, automotive, energy and currency policy to be specific.

As to what’s next, that’s a bit of a crap shoot.

East Asia has been engaged in a building arms race since the 1980s, and with the Americans abrogating protection of global oil shipments, the lifeblood of the entire East Asian littoral is now in danger.

What’s that saying? Oh yeah… wars have been fought for less.

In the pre-industrial period that littoral’s layout kept the locals apart, but naval tech has come a long way since 1800. Now, with the proverbial cruise missile out of the bag, the shared littoral area puts all the region’s competitors within easy reach of one another. Even mildly threatening behavior looks a lot like an existential threat. Because it is. It takes little imagination to see how a combination of fear, national pride, strategic maneuvering, and economic desperation will push Japan and China (and others) into conflict.

[cdrom]

The American Retreat, Part I: Oil

26 June 2019 by Peter Zeihan

I’m going to do something I loathe and quote something I read on Twitter June 24. In a pair of posts U.S. President Donald Trump asserted:

Diction and statistical issues aside, these tweets comprise the 92 most important words used by anyone in the past three decades. Trump just made clear the days of America protecting global shipping – particularly of oil shipping in the Middle East – are over.

There is an easy argument to be made that the United States’ shale revolution will make the United States a net exporter of crude oil in the current calendar year, but to understand just how critical that is for the Americans we must first pick apart just how horrible that is for everyone else.

Let’s talk importance:

In the pre-Order world if you couldn’t obtain fossil fuels yourself, first coal and later oil, you failed to industrialize. Your manufacturing would at most be a step above cottage industries, so no mass education and no consumer goods (aka peasantry and mass poverty). Lack of fuel condemned you to having an at-best rudimentary transport system meaning your cities were very small, only able to exist in regions that could grow their own food (aka high living costs and low quality of life).

The handful of locations that could secure fossil fuels – either by producing it locally or by seizing it from others – could advance into something we today recognize to broadly mean “civilization,” which includes among other things homes that don’t leak and gadgets and full bellies.

This all changed in the late 1940s. After World War II the Americans created a global Order – a mix of security and trade guarantees which they used as a bribe to induce others to join their side in the Cold War against the Soviet Union. With global security now a thing, oil could be shipped safely and at volume without military escort, meaning that countries that didn’t have a military capable of escorting could now access fossil fuels. BAM! Civilization goes global.

Remove the Order, remove global oil markets, and civilization itself goes into screaming reverse in any location that lacks either the ability to produce oil locally, or the ability to venture forth and secure someone else’s.

Let’s talk vulnerability:

Crude tankers are huge. A modern supertanker can shuttle around oil weighing more than four Nimitz-class aircraft carriers. They are so big expressly because of the Order.

Pre-Order, merchant shipping used small, fast vessels because they needed to be able to scatter and hopefully outrun predators whether those predators wore eyepatches or naval uniforms. The Order ended such predation under the watchful eye of the U.S. Navy. Instead of commercial advantage coming as a result of speed and distributed risk, it instead came from efficiencies and economies of scale. Ships evolved to became slower to save on fuel costs, and bigger to get more bang for the buck. Today’s oil tankers are the slowest and biggest of them all and are nearly 50 times the size of some of the biggest cargo ships of the WWII era.

A similar logic holds with ports: size generates economies of scale. In addition, as ships have gotten larger, ports had to expand to match – a city with a small dock simply cannot handle a ship that is longer than the Empire State building is tall. Bigger, slower ships forced fewer, larger ports. Disrupt anything within the system and the damage quickly becomes extreme.

Between oil’s criticality to and ubiquitousness in modern life, oil is by far the most commonly traded product on Earth comprising some 18% of all maritime shipping traffic (by volume). About a third of all waterborne crude and product shipments originate in the Persian Gulf.

Let’s talk stickiness:

There are no shortages of politicians out there who agitate for relocating manufacturing capacity to their countries, provinces or cities. Making a speech is one thing, but actually building industrial plant and infrastructure is another. It costs billions and takes years for large industrial shifts, and even then there is no guarantee that a new industrial park will prove economically viable.

But at least manufacturing can be relocated. Commodity production cannot. Either you have it or you don’t, and the Persian Gulf has the greatest concentrations and volumes of easily-produced conventional crude oil on the planet. It can never not matter.

There’s also the impossibility of substitution.

Simply put, greentech isn’t ready. Most advances in greentech have to do with electricity generation, and since so few countries burn oil for electricity greentech’s impact upon oil markets has been negligible. As a rule greentech is shit for transport. High cost combined with insufficient energy density makes electric cars little more than a niche sector for early adopters, with Tesla’s recent sales figures crash indicating that market may already be saturated.

Even if the medium for most modern batteries – lithium – was sufficiently energy-dense to provide a viable long-term improvement in capacity (it isn’t), the stuff still needs to be mined and processed and fabricated into battery assemblies. Each step along the value-chain is so energy- and transport-intensive that very little of it can even be attempted without fossil-fuel-based energy for processing and transport across the world. As counterintuitive as it sounds, we need more carbon-heavy fuels to get to a lighter-carbon world. And that means coal and oil. A lot of oil.

There’s also the issue of lifespan. Most vehicles put on the roads since 1990 have a long lifespan to the point that even if every passenger vehicle sold from now on was an EV, we’d not see an end to oil in passenger transport for another two decades. Even then, even if every passenger vehicle and light truck were an EV right now, that would only make a dent in global oil demand. About 2/5ths of oil is used for transporting people and heating. The rest is much more difficult to do away with. Another 1/3rd is used for air transport, industry, and other modes that require far more range or power than electric engines can manage. And another 1/5th isn’t going anywhere ever, as it is what makes petrochemicals as varied as paints, plastics and pesticides possible.

(None of which means greentech won’t eventually solve the petroleum problem, but all of which means technology needs another couple decades to give it a go – and even that assumes the capital and educational structures around the world which have made the Digital Revolution possible hold steady at their current historical highs.)

Let’s talk protection:

At the end of World War II every nation of consequence aside from the United Kingdom had lost its navy. The United States in essence inherited the global ocean. America’s creation of the Order gave everyone aside from the Soviets a vested economic interest in not floating a new one. Fast forward to today and the American Navy is over ten times as powerful as the combined blue water fleets of every other country combined. Putting that force disconnect at the service of the global commons is what makes the Order work, and what makes global energy shipments and markets possible.

The world’s second- through sixth-most powerful navies in terms of long-range power projection are (roughly in order) Japan, the United Kingdom, France, China, and Russia. Of these only Russia need not sail forth for oil, as it has plenty of its own. France and the United Kingdom can secure what they need from the North Sea and North and West Africa. China has only 30 combat-capable surface ships of size that can effectively operate over 1000 miles from shore; unfortunately (for the Chinese) Southern China is a cool 5800 or so miles distant from the Persian Gulf. Only India – keeper of the world’s seventh-strongest navy – is even remotely proximate.

End result? Today’s oil markets comprise the greatest concentration of risk in themost critical economic sector at the most vulnerable part of the global system and no one can do anything about it if the Americans leave.

And that’s just the beginning.

[cdrom]

The Unintended Consequences Of The China Trade War

https://www.forbes.com/sites/kenrapoza/2019/06/26/the-unintended-consequences-of-the-china-trade-war/#436947ce6ba0

Every war has collateral damage. When it comes to the China trade war, the long-term dominance of the U.S. is one of them.

Consider this: Many people in the world have a smartphone. Judging by the bestselling phones in the world, they run on two operating systems. One is made by the Cupertino, California-based Apple. The other is made by Mountain View, California-based Google. Two companies. One state. One country. They control the smartphone market worldwide.

When China buys soybeans from Brazil, they pay for it in U.S. dollars. Most of the cars on the road in Beijing are American brands.

Russian president Vladimir Putin once said in an interview with Hollywood filmmaker Oliver Stone that when the Soviet Union collapsed, the new government believed the U.S. was their friend. Mostly all of their government computers run on American-made software. Surely, that is changing now.

President Trump might not last the entirety of this trade war. He might not see it through to the end, which in Washington terms means a decoupling from China as the go-to manufacturing center.

But what Trump did was sew a sense of uncertainty with Washington that got countries thinking. Be it China or Germany or Russia—why be so dependent on the U.S.? Especially with respect to core technology like the one powering all-essential smartphones and computers.

“It’s going to be an interesting next 20 years to see if this little snowball at the top of the mountain falls apart or keeps rolling down the hill and gains so much momentum that you can’t stop it anymore,” says John Scannapieco, a shareholder in the Nashville office of law firm Baker Donelson and co-leader of their Global Business Team advising both U.S. and foreign companies on trade matters.

“People are starting to say, ‘Wait a second, should I still rely on these folks?’ The trade war from our side is primarily about decoupling China from the U.S. supply chain. I get it. But these policies that Trump is pursuing also gives the rest of the world an argument to decouple from the U.S.,” Scannapieco says.

China will undoubtedly take the lead on this. How far of a lead is anybody’s guess: a few feet forward, or a country mile? No one knows yet. To listen to China, they are light years behind the U.S. in technological innovation.

China’s leading telecommunications system manufacturer, Huawei, is no slouch. They are on par with the U.S. in terms of 5G development. But they need U.S. hardware to complete the task.

Their Android-powered smartphones are now the No. 2 selling smartphone in mainland China, ousting Apple from that spot.

Huawei faces restrictions in buying American-made microprocessors for its equipment. So Huawei is now rolling out their own operating system for smartphones, a move that will further erode Apple’s market share in China. And Google’s Android, led by Samsung phones.

All Beijing has to do is wave its magic wand and mandate all government employees to have phones with the Huawei OS and soon midlevel companies like Xiaomi and smaller players like Vivo and Oppo would issue phones on the Huawei OS in addition to Android.

In Europe, countries are trying to figure out ways to avoid U.S. sanctions on Iranian oil.

Russia is trying to approximate with China and figure out a way to seriously increase trade in each others currencies instead of dollars in preparation for a worst-case scenario that has Washington cutting them off from dollars someday.

“The unintended consequence will be a three-track world, with a generalized return to heightened state intervention,” says Kim Catechis, head of global emerging markets for Martin Currie, an Edinburgh, Scotland-based wealth management firm.

If decoupling from China also means decoupling from America, then three distinct camps could be carved out of the ashes of globalization: a U.S.-led one, dominant in the Americas, a China-led one dominant in Asia, and an “Old World Order” of increasing economic and political interdependency limiting cross-border investment.

For many years now, at least since the end of World War II, the U.S. led the world in soft power. Everyone wanted McDonald’s, Coca-Cola, Disney, Hollywood and American music.

Over the years, that soft power has eroded a bit only thanks to the inclusion of other sources of content (think Pokémon, for instance) and the personal tastes of a well-traveled, global middle class.

But on many key issues, namely core technology, the U.S. is as indispensable as China is in its role as the world’s assembly line. The trade war threatens to undercut the U.S. position, chip away at its dominance.

China plays the starring role in the erosion of U.S. market share in mainland China and throughout Asia. But European and Japanese companies should not be discounted. There is more disdain in Europe for companies like Google and Facebook than there is for Huawei and Alibaba. The trade war only exacerbates that disdain.

“The world is moving toward another extended period of political and economic divergence, with some similarities to the original Cold War, but in many ways more invasive and more dangerous,” thinks Catechis.

The longer-term impacts and the degree to which value chains and decision-making processes are permanently disfigured appears to be underappreciated by investors.

Ask anyone serving multinational, American clients—a law firm, a consultancy—and they will all tell you that when the trade war began last summer, no one was talking about leaving China. Then September 2018 came, and Trump slapped 10% tariffs on $200 billion worth of China sourced imports. Still, most thought it would blow over.

The Yangshan port in Shanghai. Investors have not been able to decipher what decoupling from China means from the marco perspective. There are just too many companies involved.ASSOCIATED PRESS
By October of last year, Trump and China’s president Xi Jinping announced a cease fire on tariff hikes. They would talk it out for 90 days. Tariffs that were supposed to go to 25% were on hold. Everyone pretty much thought that this was as bad as it would get for tariffs.

Then May came. Trump hiked tariffs to 25% as promised. Now nearly everyone is thinking about moving. Many in the market are assuming tariffs on $300 billion more Chinese goods.

“One of our clients who had 100% of their manufacturing sourced through a contract manufacturer in China, and when we first engaged them last fall about this they said, ‘Don’t come and talk to me about changing my supply chain, because we spent a lot of time setting it up and it runs efficiently, and we don't want to break anything unnecessarily,’” says Brian Dunch, the global trade services leader at PwC. “That has completely changed now,” he says. “Now the discussion is: How do I do this?”

