We reported (04/06/2017) prior to the UK General Election 2017:
There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.
Little did we realize how close to the mark we would be. PM May’s electoral disaster has profound repercussions for the UK. Firstly Brexit becomes a challenge at the negotiation table because of the weakened hand PM May presents to the EU. Secondly, Jeremy Corbyn’s success at the polls will force the Conservatives to move to the centre-left of UK politics to capture Corbyn’s new found friends – the 18-34 year demographic that has recently discovered politics and utopian self-interest.
This is a disaster for the UK and will not end well. May’s leadership will be under constant challenge for the next 5 years. One of her few chances of success depends on being able to negotiate a quick exit from the EU. This is unlikely.
As has happened in Australia in 2016, the UK and with a 9% confidence level in US Congress reflecting the rising distrust voters have for politicians. This is a trend that will continue around the world for the foreseeable future. The unintended consequence of voter distrust however is that political confidence begins to fail and economic confidence collapses soon after.
In the United States the Democratic – Republican flash point continues to escalate. President Trump is beginning to claw back a few points against the “Deep State” influence working inside government. Investigations are building cases on leaks and corruption. Trump is slowly gaining momentum with his agenda despite the continual challenge of the left agenda.
Unfortunately the first directly attributable acts of violence have occurred with a Republican Congressman and two police officers wounded at an annual practice baseball session for Congress politicians. The use of violence in political discourse is inherently evil itself and not in keeping with the liberal-democratic tradition that has benefited humanity. Since 2015 we have witnessed an increasing breakdown of civil discourse – a cornerstone of a free society. This marks the first violence of the civil strife we predict emerging in the US. We anticipate this will continue to escalate over the next few years. It will not end well and directly reflects the internal divisions that continue to rent US civil society.
At the same time we move slowly towards The End of the Long Game, the last gasp of the “Industrial Revolution Cycle” that commenced in 1783. We still view the September 2017 – March 2018 time window as the time for that final top, to be followed by the downward phase of the cycle. As always rebirth follows endings and the advance of humanity continues.
This worsening political discord in the US and other liberal democratic countries merely reflect the changing cycle mentioned previously. Given the magnitude of the cycle involved – one that builds and destroys empires, we can glimpse directly at the political and economic forces shaping events and the changes to come.
In the UK, the conservatives it appears, will win a reduced majority to govern the UK and Brexit process. It is also clear that a loss or hung parliament for the Conservatives will set the UK back a hundred years politically and economically in the confusion and discord it would sew.
There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.
So, the stakes are just as high as they were in June 2016. What was a ‘sure thing’ bet at the start of the election process has become marginal at a time when the consequences are high. The spontaneous ordering of the voting process may check politicians from being able to achieve their agenda at the expense of the national interest. What hubris by PM May who put personal agenda ahead of the national political interest.
This is typical of the problems found in liberal democracies. Liberal democracies around the world are dying. Voters are cynical of the promises and ability of politicians to achieve anything.
Ironically, the EU have hailed Macron’s victory as a sign that right wing populism has peaked and in remission. With no mirror for self reflection the EU elite are back at ‘business as usual’. “Nothing to look at here – move on”! They needed a Le Pen win to shock them into making real change. Macron’s victory has only deferred the inevitable by a year. Meanwhile, the political change that is sweeping the world at present will continue with German elections in October this year. Merkel it appears is set for a heavy defeat.
And in the USA the left wing is continuing its attempt to undermine President Trump and effectively ignore the rule of law. Left wing forces operating at every level of US media, government and politics are moving to impeach Trump. Meanwhile the silent majority that elected Trump are watching and waiting and growing angry.
The last time we saw his level of scale of political unrest was 1740 – 1785 culminating in the French Revolution. The rising tide of political unrest in the USA, UK and EU is polarized by left vs right as well as the elite vs the people. Remember, when political confidence falters, economic confidence falls soon after. This is what is happening now. As pressures continue to mount in the USA and EU there is increasing risk of civil strife breaking out.