That’s not an anomaly.

To think China is considering the same, either by moving parts of their manufacturing to Southeast Asia or even to Mexico, is a fool’s errand at this point.

To think that if Trump was to get reelected, and the trade war were to escalate, that countries in Europe wouldn’t consider the same is like putting your head in the sand, trying to look for rainbows and unicorns in the clouds.

[cdrom]

The real reason Republicans are so interested in the census

https://www.theguardian.com/commentisfree/2019/jun/23/republicans-census-2020-election-gerrymandering

A Republican strategist conceived a clever long-term strategy to maintain conservative power in a changing nation. We must fight back

The supreme court is expected to soon rule on whether the Trump administration can add a question about citizenship to the US census. If you want to understand the real purpose of Republican proposals to add a citizenship question to the US census, a good place to start is last November’s Texas state house elections.
Democrats call for oversight after Trump's Iran airstrikes reversal
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Democrats captured 12 seats in Texas’s lower chamber, propelled by long-simmering demographic changes that have made this red state less white, rural, and conservative. The Republican party’s enormous majority has commensurately crumbled: a 101-49 advantage in 2011 has now been sliced to a narrow 83-67. That slight edge could easily evaporate by the mid-2020s.

The master Republican strategist Thomas Hofeller didn’t live to see those dramatic results. He died three months earlier, in August 2018. He anticipated them, however, and left behind a simple yet sophisticated plan to hold back the new face of Texas and keep state government in Republican hands regardless of demographic changes. The citizenship question would be the sandbag.

Hofeller’s long-term strategy to maintain conservative power in a changing nation is at the heart of the census question, and the most important - though perhaps least understood - takeaway from a treasure trove of documents discovered after his death. If successful, his strategy could lock in Republican control not only in Texas, but other slowly changing states like Georgia, Arizona, and Florida. It could also undo any possible decision by the US supreme court this month to rein in the worst partisan gerrymandering.

The Republican plan? Fundamentally re-imagining the way we redistrict state legislatures. The US constitution mandates that congressional districts are drawn based on total population, and state governments have followed that lead when drawing their maps. But the supreme court left the actual metric up to the states.

Hofeller wanted to see what would happen if states drew districts based on citizen voting-age population, and not total population. While it sounds wonky and technical, this subtle shift has the potential to remake political power for decades to come.

The documents, revealed after Hofeller’s estranged daughter turned several thumb drives filled with her father’s work over to Common Cause, suggest this change would have a dramatic effect on political representation. Hofeller concluded in a 2015 memo that the switch “would be advantageous to Republicans and non-Hispanic whites”, because it would dilute the votes of the Texas’s growing Latino population.

Why? Drawing districts based on total population counts everyone: voters and non-voters, citizens and non-citizens, adults and children. It’s based on our constitutional, founding theory that a representative must represent all the people, not just adult voters.

But take a state like Texas, for example – a large state with a growing immigrant population, especially in cities like Dallas and Houston. Districts need to be equal in population. Include only voting-age citizens in the overall population count – and subtract, for example, non-citizen Latinos and their children – and you end up with larger, and fewer, Democratic districts.

The key to the entire strategy? Gathering citizenship data, district by district, during the next census. “Without a question on citizenship being included on the 2020 Decennial Census questionnaire,” Hofeller noted in one memo, “the use of citizen voting age population is functionally unworkable.” A state legislature under Republican control could make this change by simple statute, redefining the very nature of political power and entrenching itself in office by passing one law.

Several important revelations from Hofeller’s thumb drives have made front-page news. Last week, challengers of the citizenship question asked the Court to hold off its impending decision to consider new evidence that Hofeller designed the question to benefit Republicans. The new documents also helped place Commerce Secretary Wilbur Ross in jeopardy of contempt of Congress.

But while most of the coverage of the citizenship question has focused on the potential for an undercount of Latinos and other minority groups that transfers congressional seats to whiter, more rural states, there has been less awareness of this crucial second step. The goal, as revealed in these documents, is not simply to undercount Latinos and reapportion Congress. It’s to gain an accurate citizenship count that makes it possible to change the way we redistrict state legislatures, as well.

The citizenship question, then, did not start with Trump – and contrary to the administration’s claims, is not about better enforcement of the Voting Rights Act. It’s the latest in decades of sophisticated strategies quietly designed by Republicans over decades to protect white political power at the expense of blacks, Latinos, and other racial minorities.

It would be easy to relegate all this to the world of conspiracy theory if the Hofeller memos didn’t spell everything out so clearly in black and white – and if this didn’t fit so squarely into Hofeller’s project of using voting and demographic data to draw maps holding back the demographic tides of a changing nation.

Hofeller specialized in redistricting, and it’s the connection between his census work and redistricting that’s so important here, particularly since we are less than two years away from the redrawing of every state legislative and congressional district nationwide.

He was the Republican gerrymandering guru, the operative who taught Republican legislators how to use mapping software and voter data to construct district lines sturdy enough to hold back a Democratic wave. He was an architect and the godfather of enduring Republican advantages this decade in swing states like North Carolina, Wisconsin, Ohio, Pennsylvania and Michigan.

Back in the 1980s, Hofeller helped conceive of an audacious plan to turn the South red through the Voting Rights Act. The VRA’s reauthorization in 1982 included a provision that required mapmakers to draw majority-minority seats, where possible, to help protect minority voting rights and elect more representatives of color.
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Hofeller realized how this could also benefit Republicans. He provided black Democrats in the South with the information and computers they needed to draw majority-minority seats that expanded African-American representation – but also bleached surrounding districts to be whiter, more rural, and more Republican. In 1994, this strategy Republicans allowed Republicans to break the Democrats’ four-decade hammerlock on the US House.

Then in 2008, jubilant throngs celebrated Barack Obama’s 2008 victory in Grant Park, and pundits noted the looming demographic time bomb for the Republican Party and openly questioned whether a changing American electorate would render Republicans a minority party for a generation.

Hofeller had a different idea. He worked with the Republican State Leadership Committee on a plan called Redmap – short for the Redistricting Majority Project – which sought to solidify Republican control of state legislatures in key redistricting states ahead of the 2011 census. The RSLC dropped millions in last-minute negative ads on local Democratic legislators who never saw it coming. Then Hofeller and his team provided assistance or drew maps in North Carolina, Ohio, Pennsylvania, Wisconsin and elsewhere that have locked in Republican control all decade, even when Democrats win hundreds of thousands more votes. (The Common Cause documents also suggest that Hofeller and/or other Republicans in North Carolina used race data to redraw maps that a court had already ruled an unconstitutional racial gerrymander, then misled the court about it.)

If Hofeller were here to defend himself, he would say he was simply doing all he could to secure a partisan advantage for his side. But all these smoking-gun documents strip that pretense away. They make clear that a shift to citizen, voting-age population would dilute the votes of Latinos and enhance the power of whites and Republicans. Nevertheless, whether partisanship or race is at the heart of Hofeller’s motivation, the result is the same: Expanding the influence of white voters and Republican voters at the expense of communities of color. And an America that has become increasingly anti-majoritarian, governed by unaccountable legislators from districts carefully drawn to protect them from voters.

Democrats, meanwhile, always seem a step behind. They’re fighting the uphill battle to win back gerrymandered legislatures, and fighting partisan gerrymanders in the courts. Meanwhile, Hofeller and the Republican aim to change the entire paradigm yet again, with this shift to citizen voting-age population.

Hofeller never intended to leave a digital smoking gun. He always cautioned against leaving any digital trail that could later haunt the Republican Party in court. “The e in email,” he lectured, “stands for eternal.” But now that these digital files from the grave have shown the real motivation behind the census question and Republican gerrymanders, it’s more important than ever for the courts to defend democracy - and the crucial notion of one person, one vote - against the pernicious efforts of determined partisans to entrench their own power, no matter the price to our nation’s ideals.

[cdrom]

Something Stopped Trump From Striking Iran, and It Wasn't 150 Lives

U.S. president says he aborted an attack on Iran out of concern for civilians, but his real fear is what one attack could spiral into

Zvi Bar'el Jun 23, 2019 10:34 AM

U.S. President Donald Trump’s flip-flopping over the past three days may be the most important calming signal that the Middle East has received recently. It was said that all the major ingredients that could justify an American military offensive against Iran had come together.

Things had come to a boil in the Persian Gulf when Saudi, Japanese and other tanker ships were damaged in naval attacks. Without decisive proof, Iran was suggested as the culprit. And Yemini Houthis fired missiles into Saudi Arabia – into Jizan province and at an airfield in Abha – prompting battle cries against Iran.

Iran has shortened the period in which it will step up its enrichment of uranium and thereby violate the nuclear deal. The heads of the Iranian army and Revolutionary Guards have threatened that, despite their desire to avoid a violent confrontation, they wouldn’t hesitate to hit American targets if Iran were attacked. Tensions peaked with Iran’s downing of an American drone last week.

The legitimization for an attack was now ripe, a bank of Iranian targets was assembled and the order to deploy American forces was given. But all of a sudden, nothing. It was back to square one.

On a closer look, the two justifications for carrying out a U.S. attack were flimsy. “Circumstantial proof” is insufficient to launch a strike that in the blink of an eye could spiral into a regional war. The downing of the drone got caught up between American claims that the aircraft had been over international waters and the Iranians’ assertions that the drone had violated their airspace.

Such proof is often used by Israel to justify attacks on Hamas on a scale that doesn’t affect the Middle East as a whole. But this isn’t sufficient for a world power that has to take into account the possibility that its close allies could be hit. Saudi Arabia and the United Arab Emirates, at least publicly, said they didn’t want a war in the Gulf.

Israeli defense officials have said Iran could employ its branches in Lebanon and Syria, either in response to an attack on it or to put pressure on Washington. Only the Israeli government, which should have adopted the Saudi stance because Israeli targets are also on the Iranians’ list, remained silent.

Trump explained his decision not to attack was a desire to avoid killing 150 Iranians. Such a humanitarian explanation would have been heartwarming if it hadn’t come from the president still arming the Saudi military that’s killing thousands in Yemen. This is also the president who wasn’t upset that thousands of Syrian and Iranian civilians were hit in American attacks during the war against the Islamic State. It’s also the president who’s incapable of showing concern for the masses of migrants seeking to enter the United States from Mexico.

In any event, hadn’t the estimate of 150 dead in a U.S. strike been known before the decision to attack was made? The American intelligence services should be given credit for being able to estimate the number of fatalities in such an attack, but it would be interesting to know when such casualties stopped being unavoidable collateral damage and became a humanitarian disaster that Washington couldn’t tolerate.

The important thing, however, isn’t simply Trump’s decision-making process, if the way he tosses around orders can be deemed a process. It’s the consequences of his most recent decision on the confrontation zone in the Persian Gulf and beyond.

The U.S. administration has a vision and aspirations vis-à-vis Iran, but it lacks a strategy to bring them about. The sanctions that Trump has imposed are among the harshest that the country has known, but eight months after being put in place, they still haven’t made Iran succumb.

In their regular interpretations, analysts have been able to point out the huge losses that the Iranians have been sustaining, the exodus of companies that could invest in the country and the fact that most of Iran’s oil customers have stopped buying from the Islamic Republic. But what’s lacking is information or an estimate on how long Iran can survive under such harsh conditions.

Iraq under Saddam Hussein continued to function for more than a decade under a sanctions regime that was harsher than that currently imposed on Iran, and Saddam’s regime was ultimately only defeated on the battlefield. There is no proof that the Iranian regime will act any differently, but the Trump administration has presented no practical strategy for a situation in which Iran sticks to its policy and refuses to negotiate a new nuclear agreement. Is the United States prepared to resort to all-out war to bring down the Iranian regime?

Iran’s decision to exceed the limitations of the current nuclear agreement appear to give the United States and the Western signatories to the agreement grounds to attack Iran. But such concerted action would require a consensus among these countries.

It doesn’t exist at the moment and it’s doubtful that it could be achieved. Some European Union countries are making major efforts, albeit without major success, to create a path to bypass the U.S. sanctions. And Russia and China certainly wouldn’t lend a hand to a war against Iran.

The United States could therefore find itself alone facing both Iran and international antagonism. Granted that the anti-American international coalition that arose following the U.S. withdrawal from the nuclear accord hasn’t impressed Trump, but there’s a fundamental difference between diplomacy and war. In any case, even when it comes to such circumstances, Washington doesn’t appear to have a convincing road map.

The dilemma that should guide any military confrontation is whether it should be broken down into a series of attacks designed to “send a message” or whether an assault should be reserved for a last resort that would be applied with full force. In other circumstances, the response to the attacks in the Gulf could have sufficed with surgical, one-time strikes that would send a message.

But the Gulf region could react poorly to narrowly targeted attacks and spiral quickly into a battlefield involving many countries. It appears that this consideration rather than a loss of life among Iranian civilians is what stopped Trump from carrying out his earlier decision.

Israel will certainly tell him that in the process he has raised the threshold for a response and that Iran will interpret the decision as weakness on the part of the United States, because that’s how things are in the Middle East. From Jerusalem’s standpoint, a twofold opportunity has been missed – Sending Iran a message, and it’s the United States, not Israel, that would send the message. But sending messages isn’t a linear process that assures a desired result. Israel learned that well on other fronts, just as the United States learned its lesson in its own confrontations.

[cdrom]

Who Survives the Iran Counter-Offensive?

https://tomluongo.me/2019/06/21/who-survives-the-iran-counter-offensive/

Iran has had enough. I think it’s fair to say that after 60+ years of U.S. aggression towards Iran that the decision to shoot down a U.S. drone represents an inflection point in world politics.

In the first few hours after the incident the fog of war was thick. But a day later much of it has cleared thanks to Iran’s purposeful poke at U.S. leadership by coming clean with their intentions.

Iran chose to shoot down this drone versus hitting the manned P-8 aircraft and then chose not to lie about it in public, but rather come forward removing any deniability they could have had.

They did this after President Trump’s comments yesterday during a news conference with Canadian Prime Minister Justin Trudeau where Trump described the attack as “a big mistake” and “not intentional.”

But it was intentional.

And the reason for this was that despite Trump’s assurances yesterday there is considerable debate as to where the drone actually was. According to a report from the NY Times (and buried deep in a very long article):

Still, there remained doubt inside the United States government over whether the drone, or another American surveillance aircraft, this one flown by a military aircrew, did violate Iranian airspace at some point, according to a senior administration official. The official said the doubt was one of the reasons Mr. Trump called off the strike — which could under international norms be viewed as an act of war.

The delay by United States Central Command in publicly releasing GPS coordinates of the drone when it was shot down — hours after Iran did — and errors in the labeling of the drone’s flight path when the imagery was released, contributed to that doubt, officials said.

A lack of provable “hard evidence” about the location of the drone when it was hit, a defense official said, put the administration in an isolated position at what could easily end up being the start of yet another war with a Middle East adversary — this one with a proven ability to strike back.

This means a couple of things. First, it is likely that Trump was not properly briefed on the issue by his National Security Council, who were pushing him to strike back hard and who are itching to get the U.S. into an armed conflict with Iran.

Framing the attack as a mistake Trump was handing Iran the opportunity to de-escalate things. To me, this signaled that Trump was told through back channels this was an operation designed by us to put Iran in a no-win situation — either allow encroachment of their airspace or shoot down a drone that would land in international waters.

Moreover, doubts as to the drone’s position, remember, with a plane carrying actual ordnance on its wing, put Trump in a real bind.

And he knew it at the presser. That’s the way Trump tried to frame this the way he did. Because the implications here are that he is being boxed in on all sides by his administration and his allies — the Saudis, Israelis and the UAE — and frogmarched to a war he doesn’t want.

He wants Iran to heel but he doesn’t know how to go about it.

That Iran then chose the next day to openly declare that they were not confused or misled and knew exactly what they were doing puts Trump in an even worse position.

Because an unmanned drone, as he said in his futile tweetstorm, is not worth going to war over, especially one whose position in in dispute.

And everyone knows it. Europe wouldn’t condemn Iran here. No one did. Only the U.S. And that silence is deafening as Pompeo, Bolton and Haspel again over-extend themselves.

Trump is right that he can afford to be patient and now re-frame this as him being the magnanimous God-Emperor but what he’s really doing is talking capital markets off a cliff.

Because that’s where the U.S. is the most vulnerable and where Iran’s greatest leverage lies. This incident should have sent oil prices far higher than they did if the threat of war was real.

Why? Because the markets discounted the U.S.’s stories immediately. There have been so many incidents like this that should have started a war in the past three years which turn out to be bogus that the market reaction was muted, at best.

It also tells you just how quickly the global economy is slowing down if a major military incident between Iran and the U.S. near the Strait of Hormuz only pushed the price of Brent Crude up to fill the gap on the weekly chart and confirm the recent low.

It did push gold through its massive resistance zone between $1360 and $1375 an ounce and it looks like a close above that for the week is likely.

That said, given this was just a drone and that Trump wasn’t likely to respond with starting a wider war….

Iran shooting down a U.S. drone shouldn’t have caused gold to pop through $1,375 and stay above it…

… It was {FOMC Chair Jerome} Powell’s dovish statement that provided the fuel for this move. Iran simply lit the match.

Now Trump has to respond to this. One could ask why our drone was flying in airspace we knew Iran would respond to.

Martin Armstrong is reporting that a lot of the buying came from the Middle East and that now that we’re above $1375 hedges are lifting and short-covering is what took gold to $1415.

But it also means that something bigger is brewing in the capital markets that both Iran and Trump understand. And maybe that muted response from oil has more to do with that.

As Pepe Escobar lays out convincingly in his latest article, Iran’s threats against global oil shipping aren’t aimed at disrupting the global economy per se. There’s plenty of oil stored in Strategic Reserves around the world to keep things operating during any U.S. military operation to destroy Iran’s navy (which wouldn’t take very long) and open the strait to oil traffic.

It is that a disruption in the price of oil will force the unwinding of trillions in interest rate swap derivatives already at risk because of the tenuous hold on reality Deutsche Bank has, since DB clears a super-majority of all such derivative contracts for the whole of Europe.

No one wants to see $300 per barrel oil. That Goldman Sachs is posting potential targets of $1000 per barrel tells you where they are positioning themselves, as if they know something? Goldman? Have insider knowledge?

Please! It is to laugh.

What we are looking at here is the ultimate game of brinkmanship. Trump is saying his maximum pressure campaign will break Iran in the end and if they go one step further (which they won’t directly) he will eliminate them.

Iran, on the other hand, is stating categorically that if Trump doesn’t allow Iran to trade than no one will. And that threat is a real one, given their regional influence. Incalculable financial and political damage can be done by Iran and its proxies around the region through attacks on oil and gas infrastructure.

Governments will fall, markets will collapse. And no one gets out without scars.

It’s the kind of stand-off that needs to end with everyone walking away and regrouping but is unlikely to do so because of entrenched interests on both sides and the historical grudges of the men involved.

What’s important is to know that the rules of the game have changed. Iran has taken all the punches to the nose it will take from Trump without retaliating. When you corner someone and give them no way out you invite the worst kind of counter-attack.

Last week I asked whether Trump’s “B-Team” overplayed their hand in the Gulf of Oman, staging a potential false flag over some oil tankers to stop peace breaking out and arrest the slide in oil prices.

Today everyone wants to think Iran overplayed its hand by attacking this drone. But given the amount mendacity and the motivations of the people involved, I’d say that it was yet another attempt by the enemies of peace to push us to the brink of a world war in which nothing good comes of it.

I give Trump a lot of credit here for not falling into the trap set for him. He now has to begin removing those responsible for this quagmire and I’m sure that will be on the docket when he meets with Vladimir Putin and Xi Jinping next week at the G-20.

It starts with John Bolton and it ends with Mike Pompeo.

And if he doesn’t replace them in the next six to eight weeks then we know Trump isn’t serious about keeping us out of war. He’s just interested in doing so until he gets re-elected.

[cdrom]

2019 Third-Quarter Forecast

https://worldview.stratfor.com/article/2019-third-quarter-forecast-geopolitics-global-business-risk-q3

Overview



The U.S.-China Trade War Will Drag On. While there is a small window for a truce between U.S. President Donald Trump and Chinese President Xi Jinping, there is a stronger likelihood that the White House will follow through on its threat to impose tariffs on remaining Chinese imports. Nearly every move China makes to push back and cope with tariff pressure, including ramping up state backing for strategic industries and retaliating against U.S. businesses, will drive the two economic giants further apart as the trade war continues to damage the global economy.

Iranian Retaliation Will Raise the Risk of a Military Confrontation. Iranian retaliatory moves against the United States, including the resumption of nuclear activities and threats to shipping in the Strait of Hormuz, will raise the threat of U.S. punitive strikes on Iran. Even though the White House intent will be to limit offensive action and avoid bogging itself down in another politically unpopular war in the Middle East, the potential exists for a more serious escalation. Short of the negotiation Trump envisioned for Iran, progress could be made toward establishing a deconfliction channel via third-party mediators.

A High Stakes Tech Battle Will Drive Fragmentation in the Global Tech Sector. Far-reaching U.S. export restrictions against Chinese telecom giant Huawei Technologies Co. will nearly paralyze the company in the near term, and it could strengthen the White House's ongoing campaign to deter other countries from working with Huawei on 5G rollouts. Even if the United States agrees to a partial relaxation of its ban against Huawei, China will move full steam ahead to accelerate indigenous semiconductor development and software alternatives to its Western competitors. At the same time, U.S. regulators will ramp up their investigations of U.S. tech giants over antitrust, privacy and data protection concerns.

Mexico Faces an Uphill Battle to Appease Trump and Avert Tariffs. Though Mexico narrowly averted U.S. tariffs by pledging to do more on border security, it is not out of the danger zone yet. Mexico will fall short of meeting Trump's demand that it chokes off migrant flows, and Trump will likely rely on tariffs, or at least the threat of tariffs, as his preferred enforcement tool.

Geopolitical Risk Will Create Significant Headwinds for the Global Economy. Global economic growth estimates are headed for another downgrade in the third quarter. Intensifying U.S. trade conflicts with China, along with the lingering threat of a major disruption to North American trade, will continue to sap investor confidence and drive a U.S. Federal Reserve decision to ease interest rates. The Chinese yuan is likely to depreciate past 7 to the dollar, though China's Central Bank will intervene to avoid a much steeper devaluation that would accelerate capital flight and apply stress on a number of emerging markets. Between slowing consumer demand and a higher risk of supply disruptions from a potential Iran conflict, oil markets will remain in flux.

Brexit Chaos and Italy Will Weigh on Europe. The United Kingdom will get a new hard-line prime minister, who will inevitably hit a wall with Brussels when negotiating the terms of the United Kingdom's future relationship with the European Union. The risk of a no-deal Brexit will rise through the quarter, but the likely result will be more delays and possibly a path to early elections. And even as Rome manages to dodge EU sanctions over its ballooning deficit, Italy's fiscal policies, weakening banking sector and fragile government coalition will continue to stress the European Union.

Great Power Competition Will Create Opportunity But Mostly Risk for Middle Powers. As U.S. competition with Russia persists, Poland will be able to take advantage of the White House's strategic focus on Eastern Europe, advancing plans to rotate more U.S. troops through Poland and pushing for targeted U.S. sanctions against Nord Stream 2. Turkey and India, meanwhile, will remain in the White House's crosshairs over their energy relationships with Iran and defense ties to Russia, with New Delhi facing the additional threat of tariffs this quarter.

Military-Backed Transitions in North Africa Face Major Hurdles. The fall of legacy dictators in Sudan and Algeria have emboldened opposition groups hungry for political change. The militaries of each country trying to manage the tumultuous transition will struggle to satisfy opposition demands while navigating elite power spats behind the scenes. Sudan will rely more on brute force to quell unrest, while Algeria's more diverse set of power brokers will likely become mired in political negotiation as unrest persists.

The U.S. "Tariff Man" Strikes Again

U.S. President Donald Trump, the self-proclaimed "Tariff Man," is likely to be the single most important source of geopolitical risk to the global economy in the third quarter of 2019. A deepening standoff with China increases the probability that Trump will follow through with threats to impose 25 percent tariffs on all remaining Chinese imports. Tariff threats against Mexico over auto imports will continue to linger at a time during which global trade risk creates headwinds for global economic growth. Trump nonetheless appears to be operating under the assumption that the U.S. economy is on solid enough footing to justify tariffs, both as a wide-ranging negotiating tactic and as a means to drive down the U.S. trade deficit.
A graphic showing the impact of Trump's trade wars.

Of all its trade battles, the United States will maintain a particularly hard line on China as Washington's strategic competition with Beijing deepens on nearly all fronts. A deliberate attempt by the White House to cripple Chinese tech giant Huawei Technologies Co. has narrowed what little middle ground there was last quarter for a trade compromise. And for every U.S. action designed to coerce Beijing into making greater concessions, there will be a Chinese reaction that pushes the economic giants further apart in the negotiation. For example, U.S. trade assaults on China will prompt Beijing to increase financial support for strategic sectors, such as the semiconductor industry, directly violating a U.S. demand to reduce state support and level the playing field for foreign businesses. Chinese tariff retaliation and possible boycotts of U.S. goods will counteract Washington's demand for China to buy more American products to reduce the U.S. trade deficit. Chinese attempts to push back against the United States by selectively blacklisting and fining American firms only feeds into a familiar White House complaint: that China actively discriminates against foreign businesses.