The phase June 2017 to December 2018 remains a time of escalating risk. Over this 18 month time frame, what transpires will shape the world and its history for the next 12 years and set up the circumstances that will shape the rest of this century.
Going into the final round of the French Presidential election we see heavy media bias for Macron to win over Le Pen. Polls indicate Macron should win by a comfortable margin. The Law of Contrary Opinion in 2016 had indicated another upset due.
There are mitigating factors at play however. Having correctly picked the Australian, Brexit and US Presidential elections, we point out that the shock results shown in those elections all occurred after lengthy social and political trends had been underway for sometime. We see there is a lower probability that contrary opinion may affect the outcome. We had predicted in 2016 that Le Pen would receive the presidential mandate. We still hold to that view which would have an immediate negative impact on financial markets whichever candidate wins. Markets appear poised for a fast corrective move to the downside before resuming their longer term trends.
Longer term, if Le Pen happened to win, there would be a soft EU awakening and resolution. Macron’s win will have the effect of bringing on a hard EU awakening and resolution.
Its clear we are in a cycle of increasing political chaos and uncertainty. This is continuing to escalate. Its happening in liberal democratic countries. National elections are due in these countries (Germany, France 2017), UK (2018). We can anticipate major upheavals along with the US. We are seeing the death throes of the liberal democratic tradition. Worsening economic inequality, the self interest of political elites, political coverups, politicians unable to deliver on their promises, vote rigging, dodgy economics, disenfranchised voters, unaccountable rogue police are just some of the issues to be seen in newspapers and television. Democracy, a human system, like all systems before, is failing.
Next US President
Given the increasing political chaos we anticipate Donald Trump will be elected as the 45th US President of the United States of America. Between now and November we should see a marked swing towards Trump. Viewing the US situation through the lens of cycles analysis we step beyond the character and reputation of US Presidential nominees to see the fabric of a society and economy being eroded through self interest.This process has been underway for over 5 decades.Trump’s election should be seen as the response to a disenfranchised electorate. That’s both within the parties and without. Its an increasingly angry social mood. Voters are angry and one of their few options is to respond at the ballot. Electoral horror at the status quo has emerged with a dual society – the haves and have nots, cronyism, hidden interests, corporatism, the endless wars, spurious economics, indebtedness………..
Like Brexit and many of the problems we are witnessing nightly in the news (EU refugee crisis, police and citizen shootings, etc), many crises have been manufactured by governments themselves.
We witness the unfolding political, social and economic drama of the USA and by extension the global stage since the US ascended to become the global hegemon after WWII. Most people acknowledge things have gone terribly wrong over the last 20 years but nobody knows what to do. There is little or no confidence in the political class, or their technocrat advisors, government institutions, the economy and society at large. We anticipate the continuing breakdown of the status quo an Trump’s election to the presidency is merely a reflection of the zeitgeist of our time. Yet this is perfectly understandable when you step back from the noise of daily media and observe the cycles of history evolving before our eyes.
An historical example of a time when a large scale breakdown of society occurred on this scale was during the phase 1740-1792 leading to the French Revolution. This time however, with globalization, it spans over many countries. At that time we saw increasing political instability with its attendant corruption, economic decay and the polarization of the people against the political elites (king and government). It’s happened many times before as any student of history will testify, is happening now and will happen again as humans consistently fail to learn from their past.
Understanding Cyclic History
We are witnessing in our lifetime the completion of large scale cycles of human endeavor and activity with the attendant dislocation and reallocation of social, economic and political activity and resources. An understanding of the broad brush strokes economically, socially and politically may serve to enhance your perspective on what emerges next. The scale of forces at work in liberal and democratic societies and economies is so huge that the current drama is taking decades to unfold.
This is the topping and completion process of an economic cycle that has been going on for around 224 years. By the time this top and the ensuing drama is finished, it may well have spanned generations of people. On a historical note, we are witnessing the completion of the growth phase of the industrial revolution cycle that began around 1783-5.