Washington will not ease up on Beijing over the quarter, but every U.S. action will have a Chinese reaction.

A potential Chinese restriction of rare earth exports will amplify threats to U.S. commerce that the White House is citing to legally justify Section 301 tariffs in the first place. And the unavoidable depreciation of the yuan from the stress of the trade war will be used by the White House to name and shame China as a currency "manipulator" bent on disadvantaging U.S. exporters. This burning economic dispute is meanwhile unfolding against a backdrop of rising security tensions in the South China Sea and growing pushback against Beijing in China's periphery, where the United States has the potential to apply sanctions against the Chinese government and its affiliates in the name of protecting human rights and democracy.
A chart showing the estimated global cost of a U.S.-China trade war

This geopolitical climate does not bode well for Trump and Chinese President Xi Jinping to reach a breakthrough in negotiations if and when they meet at the G-20 summit in Japan in late June. Beijing will keep the door open for future dialogue, and Trump still has the option of buying more time in the negotiation before resorting to all-encompassing tariffs. But the window for a truce is closing fast, and Xi and Trump will have enough political backing to prolong their economic war well beyond the quarter.
A chart showing possible scenarios for the U.S.-China trade war

While Mexico has been among the main beneficiaries of the U.S.-China trade war, it has now found itself squarely in Trump's trade crosshairs. Having narrowly averted tariffs this time around, Mexico's government is facing a tight timeline and an uphill battle to appease the U.S. president. Given the Mexican national guard's questionable ability to crack down on migrant traffic coming across its southern border — coupled with escalating unrest in parts of Central America and the reluctance of countries in the region to overhaul their asylum laws — the best Mexico City may be able to hope for is a temporary lull in migrant flows as smugglers adapt to expanded border controls. Moreover, Mexico's already robust trade relationship with the United States and lack of market-based purchasing does not leave much room for the current administration to make a showy concession to Trump by increasing agricultural imports.

Fearing a descent into recession, Mexico will carefully avoid a confrontation with the United States this quarter as it tries to steer clear of costly tariffs.

Trump's tariff threats against Mexico could resurface around July 22 and again on Sept. 5, when the Mexican government is supposed to deliver to the White House its progress report on curbing illegal border crossings. Already on the edge of recession, Mexico will be careful to avoid a confrontation with the White House in an effort to steer clear of costly tariffs. After more than a quarter of a century of tariff-free trade on the U.S.-Mexico border, the economic impact of just 5 percent tariffs on Mexican imports, as Trump earlier threatened, would be tantamount to ripping up the North American Free Trade Agreement and returning to average World Trade Organization-level tariffs for most sectors. Supply chain disruptions would reverberate across the auto, electronic, industrial and food sectors. Furthermore, U.S. agricultural producers would be singled out for retaliatory tariffs, and Congress could even regain momentum to challenge the president's trade authority — though a veto-proof majority on such a measure would be far from assured. Even if Trump avoids the heavy economic and political toll that comes with disrupting North American trade through tariffs, the uncertainty that comes with merely keeping the threat alive will continue to erode investor confidence.

The threat of auto tariffs will meanwhile continue to loom large as Trump waits for U.S. trading partners to come to him with a "solution" by November, in the form of voluntary export restraints and/or acceptance of U.S. quotas. While Japan has a better chance of negotiating a trade compromise with the White House that includes agriculture and autos, EU leaders, too divided and consumed with horse-trading over political positions in the European Union for most of the quarter, will resist the White House's ultimatum on restricting auto exports to the United States. As a result, there won't be much movement in Continental trade negotiations with the Trump administration.

The psychological impact of Trump's tariff weaponization strategy will linger well beyond the quarter.

The White House has already raised the WTO's hackles by stretching the definition of national security to justify a variety of tariffs, all while discrediting the global trade body's authority to arbitrate trade disputes. With a Dec. 10 deadline pending for the United States to lift its siege on the WTO Appellate Body or else drive it into paralysis, European leaders will prepare for the worst and work on convincing other WTO members to sign onto an ad hoc solution that would have former WTO appeals judges settle trade disputes under WTO arbitration rules until a compromise — likely with the next White House — can be found.

The European Union's creative workaround at the WTO points to a growing assumption among U.S. allies and adversaries alike that negotiation with the current White House may be futile. Erratic U.S. negotiating tactics and the elusiveness of a final, negotiated settlement will bruise business confidence and investor sentiment globally. Hamfisted diplomacy will also convince a number of powers, including China, Europe and Iran, that seeing out the result of the 2020 U.S. election makes more strategic sense than entertaining heavy concessions in a negotiation with the Trump White House over a deal that may or may not last.

Geopolitical Risk Bludgeons the Global Economy

In the face of yet another major tariff escalation, China will erect stronger capital controls and draw on its reserves to defend its currency, the yuan. China's Central Bank will intervene to avoid a steep and sudden devaluation because a depreciation beyond 7 yuan to the dollar will exacerbate China's economic slowdown and place greater stress on emerging market currencies. Heavy downside risk from the White House's trade wars will drive the U.S. Federal Reserve to ease interest rates this quarter.

A variety of competing factors will slow but not quite stall the global economy in the third quarter.

The European Central Bank has already abandoned plans to tighten monetary policy this year as crises of the European Union's own making roil the bloc. We do not think this quarter will end in a no-deal Brexit, but an escalation of political chaos in the United Kingdom, along with a drawn-out confrontation between Rome and Brussels over Italy's expansive fiscal policies, will continue to sap at European growth amid rising global trade frictions.

For energy markets, between the opposing forces of slowing consumer demand and the threat of military conflict in the Persian Gulf creating a sharp supply disruption, oil prices will remain in flux. When the Organization of Petroleum Exporting Countries meets early in the quarter (with its expanded retinue of crude-producing partners, a collective known as OPEC+), Saudi Arabia and Russia will drive an agreement to extend production cuts into the second half of the year as the world's biggest oil producers try to contend with rising U.S. inventories and weaker global demand.
A chart showing geopolitical risk against oil markets

Great Power Competition Drives Global Tech Fragmentation

An aggressive U.S. move in the second quarter to ban Huawei from selling and operating in the United States and, more importantly, to proscribe U.S. tech suppliers from working with the company goes well beyond trade leverage and fits into a broader White House strategy to cripple China's tech giants as a U.S.-China battle for technological dominance intensifies. If Xi and Trump agree to de-escalate the trade war this quarter, the White House could offer a selective and partial relaxation of export controls on goods and/or licenses that fall outside of highly strategic applications — specifically, dual-use technologies that could be used for security, surveillance or defense purposes. Pressure from affected U.S. businesses and ongoing court challenges could also have the effect of weakening U.S. restrictions against Huawei.

Regardless of their country of origin, global tech companies will find themselves on the firing line as the U.S.-China trade dispute heats up.

Uncertainty surrounding the U.S.-China trade negotiation and the viral nature of U.S. export law, in which even a minimal amount of U.S. components, software and technology could subject a company to sanctions, will accelerate Chinese efforts to shore up indigenous semiconductor development. Huawei will further seek to roll out an independent operating system for smartphones to maintain the company's global market share. China will struggle to reduce its reliance on major international chip providers — such as Intel Corp., Samsung Electronics and the Taiwan Semiconductor Manufacturing Company (TSMC) — that are now liable for U.S. sanctions. But over time, the rise of Chinese competitors in the chip manufacturing sector and the rollout of Chinese software alternatives — such as Huawei's mobile operating system challenger to iOS and Android — are likely to contribute further to the fragmentation of the global tech sector.
A graphic showing global telecom operators and manufacturers

Ongoing U.S. diplomatic efforts to pressure countries in Europe, Latin America and Southeast Asia into imposing similar bans against Huawei equipment on national security grounds are already stalling. This is because most countries are unwilling to tolerate the much higher costs and implementation delays for 5G networks that would come with blacklisting Huawei. But the broad reach of U.S. export controls against Huawei will now give many of these governments and relevant telecommunications partners pause as they weigh a much bigger compliance risk in dealing with the Chinese firm.

Even as its efforts to defang Chinese tech leaders gain momentum, the U.S. government has also made a point of targeting the exact Silicon Valley tech giants that Washington relies on to outperform China in a global race for technological supremacy. In line with Stratfor's 2019 Annual Forecast, bipartisan momentum is quickening behind U.S. efforts to scrutinize Big Tech over antitrust, privacy and free speech concerns. Google and Facebook are likely at the top of the list for the Federal Trade Commission and the Justice Department, which share oversight duties over the United States' largest tech firms. U.S. tech companies will also remain a prominent target in the European Union, where Ireland has launched a probe into Google for violating the European Union's General Data Protection Regulation on privacy protections.

The White House Struggles to Find Order in Its Cluttered Foreign Policy

As well as juggling trade wars, the White House will also have to balance competing foreign policy priorities. Iran remains at the top of that list. The Trump White House is operating under an assumption that its ability to choke off Iranian exports and inflict heavy economic pain on the Islamic Republic will drive Tehran to the negotiating table or, better yet, instigate a grassroots overthrow of the clerical regime. Neither is likely to happen, though — and certainly not this quarter. At most, Tehran could rely on third-party mediators to establish a deconfliction channel with the United States as military frictions rise. Trump appears well aware of the political flack he would receive by committing the United States to yet another massive military conflict in the Middle East and so is likely to exercise some restraint in trying to avoid a costly military scenario with Iran. But there are a number of triggers that will arise this quarter, such as Iran telegraphing threats to shipping in the Persian Gulf and restarting parts of its nuclear program, that will embolden White House hawks to argue for punitive strikes against Iran.
A graphic outlining how Iran might respond to U.S. aggression.

A lingering threat of military confrontation between the United States and Iran will detract from Washington's focus on its burgeoning great power competition with both China and Russia. Beyond high-stakes economic battles, the potential for skirmishes between the United States and China in the South China Sea and in the Taiwan Strait will rise as the U.S. Navy and Coast Guard steadily expand their footprint in China's near abroad. Russia, meanwhile, will oscillate between instigator and mediator in multiple theaters that have the potential to dominate the White House's attention. While Russia already provides significant political and economic backing to Iran and Venezuela, it can always dial up military support should it see an opportunity to generate leverage against a highly distracted White House. U.S. attempts to coax Russia and China into a trilateral strategic arms control treaty are unlikely to gain much momentum this quarter as arms buildups continue on all sides.

The White House will have its hands full this quarter when it comes to foreign policy — Iran, Russia, China, Venezuela, North Korea and Afghanistan all require Washington's attention in differing measures.

Unlike most countries dealing with the current White House, North Korea is trying to accelerate negotiations while Trump is still in office. Now that the United States has little choice but to plan for a military contingency around Iran, Pyongyang will have more room to push the line on missile testing while trying to break through a stalemate in negotiations. North Korean leader Kim Jong Un remains confident that Trump would rather keep North Korea in diplomatic limbo and call it a foreign policy win than return to a military confrontation with Pyongyang.

When compared to a prospective nuclear-equipped nation, Venezuela inevitably falls much lower on the list of U.S. foreign policy priorities. Even as the persistent threat of another coup attempt and the specter of greater Russian involvement in Venezuela will vie for Washington's attention, the White House is unlikely to risk a messy military intervention at this stage to force regime change. A steady intensification of U.S. sanctions and ongoing backchannel dialogue with military leaders to try and crack the rule of President Nicolas Maduro will be the White House's preferred method of managing Venezuela as the country descends further into chaos.

Additional Forecasts
These Stratfor assessments provide additional insights for the Quarter

At the same time that the United States is trying to cripple Chinese tech giants, growing domestic antitrust moves threaten to undercut its own tech prowess globally.
Techno-nationalism, digital colonization fears and privacy concerns are accelerating the fragmentation of the internet.
A deadline is approaching for the United States and Russia to agree to a New START agreement, but China will demur U.S. efforts to draw Beijing into a new framework to limit nuclear arms.
The specter of a conflict between the United States and Iran in the Persian Gulf threatens to consume the United States at a time when great power competition is already demanding the White House's full attention.

Key Dates to Watch

--June 25-26: OPEC+ members meet in Vienna, Austria.
--June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
--Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods.
--July: If the U.S. economy continues to grow, this month will mark the longest U.S. economic expansion in its history.
--July 7: The 60-day deadline Iran gave to the European Union expires, after which time Tehran vowed a partial nuclear restart.
--July 22: 45-day review of the U.S.-Mexico deal on border security.
--Sept. 5: 90-day review of the U.S.-Mexico deal on border security.

[cdrom]

As trade war continues, are the US and Chinese economies heading for a messy divorce?

-Separation is under way in manufacturing, technology and investment, and while it predates the trade war, the Trump administration tariffs have acted as turbo boosters
-Unconfirmed reports that Apple is considering moving part of its manufacturing out of China fuel suspicion that the two nations will increasingly go their separate ways

Finbarr Bermingham- Published: 7:00pm, 20 Jun, 2019

This is the first of four stories examining important issues ahead of the meeting between Chinese President Xi Jinping and US President Donald Trump at the G20 leaders summit on June 28-29 in Osaka, Japan.

Like many Americans who manufacture in China, Daniel Krassenstein will be watching Xi Jinping’s meeting with US counterpart Donald Trump on the sidelines of the G20 meeting in Osaka next week very closely.

Procon Pacific, Krasserstein’s company, makes 40 per cent of its industrial packaging products – “super sacks or bulk bags that can store anything from sugar milk powder to dangerous chemicals to fertiliser to mixed cement, you name it” – in China.

A few years ago, almost all of its products were made in China, initially in Changzhou, Jiangsu province. But as costs rose, it moved some production to the northern province of Shandong, where it could source cheaper land and labour through its Chinese partners.

Then the Chinese government “rightfully started shutting down plants who are non-compliant with pollution and emissions” and “cracking down on those Shandong suppliers not paying social credits correctly”, and so Procon shifted 50 per cent of its production to India and 10 per cent to Vietnam.

“This had nothing to do with Trump, or the trade war, it was purely due to labour costs and the cost of compliance impacting China in general. But in this case it started hitting Shandong province, which was our sweet spot for our lower end bags,” said Krassenstein, the company’s global supply chain director.

The company’s products are subject to an 8.4 per cent import duty when sold to companies in the United States, no matter where they are made. However, if Trump adds 25 per cent tariffs on US$300 billion worth of goods made in China, in what is the next potential tariff rise, it would push it to 33.4 per cent.
“We’d have to rush production out of China for sure,” added Krassenstein, who expects the US to enact a small tariff increase on China after the G20 summit in Japan
next week as “a slap on the wrist”, but said the long-term trajectory for US manufacturers in China is only going in one direction.

“The concern is what happens 12 months down the road, especially when you get into the US election season and Trump plays the China card to get more votes. Frankly speaking, I think while there might be a temporary truce with a small [tariff] increase, I'm more concerned with what happens next summer.”
The concern is what happens 12 months down the road, especially when you get into the US election season and Trump plays the China card to get more votes Daniel Krassenstein

This supply chain shift is a simple example of what many are terming the wider phenomenon of US-China economic “decoupling”. The trend predates the trade war, but the tariffs have acted as turbo-boosters. Now, what was regarded a year ago as a fringe view on the extreme edges of the Trump administration, is at the crux of mainstream conversations.
Most China watchers believe that some amount of decoupling, to some extent, is now inevitable, regardless of what is achieved at the G20 in Japan.

“I think that to the extent it is possible, it is going to happen. Business hates uncertainty, business does not want to be caught in the middle of political conflict. Business wants to find a stable environment. And so anyone that can move, will move,” said Jeff Moon, a public affairs consultant who was assistant United States trade representative (USTR) for China during the Obama administration.

Chen Li, an assistant professor at the Chinese University of Hong Kong, refers to the split as a “Balkanisation of supply chains”.

“If politicians want, they can always break the global market, right? But I don't think it's going to get that bad yet,” Li said.

While low- to medium-end manufacturing is relatively simple to disentangle, there are chasms and barriers appearing all over the US-China economic relationship, suggesting that a broad-based break-up may be underway, even in more complex sectors.

Early in June, US Senators Marco Rubio, Bob Menendez, Tom Cotton and Kirsten Gillibrand introduced legislation which, if passed, would “increase oversight of Chinese and other foreign companies listed on American exchanges and delist firms that are non-compliant with US regulators for a period of three years”. The implication is that Chinese companies that are not transparent would be banished from US financial markets.

The decoupling of investment is already clear. Last year, Chinese acquisitions of American companies plunged 95 per cent from its peak in 2017 after the US Congress gave the Committee on Foreign Investment in the US authority to broaden the scope of its reviews of Chinese acquisitions on national security grounds.

Add in the increasingly messy US-China technology rivalry after the US blacklisted Huawei, cutting China’s technology giant off from many of its important suppliers, while Washington aggressively lobbies other nations to ban Huawei equipment from their 5G networks.

Beijing, in turn, reportedly summoned US technology firms, including Dell and Microsoft, to warn them against cooperating with the blacklist, then formed a register of its own. The list of “unreliable” foreign entities singles out those deemed to have damaged the interests of Chinese firms and shows how deep the cracks in the relationship are becoming.

This week came the news that Apple was considering moving 15 to 30 per cent of its production out of China. The story by the ?Nikkei Asian Review followed claims last week from an executive at Foxconn, which assembles iPhones and iPads for Apple in China, that it had sufficient capacity in other countries to produce all US-bound Apple products, but some experts are skeptical.

“Apple has probably invested more in a China-centric supply chain than any successful company in recorded history. To just presume that they can jettison everything they have achieved with Foxconn and move to an alternative platform and get the same product with the same quality and the same assembly protocols without skipping a beat. I mean, anything is possible, but that to me sounds like a great tale of fiction,” said Stephen Roach, a professor at Yale University and former chairman of Morgan Stanley in Asia, the day before the? Nikkei story broke.
Apple would be following other technology giants out of China, with Samsung
on the verge of closing its last Chinese factory, although the company has yet to confirm its exit strategy.

China accounts for an important, but declining, share of Apple’s revenue: 10.22 per cent in the second quarter this year, according to Statista, down from 13.17 per cent in the previous quarter and its all-time peak of 17.96 in the first quarter of 2018.

“There is no question that if Apple goes, others will follow,” said Alex Capri, a visiting fellow at the National University of Singapore, who has been predicting decoupling for the past two years. “They are a primary link in the chain. There are a lot of links in that chain that are reliant on Apple. When you have something as big as Apple moving, others have to go where their customer needs them.”

Merle Hinrich, the founder of business media firm Global Sources and patron of the pro trade Hinrich Foundation, suggested that Apple would be wise to diversify its supply chain and intimated that “decoupling” is a natural evolution in global trade.

“There are companies like Apple who have become overreliant on China. Is that pure supply chain management on their part, or is it perhaps lack of foresight, they maybe did not foresee a time when it would become so politically charged?,” he said. “I think there are a lot of companies now that will reflect on their commitment to China and think it was a good decision when they made it, but it probably needs to be reviewed in conjunction with what we expect the geopolitical issues to be moving forward.”

However, that a move out of China is now being discussed at all points to the sudden decline in US-China relations, one which many feel is irreversible.

Indeed, it is China’s growing technological strength that many believe sparked decoupling. Five years ago, professor Roach wrote a book called Unbalanced: The Co-dependency of America and China, which said that the US and Chinese economies should not become codependent, since a fracture in the relationship would instigate decoupling. That fracture, he now said, came with China’s shift in economic policy, away from an industrial base and towards hi-tech innovation and consumption.

“The United States was far more comfortable with China staying in its old patterns of economic activity and views to a large extent this change as one that is more threatening and predictably, according to at least my theory, and has lashed out in response,” Roach said.

“My guess is that there is still a lot of hope that a lot of this is a bad dream and the tariffs will go away, and there will be some agreement on the structural issues that companies are complaining about. So I don't think we have completed a decoupling. We're in the early stages of a strong resistance to the relationship, catalysed by the very aggressive policy actions of the Trump administration.”

A US Chamber of Commerce in China survey published in May found that 60.4 per cent of companies had no plans to relocate their “China-based manufacturing facilities to other countries because of the tariffs and/or concerns over the future of US-China trade relations”, which suggested that many companies will not move unless they absolutely have to.

But there may be other factors at play, said Stewart Paterson, author of the 2018 book China, Trade and Power – Why the West's Economic Engagement has Failed.

“There will be no big announcements. Corporations should not be out there saying ‘we're closing this factory and reopening in Bangladesh’. It is all very ‘hush-hush’,” he said.

The Chinese government, meanwhile, has been at pains to discourage further fragmentation of the US-China relationship.

At a summit in St Petersburg at the start of June, Xi said: “I can hardly imagine a complete decoupling between China and the US. This is not the case that I would like to see, and I don’t think our American friends want to see it, and my friend Trump wouldn’t want to see it either.”

The following week, China’s foreign ministry spokesman Geng Shuang tried to further dampen thoughts of decoupling.

“Both countries have become each other's largest trading partner and important investment destinations,” said Geng. “The US has gained huge interests from China-US economic and trade cooperation.”

In the northern province of Shandong, however, the feeling of separation is becoming very real. Krassenstein’s suppliers have been in touch to ask if he needs better credit terms, whether there is an issue with price, desperately asking what they can do to keep his business. He stops short of using the word “decoupling”, saying that plenty of manufacturing will remain in China due to the quality of service and sheer size of the domestic market.

“But I've lived in China for the last 15 years and let’s just say more and more Americans are leaving China and setting up shop elsewhere. There is a feeling as an American leaving in China, it’s just not as warm and cosy as it used to be.”

Part two will ask whether the G20 summit will lack leadership and if important issues will go unresolved as the US-China standoff continues.

[cdrom]

‘The countdown has started’: Iran says it will pass uranium stockpile limit in 10 days

-Announcement came after Tehran said it would stop observing nuclear restrictions agreed in a 2015 deal with the West in retaliation for the US withdrawing
-White House calls for Iran ‘nuclear blackmail’ to be met with international pressure

Agence France-Presse Published: 7:56pm, 17 Jun, 2019

Iran said on Monday it will surpass the uranium stockpile limit set under the nuclear deal with world powers on June 27, turning up the pressure after the US walked away from the landmark pact last year.

“The countdown to pass the 300kg reserve of enriched uranium has started and in 10 days time … we will pass this limit,” Iran’s atomic energy organisation spokesman Behrouz Kamalvandi said at a press conference broadcast live.

The move “will be reversed once other parties live up to their commitments”, he added, speaking from the Arak nuclear plant southwest of Tehran.

A White House National Security Council spokesman said on Monday that the move amount to “nuclear blackmail” and must be met with increased international pressure.

“Iran’s enrichment plans are only possible because the horrible nuclear deal left their capabilities intact,” NSC spokesman Garrett Marquis said, adding that US President Donald Trump “has made it clear that he will never allow Iran to develop nuclear weapons. The regime’s nuclear blackmail must be met with increased international pressure.”

On May 8, Iranian President Hassan Rowhani announced that Iran would stop observing restrictions on its stocks of enriched uranium and heavy water agreed under the 2015 nuclear deal.

He said the move was in retaliation for the unilateral US withdrawal from the accord a year earlier, which saw Washington impose tough economic sanctions on Tehran.

US Senator Patrick Leahy, a Democrat and vocal Trump critic, said on Monday that the US president’s decision to scrap the accord was “foolish” and now it is “harder for us to say much now”.
China scales back Iran nuclear cooperation ‘due to fears of US sanctions’

At the same time, Israeli Prime Minister Benjamin Netanyahu urged world powers to step up sanctions against Iran if it exceeds the enriched uranium limit.

“Should Iran deliver on its current threats, and violate the nuclear deal, the international community will have to implement, immediately, the pre-set sanctions mechanism, what is called ‘snapback sanctions’,” Netanyahu said. “In any event, Israel will not allow Iran to get nuclear weaponry.”

Tensions between Iran and the United States have escalated ever since, with Washington bolstering its military presence in the region and blacklisting Iran’s Revolutionary Guards as a terrorist organisation.

The US has also blamed Iran for last week’s attacks on two tankers in the Gulf of Oman, a charge Tehran has denied as “baseless”.

Iran has threatened to go even further in scaling down nuclear commitments by July 8 unless remaining partners to the deal – Britain, China, France, Germany and Russia – help it circumvent US sanctions and especially enable it to sell its oil.

Under the agreement, Iran pledged to reduce its nuclear capacities for several years and allow international inspectors inside the country to monitor its activities in return for relief from international sanctions.

The deal set a limit on the number of uranium-enriching centrifuges, and restricted its right to enrich uranium to no higher than 3.67 per cent, well below weapons-grade levels of around 90 per cent.

It also called on Iran to export enriched uranium and heavy water to ensure that the country’s reserves would stay within the production ceiling set by the agreement, yet recent US restrictions have made such exports virtually impossible.

According to Rowhani, his ultimatum last month was intended to “save the [deal], not destroy it”.

The three European parties to the accord created a trade mechanism meant to bypass US sanctions, but their attempt was dismissed by Iran’s supreme leader Ayatollah Ali Khamenei as a “bitter joke”.

If world powers do not step up to help Iran, the atomic energy organisation spokesman warned further steps could be taken.

“They range from going to 3.68 per cent to any other per cent according to the country’s needs,” said Kamalvandi.
Iran presses China and Russia to save nuclear deal

Authorities are still debating whether to “redesign or revive” the Arak reactor, he said.

Uranium enriched to much higher levels than Iran’s current stocks can be used as the fissile core of a nuclear weapon, while heavy water is a source of plutonium, which can be used as an alternative way to produce a warhead.

“A point to Europeans: if the first step took time to be done, other steps, especially increasing enrichment … need no more than a day or two,” said Kamalvandi.

Germany has acknowledged the economic benefits Tehran hoped for from the deal were now “more difficult to obtain”, but has urged Iran to fully respect the “extraordinarily important” nuclear deal.

[cdrom]

The US and the 'Two-war' Defense Strategy

Hal Brands - Saturday, 15 June, 2019 - 05:30


Over the past 18 months, the Pentagon has been pursuing a radical change in US defense strategy. The Department of Defense has been working to overhaul the “two-war” defense strategy of the past quarter-century, in favor of one that focuses on winning a single high-stakes fight against China or Russia. This one-war strategy is rooted in an entirely correct judgment that defeating a great-power adversary would be far more difficult than anything the US military has done in decades. Yet it also runs the risk that America won’t have enough military power to deal with a world in which it could face two or more major threats at the same time.

During the post-Cold War era, the US military had a force-planning construct (a scheme that matches the size and capabilities of the force to the key scenarios it is likely to face) focused on fighting two major regional contingencies more or less simultaneously. The idea was that the US should be able to decisively defeat an adversary in the Middle East - Iraq or Iran - without fatally compromising its ability to take on North Korea. This two-war capability was deemed critical to preventing opportunistic aggression by one adversary while the US was engaged with another, and thereby upholding a grand strategy premised on deterring war in multiple regions at once. The two-war strategy, Pentagon officials wrote in 1997, "is the sine qua non of a superpower."

After the onset of budgetary austerity in 2011, the two-war strategy gradually eroded as defense cuts made it harder to handle two regional adversaries at once. And after the Russian invasion of Ukraine in 2014, it was clear that the US was facing a fundamentally different world, in which the country’s foremost adversaries were not inferior rogue states but major powers fielding formidable military capabilities. Add in that any war against Russia or China is likely to occur in their geopolitical backyards, and that both rivals have spent considerable time, money and intellectual effort seeking to neutralize America’s ability to project power, and the US military would have enormous difficulty in winning even a single war against a great-power challenger.

In the 2018 National Defense Strategy and subsequent statements, the Pentagon thus outlined a significantly different force-planning construct. It announced that the fully mobilized American military would be capable of defeating aggression by a great-power adversary, while also deterring (not necessarily defeating) aggression in a second theater. In other words, the US is now building a force not around the demands of two regional conflicts with rogue states, but around the requirements of winning a high-intensity conflict with a single, top-tier competitor — a war with China over Taiwan, for instance, or a clash with Russia in the Baltic region.

There is plenty of serious thinking behind this shift. The new strategy is meant to signal unambiguously — to allies, competitors and the Pentagon bureaucracy — that the US is now focusing squarely on great-power competition and the immense challenges it presents for a force that has been preoccupied with counterterrorism and counterinsurgency for nearly two decades. It recognizes that America’s military advantages vis-à-vis China and Russia have eroded gravely, and that the Defense Department will need new high-tech capabilities and creative operational concepts to defeat either country should war break out.

The new strategy therefore puts a priority on getting right those key concepts and capabilities — which are mostly still nascent — over expanding the force by acquiring more aircraft carriers, Cold War-era fighter jets and other legacy capabilities that would simply get chewed up in a fight against Moscow or Beijing. And it is meant to wrench the Pentagon away from America’s old way of war — one that relied on assembling overwhelming power in a theater and then launching the war at a time of our choosing — and toward a new way of war in which US forces will have to deny adversaries the ability to seize key terrain quickly, while operating in an incredibly deadly environment.

In sum, the Pentagon’s approach is based on the idea that the US has to nail down how to defeat just one great-power rival before it takes on anything more ambitious than that. This is a sensible approach, but one that also entails real risks in war and peace alike.

The major risk in wartime is that the world may throw more at the US than the Pentagon can handle. America faces not one but two great-power rivals, not to mention the lesser threats posed by North Korea, Iran and various terrorist groups. There is a non-trivial chance that the US could find itself dealing with serious military challenges in two or more theaters at the same time.

Indeed, if the US has to throw most of its military at defeating a Chinese bid for dominance in the Western Pacific, another hostile power — perhaps Russia — could decide to roll the iron dice while America is committed elsewhere. And even if that second country doesn’t launch a major war against the US or its allies, it could seek to gain diplomatic concessions by threatening — explicitly or implicitly — aggression at a time when Washington is ill-equipped to deal with it.

To be fair, the Pentagon and key former officials have argued that under a one-war doctrine the US can still “deter” in a second theater, and that the success the military has in handling the first challenger will be critical in determining whether it faces others. Yet as the congressionally mandated National Defense Strategy Commission (which I worked for) has noted, it is not clear how, exactly, the Pentagon plans to deter a second aggressor if it lacks the ability to prevent that aggressor from seizing key territory in the first place.

[cdrom]

Trump trade war: India announces tariffs on U.S. products

India announced it's imposing higher tariffs on 28 U.S. products from Sunday, after Washington withdrew the South Asian country's preferential trade status.

Why it matters: It's the latest escalation in President Trump's trade war, designed to cut U.S. deficits. The tariffs on products including almonds and apples are as high as 70% on some items and are in response to Washington's refusal to exempt Delhi from higher taxes on steel and aluminium imports, the BBC notes.

The big picture: India was until the U.S. cut privileges on June 5 the biggest beneficiary of the Generalized System of Preferences scheme, which allowed duty-free exports of up to $5.6 billion, per Reuters.

India announced in June 2018 retaliatory tariff increases totaling $235 million on U.S. goods, but trade talks had delayed their implementation.

What they're saying: Secretary of State Mike Pompeo, who is expected to visit India this month, said this week the United States is open to resolving trade differences with the country if there's greater access for U.S. firms to its markets, according to Reuters.

[cdrom]

Communist Party journal lays out China’s trade war stance ahead of possible Xi-Trump talks

-Beijing wants a ‘win-win’ deal to end conflict with Washington but will ‘struggle to the end’ if necessary

-Qiushi, or ‘Seeking Truth’, reflects leadership’s position and is required reading for all cadres

Keegan Elmer Published: 10:30pm, 16 Jun, 2019

The Communist Party’s top journal set out the leadership’s position on the trade war
in a series of essays published on Sunday, suggesting a “win-win” deal to end the dispute was still possible but vowing to “struggle to the end” if necessary.

Bimonthly journal Qiushi, or “Seeking Truth”, is required reading for all cadres and forms the basis for the rank and file of the party to understand the leadership’s position on key issues.

In the essays, the journal sought to clarify the party’s position on the trade war with the United States, laying out arguments that portray China as occupying the moral high ground in the conflict, while repeatedly questioning Washington’s logic for starting the dispute.

While China wishes to avoid a prolonged conflict, which would be in no one’s interest, it is prepared for one, the journal made clear.

The message comes ahead of a possible meeting – which Beijing has not yet confirmed
– between President Xi Jinping and US leader Donald Trump during the Group of 20 summit in Japan later this month. The journal also reiterated Beijing’s support for the G20, Asia-Pacific Economic Cooperation and other multilateral institutions.

In the main 13,000-character essay on US-China relations, it gave a 10-point explanation of the party’s stance, arguing that the conflict “comes down to whether the relationship is a zero-sum game or win-win, confrontation or cooperation, closed-door or open-door, monopoly or competition, unilateralism or multilateralism”.

The essay repeated Beijing’s complaints about US tactics during the 11 rounds of negotiations that broke down in early May, but suggested that a rapprochement was possible by “considering the big picture”. However, if that did not happen, it suggested a prolonged trade war was likely.

“China looks forward to a win-win agreement [to end the trade war] based on mutual respect and equality. Our sincerity remains the same, our principles are also impregnable. China will not fear an escalation of trade and economic conflict with the US, threats or pressure. China has no choice, no path of retreat, and can only resolutely struggle to the end,” the essay said.

“No one, no force should underestimate or look down on the iron determination and indomitable spirit of the Chinese people to fight a prolonged war.”

Since the breakdown of trade talks, Beijing has taken a tougher ideological posture towards the US, mobilising ambassadors, newspapers, and now the top party journal, to criticise US tactics in the trade war while attempting to bolster China’s global standing.

The journal’s main essay again sought to reinforce the perception that China is seeking to protect the existing global trading order while accusing the US of trying to destroy it through unilateral action.

“In the face of some people in the US continually sabotaging the current global order, China will resolutely defend the multilateral trading system, actively taking part in and leading the reform of the global system and its structure,” it said.
Pain of tariffs and sanctions behind China and Russia’s push to dethrone the US dollar

The journal also renewed Beijing’s long-standing call for developing markets like China to have a greater say in multilateral institutions. And it waded into the controversial topic of reforming the rules of the World Trade Organisation, but it did not address the US claim – which is the core of the US logic for the trade war – that China has ignored its obligations under those rules.

“As the world’s largest developing economy, China resolutely stands by and defends WTO rules, supports an open, transparent, inclusive, non-discriminatory multilateral trading system, as well as supporting necessary reforms to the WTO,” the essay said.

The journal said China would also strive to maintain control over its own destiny through self-reliance, while continuing to reform and open up its economy. Beijing would “resolutely go its own way, speed up innovation, strive to control key core technology, and firmly grasp the initiative of innovation development in our own hands”, it said.

“Strengthening oneself through reform is the underlying strategy in dealing with economic and trade conflict. China will continue to deepen its reforms, China will keep its front door open, never shut it, and only open it wider and wider.”

[cdrom]

‘Chills Down My Spine’: Ex-State Dept. Official Warns That Trump Is Taking America To War

https://www.politicususa.com/2019/06/15/chills-down-my-spine-ex-state-dept-official-warns-that-trump-is-taking-america-to-war.html

The former State Department official said:

The truth is, no, we do not have to go to war with Iran today. It sends chills down my spine, too. The rhetoric I have seen coming out of the Trump administration over the past month feels so much like the lead up to the war in Iraq. They’re cherry picking intelligence, they’re upping what they consider to be the threat. And, look, there is a real threat. I don’t want to downplay that. But what worries me the most, Alex, is that something like this happens, or the Iranians do something else that is a provocation and we get locked in this cycle of escalation where John Bolton – don’t forget John Bolton is still there – Mike Pompeo push President Trump so he feels like he can’t back down and then we’re in this cycle of escalation that, quite frankly, could end very badly. There’ is no reason to go war with Iran today. We can counter them in many, many other ways. The Trump administration doesn’t seem to have a strategy to do that and that is scary to me.

[cdrom]

Lessons from an old trade war: China can learn from the Japan experience

-In the last half of the 20th century US worries about a rising Japan led to tariffs and technology mistrust
-Differences in the Chinese experience may predict a different outcome

If history is a mirror to the future, the similarities between the spiralling technology stand-off between China and the US and the economic wars waged by the US with Japan – which peaked in the 1980s and 1990s – may be instructive. But there are differences between the two which may predict a different outcome.

The US-Japan economic tensions started in the 1950s over textiles, extended to synthetic fibres and steel in the 1960s, and escalated – from the 1970s to 1990s – to colour televisions, cars and semiconductors, as Japan’s adjusted industrial policy and technology development moved it up the industrial chain.

Boosted by government support, Japan’s semiconductor industry surpassed the US as the world’s largest chip supplier in the early 1980s, causing wariness and discontent in the US over national security risks and its loss of competitiveness in core technologies.

The Reagan administration regarded Japan as the biggest economic threat to the US. Washington accused Tokyo of state-sponsored industrial policies, intellectual property theft from US companies, and of dumping products on the American market.

The US punished Japanese companies for allegedly stealing US technology and illegally selling military sensitive products to the Soviet Union. It also forced Japan to sign deals to share its semiconductor technologies and increase its purchases of US semiconductor products.

“The Trump administration is using similar tactics against China that were used against Japan in the 1980s and 1990s,” said an adviser to the Chinese government, on condition of anonymity, adding that the US was continuing its hegemony to curtail China’s tech development and was trying to mobilise its allies to follow suit.

After talks to end the US-China trade faltered last month, Huawei – a global leader in the 5G market – is now standing at centre stage of a protracted technology stand-off between Beijing and Washington, which has grown increasingly wary of the rising competitiveness of Chinese tech companies.

Zhang Monan, a researcher with the Beijing-based China Centre for International Economic Exchanges, does not foresee an easing of the rivalry between the US and China.

“The current US-China conflicts are more complicated than those between the US and Japan,” she said.

“The US will only get more intense in its containment of China and the tech rivalry won’t ease, even if China and the US could reach a deal to de-escalate the trade tensions.”

Back in 1982, the US justice department charged senior officials at Hitachi with conspiracy to steal confidential computer information from IBM and take it back to Japan. IBM also sued Hitachi. The two companies settled the case out of court and Hitachi paid 10 billion yen (US$92.3 million) to IBM in royalties in 1983, while accepting IBM inspections of its new software products for the next five years.

Toshiba, a major electronics producer in Japan, and Norway’s Kongsberg Vaapenfabrikk secretly sold sophisticated milling machines to the Soviet Union from 1982 to 1984, helping to make its submarines quieter and harder to detect. This transfer of sensitive military technology in the middle of an arms race between the US and the Soviet Union was not revealed until 1986.

The US issued a three-year ban on Toshiba products in 1987 and the company ran full-page advertisements in more than 90 American newspapers apologising for its actions.

In 1985, the US imposed 100 per cent tariffs on Japanese semiconductors. A year later, in its five-year semiconductor deal with the US, Japan agreed to monitor its export prices, increase imports from the US, and submit to inspections by the Office of the United States Trade Representative.

This was followed by a second five-year semiconductor deal in 1991, in which Japan agreed to double the US market share in Japan to 20 per cent. In yet another bilateral semiconductor deal in 1989 Japan was required to open its semiconductor patents to the US.

Meanwhile, the US government boosted its efforts to help American businesses cement their industrial leverage in the chip sector and unveiled rules to protect its domestic chip industry.

The two countries were irreconcilable in 1996 on how to measure their respective market share. Overall market circumstances had also changed by then, with the US becoming competitive in microprocessing, and South Korea and Taiwan emerging as strong rivals to Japan.

Its dominance in semiconductors lost, Japan reached out to Europe for a range of cooperative technology deals.
Cooperate, don’t confront: academic advises Beijing on trade war tactics

“History can tell that high technology matters greatly to national security strategies. It is not a process of mere market competition. It follows the law of the jungle,” Zhang said.

The US has intensified its investment scrutiny by rolling out the Foreign Investment Risk Review Modernisation Act last year, which extends the regulation to key industrial technology sectors.

Zhang predicted the US would continue to contain China’s technological development in key sectors such as AI, aerospace, robots and nanotechnology – all of which are of great importance to Beijing.

The US has said Chinese tech giants Huawei and ZTE present a national security risk. Last April it cut US supplies to ZTE, citing violations of sanctions against Iran and North Korea. The ban was removed three months later after ZTE paid US$1.4 billion in fines.

It was a wake-up call for China to develop its own core technologies. The subsequent US ban on Huawei added to the urgency to do so, observers said.

8
Toshiba was one of the companies affected by US actions to prevent the rise of Japan in a trade war that echoes in today’s tensions between the US and China. Photo: ReutersToshiba was one of the companies affected by US actions to prevent the rise of Japan in a trade war that echoes in today’s tensions between the US and China. Photo: Reuters
Toshiba was one of the companies affected by US actions to prevent the rise of Japan in a trade war that echoes in today’s tensions between the US and China. Photo: Reuters

If history is a mirror to the future, the similarities between the spiralling technology stand-off between China and the US and the economic wars waged by the US with Japan – which peaked in the 1980s and 1990s – may be instructive. But there are differences between the two which may predict a different outcome.

The US-Japan economic tensions started in the 1950s over textiles, extended to synthetic fibres and steel in the 1960s, and escalated – from the 1970s to 1990s – to colour televisions, cars and semiconductors, as Japan’s adjusted industrial policy and technology development moved it up the industrial chain.

Boosted by government support, Japan’s semiconductor industry surpassed the US as the world’s largest chip supplier in the early 1980s, causing wariness and discontent in the US over national security risks and its loss of competitiveness in core technologies.

The Reagan administration regarded Japan as the biggest economic threat to the US. Washington accused Tokyo of state-sponsored industrial policies, intellectual property theft from US companies, and of dumping products on the American market.

The US punished Japanese companies for allegedly stealing US technology and illegally selling military sensitive products to the Soviet Union. It also forced Japan to sign deals to share its semiconductor technologies and increase its purchases of US semiconductor products.

“The Trump administration is using similar tactics against China that were used against Japan in the 1980s and 1990s,” said an adviser to the Chinese government, on condition of anonymity, adding that the US was continuing its hegemony to curtail China’s tech development and was trying to mobilise its allies to follow suit.
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After talks to end the US-China trade faltered last month, Huawei – a global leader in the 5G market – is now standing at centre stage of a protracted technology stand-off between Beijing and Washington, which has grown increasingly wary of the rising competitiveness of Chinese tech companies.
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Zhang Monan, a researcher with the Beijing-based China Centre for International Economic Exchanges, does not foresee an easing of the rivalry between the US and China.

“The current US-China conflicts are more complicated than those between the US and Japan,” she said.

“The US will only get more intense in its containment of China and the tech rivalry won’t ease, even if China and the US could reach a deal to de-escalate the trade tensions.”
Huawei is at the centre of a technology stand-off between Beijing and Washington. Photo: AP
Huawei is at the centre of a technology stand-off between Beijing and Washington. Photo: AP
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Back in 1982, the US justice department charged senior officials at Hitachi with conspiracy to steal confidential computer information from IBM and take it back to Japan. IBM also sued Hitachi. The two companies settled the case out of court and Hitachi paid 10 billion yen (US$92.3 million) to IBM in royalties in 1983, while accepting IBM inspections of its new software products for the next five years.

Toshiba, a major electronics producer in Japan, and Norway’s Kongsberg Vaapenfabrikk secretly sold sophisticated milling machines to the Soviet Union from 1982 to 1984, helping to make its submarines quieter and harder to detect. This transfer of sensitive military technology in the middle of an arms race between the US and the Soviet Union was not revealed until 1986.

The US issued a three-year ban on Toshiba products in 1987 and the company ran full-page advertisements in more than 90 American newspapers apologising for its actions.

In 1985, the US imposed 100 per cent tariffs on Japanese semiconductors. A year later, in its five-year semiconductor deal with the US, Japan agreed to monitor its export prices, increase imports from the US, and submit to inspections by the Office of the United States Trade Representative.
A display of chips designed by Huawei for 5G base stations on show at the China International Big Data Industry Expo. Photo: AP
A display of chips designed by Huawei for 5G base stations on show at the China International Big Data Industry Expo. Photo: AP
Share:

This was followed by a second five-year semiconductor deal in 1991, in which Japan agreed to double the US market share in Japan to 20 per cent. In yet another bilateral semiconductor deal in 1989 Japan was required to open its semiconductor patents to the US.

Meanwhile, the US government boosted its efforts to help American businesses cement their industrial leverage in the chip sector and unveiled rules to protect its domestic chip industry.

The two countries were irreconcilable in 1996 on how to measure their respective market share. Overall market circumstances had also changed by then, with the US becoming competitive in microprocessing, and South Korea and Taiwan emerging as strong rivals to Japan.

Its dominance in semiconductors lost, Japan reached out to Europe for a range of cooperative technology deals.
Cooperate, don’t confront: academic advises Beijing on trade war tactics

“History can tell that high technology matters greatly to national security strategies. It is not a process of mere market competition. It follows the law of the jungle,” Zhang said.

The US has intensified its investment scrutiny by rolling out the Foreign Investment Risk Review Modernisation Act last year, which extends the regulation to key industrial technology sectors.

Zhang predicted the US would continue to contain China’s technological development in key sectors such as AI, aerospace, robots and nanotechnology – all of which are of great importance to Beijing.

The US has said Chinese tech giants Huawei and ZTE present a national security risk. Last April it cut US supplies to ZTE, citing violations of sanctions against Iran and North Korea. The ban was removed three months later after ZTE paid US$1.4 billion in fines.

It was a wake-up call for China to develop its own core technologies. The subsequent US ban on Huawei added to the urgency to do so, observers said.

Wang Yiwei, a professor in international relations with Renmin University, said China had to develop its own hi-tech know-how while continuing the opening up process.

“China has paid a price to learn whose globalisation it is,” he said.

“We may see some extent of disengagement with the US in technology and dual-use sectors, but China can speed up cooperation with European countries, and other countries such as Israel, to offset the risks from the US.”

In December, the US filed criminal charges against Huawei and its chief financial officer Sabrina Meng Wanzhou, alleging bank fraud, obstruction of justice and technology theft.

The squeeze continued last month with the US blacklisting Huawei, restricting its access to American hi-tech supplies and putting pressure on its allies to freeze the company out of the 5G market. So far, those allies, including Germany and Japan, have remained hesitant about meeting the US request and refrained from siding with either country.

Chinese foreign ministry spokesman Geng Shuang said on Monday that Huawei had obtained 46 commercial contracts in 30 countries as of June 6, “including some US allies and some European countries that the US has been working hard to persuade out of the contracts”.

For Zhang, the differences between Japan’s experience of US concerns of technological advancement and China’s may offer some hope for Chinese ambitions.

“Dependent on US for security protection, Japan was limited in [its ability to] push back and was already a developed country,” she said.

“But China has huge domestic market potential to address the imbalance [between] economic and technology development. This remains a big attraction to multinational companies, which would enable China to integrate into global innovation and technology cooperation, but China has to figure out how to dispel the doubts on its growth model.”

[cdrom]

Pain of tariffs and sanctions behind China and Russia’s push to dethrone the US dollar

-Russia is looking to launch yuan-denominated bonds, and has agreed with China to work on settling more of their bilateral trade in the yuan or the rouble
-Other trading partners suffering from US sanctions and along China’s belt and road map are also open to de-dollarisation

Two weeks ago, Russia and China took a major step
away from the use of the American dollar in agreeing to develop bilateral trade using the Russian rouble and the Chinese yuan.

“Russia and China intend to develop the practice of settlements in national currencies,” said President Vladimir Putin after meeting President Xi Jinping in St Petersburg. He added that both countries had signed agreements to expand the use of their currencies in bilateral financial operations.

This move is long awaited and makes perfect sense, given the growing economic ties between Moscow and Beijing, and attempts by the United States to exploit the special position of its currency to force other countries to do its bidding. China-Russia bilateral trade reached US$24.2 billion in the first quarter of 2019, according to Chinese customs, up almost 30 per cent over the corresponding period last year. China has become Russia’s largest trade partner with about 14 per cent of payments in yuan and 7-8 per cent in rouble.

There are plans to reach US$200 billion in mutual trade by 2020, sign a local currencies settlement agreement later this year and extend the use of the national credit-card systems Union Pay and Mir in both countries.

Members of the Eurasian Economic Union and other emerging economies have also declared their readiness to avoid using the US dollar and to increase settlements in local currencies. In May last year, China and the Eurasian Economic Union signed a trade and economic agreement as a base to reduce dollar dominance in trade and as an important milestone in realising the linking of the union to the Belt and Road Initiative, China’s massive infrastructure project.

China is the world’s largest importer and second largest consumer of crude oil. Last year, it launched a yuan-denominated crude oil futures contract on the Shanghai Stock Exchange – the so-called petroyuan – amid a growing willingness from Iran, Russia, Saudi Arabia and Venezuela to settle oil payments in yuan and other non-dollar currencies. Despite the risk of currency fluctuations and the concerns of traders, the petroyuan is a necessary step in creating a potential rival to dollar-denominated benchmark oil prices – West Texas Intermediate and Brent Crude – and reducing the dollar dominance in the commodities trade.

[cdrom]

The real reason behind Trump’s trade war

The US President wants to maintain the dollar’s reserve currency status and retain US’ monopoly in hi-tech

With the Turkish lira in free fall, Chinese yuan down by 8 per cent in July alone, and ?70 required to buy one dollar, experts warn that the trade war might soon escalate into trade plus currency war. But the ‘law of unintended consequences’ may not be at work here. Securing the interest of the US currency may be a less discussed yet real agenda behind the current trade war.

Trump is trying to deal with two serious concerns facing the American economy: Counter the threats to the dollar’s status as the reserve currency, and retain the near monopoly in Digital and Hi-Tech space. These issues, central to the US power and eminence, are now under serious challenge.

First the dollar issue. The dollar’s status as a reserve currency the world trusts is the primary reason for the US economic supremacy. Other countries need to export something to earn dollars. Not the US, which can print as many as it wants and buy any property, technology or pay for its massive imports. Also, it can invest a large amount of venture capital to buy any firm anywhere. Individual countries may face inflation if they print more local currency, not the US as the excess dollar is absorbed happily by the world.

Consider China-US trade. China sells all type of products to the US. In return, the US just prints dollars and gives them to China, which beyond a point has no use of these. So China deposits unspent trillions of dollars again with the US Treasury or buys firms and properties around the world.

The dollar has become the reserve currency because over 70 per cent of world trade happens in dollars. This may look strange as the US share in world trade is less than 15 per cent. The US manages this by ensuring that large trade contracts for commodities like crude oil are always denominated in dollars. Also, large US banks operating globally ensure that most export contracts are made in dollars even though it is not the currency of the buyer or seller.
Iraq example

And the US goes great lengths to deal with any threat to the reserve status of the dollar. In 2003, the US army captured Iraq and hanged its President Saddam on allegations that Iraq had Weapons of Mass Destruction (WMD). No WMDs were ever found. And we soon learned that Saddam started the process of denominating oil contracts in Euro and other currencies.

The dollar’s position as the reserve currency is under strain again. Many countries including China are taking steps to denominate their trade contracts in local currency and reduce dependence on the dollar. China plans to denominate all Belt and Road Initiative (BRI) contracts in local currencies. No wonder China is the primary target in the trade war.

The Saudi royal family has since the 1970s ensured that all OPEC oil contracts are denominated in US dollars. In return, the US ensured the continuation of the royal rule and fought Saudi enemies in the Gulf region. And this explains Trump’s action of isolating Iran. Since Iran is an enemy of Saudi, Trump announced sanctions to cripple Iran. Anyone buying from Iran after November would also face sanction.
Threat to hi-tech

Trump’s second concern is to retain the US lead in digital and high tech space. It is under threat from China which is going all-out to become a leader in Artificial Intelligence and high technology by 2025. Loss of US monopoly in digital space is a worry too.

Many of China’s home-grown firms are large unicorns ready for global operations in direct competition to the US firms. Worse, the China model of not allowing entry to Google and Facebook is being copied by Russia, Brazil, and many others. The EU is also thinking of creating an EU wide internet. All this would mean an end of the dominance of the US firms in digital space.

The US tariffs on imports from China will impact not only its exports to the US but to all countries. Most of China’s exports are produced in the tariff-free global supply chains (GVC) where collaborative manufacturing happens among a group of countries. Tariffs by partner countries will delay numerous Customs clearances and significantly reduce the effectiveness of GVCs. The US would love to think that this will rock the Chinese boat and force them to a compromise.
Discrediting WTO

The question remains, why discredit the WTO which served the cause of world trade well and pursued the earlier US priorities. A smart strategy is at work here. Trump is using tariffs as primary tools for trade war because raising tariffs requires no investments and they do the most damage in a world where trade accounts for more than a quarter of world GDP. He needs to raise tariffs, but doing so violates the WTO rules because the US has in 1995 tied its hands by agreeing to maintain very low tariffs (less than 3 per cent). So the solution is clear. Raise the tariffs, but discredit the WTO as being unfair to the US.

So these could be the real reasons for the trade war. Reasons such as imports posing a threat to national security or the US exports facing high trade barriers may just be used by Trump to buy peace with the WTO, humour rust belt voters and distract everyone else.

The US reasons for the trade war may look selfish, and harm world trade, production, and employment globally. But that’s what the US script is. And no other US President could have played this better. It required the persona of Trump to make everything look so real.

[cdrom]

President Trump Called Former President Jimmy Carter To Talk About China

https://www.npr.org/2019/04/15/713495558/president-trump-called-former-president-jimmy-carter-to-talk-about-china

President Trump called former President Jimmy Carter for the first time this weekend.

Carter revealed that news during his regular Sunday school lesson at his home church, Maranatha Baptist Church in Plains, Georgia, on Sunday morning.

Earlier this year, Carter sent Trump a letter with some advice about managing the U.S.-China relationship. Carter oversaw the normalization of diplomatic relations between the two countries 40 years ago.

On Saturday evening, Trump called Carter to talk about it. It was the first time they'd spoken, Carter said. He said Trump told him that he is particularly concerned about how China is "getting ahead of us."

Carter said he agreed with Trump on this issue.

"And do you know why?" Carter said. "I normalized diplomatic relations with China in 1979. Since 1979, do you know how many times China has been at war with anybody? None. And we have stayed at war," he said. (China and Vietnam actually fought a brief border war in early 1979, weeks after U.S. relations with China were normalized.)

Carter said the United States is "the most warlike nation in the history of the world" due to a desire to impose American values on other countries, and he suggested that China is investing its resources into projects such as high-speed railroads instead of defense spending.

"How many miles of high-speed railroad do we have in this country?"

Zero, the congregation answered.

"We have wasted, I think, $3 trillion," Carter said, referring to American military spending. "China has not wasted a single penny on war, and that's why they're ahead of us. In almost every way.

"And I think the difference is if you take $3 trillion and put it in American infrastructure, you'd probably have $2 trillion left over. We'd have high-speed railroad. We'd have bridges that aren't collapsing. We'd have roads that are maintained properly. Our education system would be as good as that of, say, South Korea or Hong Kong.

"I wasn't comparing my country adversely to China," Carter qualified. "I was just pointing that out because I happened to get a phone call last night."

The former president said he understands that Trump is worried about China surpassing the U.S. as the world's top economic superpower.

"I don't really fear that time, but it bothers President Trump, and I don't know why. I'm not criticizing him — this morning," Carter said to laughs from the audience.

The White House confirmed the conversation in a statement released Monday.

"President Jimmy Carter wrote President Trump a beautiful letter about the current negotiations with China and on Saturday they had a very good telephone conversation about President Trump's stance on trade with China and numerous other topics," said the statement, which wasn't attributed to a spokesperson.

Much of Carter's Palm Sunday lesson was focused on peace and kindness and was given before an audience that was mostly composed of visitors, many of whom had lined up overnight for the service.

Last month, Carter became the nation's longest-living president.

[cdrom]

A coordinated global response is needed to defend multilateralism

The world is moving towards a common position against the protectionist onslaught of the Trump administration

How well efforts are progressing will be apparent at the Group of 20 summit in Osaka, Japan, at the end of the month

The threat of an economic crisis and worse is moving the world towards a common position against the protectionist onslaught of United States leader Donald Trump’s administration.

With trade, technology and security in the balance, Vice-President Wang Qishan and German Chancellor Angela Merkel recently joined forces to defend the global multilateral order, the day the same sentiment was expressed by Singaporean Prime Minister Lee Hsien Loong.

Even Britain’s Queen Elizabeth has voiced concern, setting aside pomp for politics at the banquet for the visiting American to praise the institutions established after World War II that have ensured peace and stability.

As tariffs bite, stock markets falter and financial and security structures and alliances increasingly come under pressure, governments have to work together.

While meeting Merkel in Berlin on May 31, Wang asked Germany to work with China to build a more just governance system to deal with rising uncertainty.

The chancellor spoke of the need for international collaboration and coordination to counter threats; a day earlier, giving the commencement speech at Harvard University, she urged graduates to reject protectionism and “tear down walls of ignorance” that feed nationalism and isolationism.

With trade, “the very foundations of our prosperity” under fire, she called for nations to “work together rather than alone”.

But even as she spoke, US Secretary of State Mike Pompeo was in Germany pushing efforts for American allies to shut out the Chinese technology giant Huawei on national security grounds.
Harvard cheers as Angela Merkel takes aim at Trump’s politics

The US’ weaponising of trade, as with China and now Mexico, is the biggest threat to global economic growth and development.

It prompted Lee, speaking at the Shangri-La Dialogue security forum in Singapore, to raise the importance of multilateralism, particularly for smaller nations, so that they could strengthen their influence as a group.

Without referring to China or the US, he said big powers should ensure regional cooperation initiatives were open and inclusive and help bring nations together, not “create rival blocs, deepen fault lines or force countries to take sides”.
Merkel delivering the keynote speech at Harvard University's 368th commencement ceremony last month. Photo: AFP
Merkel delivering the keynote speech at Harvard University's 368th commencement ceremony last month. Photo: AFP
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But Trump’s criticism and shunning of the established global order are also cause for concern and that is what the British monarch turned to last Monday while feting Trump.

Highlighting the efforts made after World War II to ensure stability, she spoke of the importance of “nations working together to safeguard a hard-won peace”.

A coordinated global response is the best way to fight back. How well efforts are progressing will be apparent at the Group of 20 summit in Osaka, Japan, at the end of the month.

[cdrom]

Brace for a global recession unlike any other amid a world polarised by the US and China

The 2019 recession will be different, in a heavily leveraged global economy with already slowing trade – where normal policy tools may no longer work.

Post-recession, Asian nations in particular should expect to have to take sides as the US and China vie for ownership of the new global economic narrative

Anthony Rowley Published: 11:00pm, 9 Jun, 2019

Global economic recession is no longer a threat but an inevitability. The question economists should be asking is not whether or when a recession will strike but rather what can be done once it does. Normal policy tools such as monetary easing and/or fiscal stimulus may be no more effective than pushing on the proverbial piece of string.
This time, it will be different — as optimists like to say when trying to convince themselves that crises cannot happen again; though not for the reasons they think. The 2019 recession will be different from the Great Recession
a decade ago, and indeed, from any slump since the Great Depression of the 1930s.
The comparison with 1930
— when the US introduced its Smoot-Hawley tariffs and plunged the world into depression in the wake of the 1929 US stock market crash — is obvious, except, this time, world trade growth is already crumbling. Global trade growth is at its slowest in 10 years, according to the World Bank.

Trade crises tend to cut deeper into the heart of global economic activity than any of the post-war financial or debt crises did. The onset may be slower and less dramatic but the adverse effects last longer.
It is easy to forget that what caused global economic growth to stagnate for seven or eight years after the 2008 financial crisis was the secondary shock to trade. World trade only began to pick up again in 2016, to then have US President Donald Trump clobber it with tariffs
.
The renewed slowdown in trade this time is more complex and systemic than the one that followed the Great Recession, and it is accompanied by a global economy still dependent on residual monetary stimulus from the 2008 crisis to keep investment and consumption moving forward, if uncertainly.
The World Bank expects global economic growth to ease
to a weaker-than-expected 2.6 per cent in 2019. Its president, David Malpass
, said: “There's been a tumble in business confidence, a deepening slowdown in global trade, and sluggish investment in emerging and developing economies.”

Yet, stock markets have chosen to focus on hopes that the US Federal Reserve and other central banks will conduct monetary easing again. This is clutching at straws. As former Deutsche Bundesbank president Axel Weber noted in Tokyo last week, markets have “overpriced” the chances of precautionary easing.
China has been easing off on easing.
China has been easing off on easing.
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China central bank says no need for easing after tariff hike
Another legacy of the 2008 crisis is the mountain of debt
in advanced and developing economies, a consequence of easing and historically low interest rates. As Malpass said, “Debt management and transparency need to be high priorities”.

In this situation of slowing economic momentum, declining business confidence and investment, and a general sense of economic malaise, who can doubt that the slowdown risks spilling over into a recession?
The world following a 2019 recession is likely to be more polarised
or even bifurcated, where the US and China, as the two biggest growth poles, seek to write their separate economic narratives.
They will be more mutually distrustful, and the nations that depend on them are likely to need to adapt their economic structures — including supply chains
for manufacturing and service sector activities — to new and more restricted areas of operation.
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Technological interchange and advancement is likely to slow. And the already growing tendencies towards nationalism and populism could prove a significant and persisting setback to globalisation.

The effects are likely to play out most obviously in Asia, where nations have so far been steering a successful, if fine, line between the two major economic powers. They are increasingly likely to have to take sides in trade wars that cannot be won.
US-China trade war will make or break Asean

Perhaps the most they can hope for is to survive a new cold war and avoid a “hot” war. Even if a stock market collapse (in the US or China) or a renewed debt crisis forces a truce between the US and China, a rapid return of business confidence, investment and consumption is unlikely.

Both Trump and Chinese President Xi Jinping are strong-minded leaders and they represent a clash of cultures and systems that, perhaps, was due for confrontation. There is still room for compromise and mutual coexistence, even if not a marriage of minds. But the room for manoeuvre is getting worryingly small.