And so what does Trump have to do with economic cycles?
The current political chaos will continue to intensify and this will give way eventually into economic chaos. The impending signs for that economic chaos are clearly to be seen and once again it centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Trump has nothing to do with these economic cycles. He merely reflects the zeitgeist of the times. Like someone surfing a wave, they ride the wave for a period of time then disappear into the footnotes of history. Trump has often appeared at major tops of economic cycles in the last 30 years in US history. Its not surprising then he has reappeared surfing the zeitgeist wave as the US completes the topping phase of this huge cycle of human endeavor.
Trump’s ability to ride the social mood of the time we believe will help him to take the presidency. Whether he will have the power to change the status quo, like Obama who promised major change yet found himself caught in the entrenched self interest of Congress, Wall Street, Big Pharma and the military. Trump may well ride the last vestiges of prosperity in this cycle. Given the growing political and economic storm Trump may well find himself the target of assassination attempts in the next four years. He will be remembered as the President that reigned at the time the US and world peaked in economic activity for many decades to come.
Whether we have a few more months or years of twilight before the downside comes home to roost, suffice to say, from now on we can expect increasingly tough times punctuated by phases of optimism. The current political chaos will continue to intensify and this will give way into economic chaos. The impending signs for that economic chaos are already clearly seen and once again it the focus centers on the incapacity of central planners and bureaucrats to perceive the unintended consequences of their mischief. Will people in future times learn from our mistakes and mistakes of the past? We think not.
Charles Hugh Smith writing on his blog Of Two Minds:
The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.
Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.
1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.
2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.
3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.
4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.
5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.
6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.
Each of these dynamics is easily visible in the global status quo.
As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.
This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.
Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.
This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.
The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.
The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.
Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.
Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.
GEORGE FRIEDMAN looks at Russia’s strategy going forward and its impact on geopolitics.
Russia is in a geographically vulnerable position; its core is inherently landlocked, and the choke points that its ships would have to traverse to gain access to oceans could be easily cut off. Therefore, Russia can’t be Athens. It must be Sparta, and that means it must be a land power and assume the cultural character of a Spartan nation. Russia must have tough if not sophisticated troops fighting ground wars. It must also be able to produce enough wealth to sustain its military as well as provide a reasonable standard of living for its people—but Russia will not be able to match Europe in this regard.
So it isn’t prosperity that binds the country together, but a shared idealized vision of and loyalty toward Mother Russia. And in this sense, there is a deep chasm between both Europe and the United States (which use prosperity as a justification for loyalty) and Russia (for whom loyalty derives from the power of the state and the inherent definition of being Russian). This support for the Russian nation remains powerful, despite the existence of diverse ethnic groups throughout the country.
As a land power, Russia is inherently vulnerable. It sits on the European plain with few natural barriers to stop an enemy coming from the west. East of the Carpathian Mountains, the plain pivots southward, and the door to Russia opens. In addition, Russia has few rivers, which makes internal transport difficult and further reduces economic efficiency. What agricultural output there is must be transported to markets, and that means the transport system must function well. And with so much of its economic activity located close to the border, and so few natural barriers, Russia is at risk.
It should be no surprise then that Russia’s national strategy is to move its frontier as far west as possible. The first tier of countries on the European Peninsula’s eastern edge—the Baltics, Belarus, and Ukraine—provide depth from which Russia can protect itself, and also provide additional economic opportunities.
With regard to the current battle over Ukraine, the Russians have to assume that the Euro-American interest in creating a pro-Western regime has a purpose beyond Ukraine. From the Russian point of view, not only have they lost a critical buffer zone, but Ukrainian forces hostile to Russia have moved toward the Russian border. It should be noted that the area that the Russians defend most heavily is the area just west of the Russian border, buying as much space as they can.
The fact that this scenario leaves Russia in a precarious position means that the Russians are unlikely to leave the Ukrainian question where it is. Russia does not have the option of assuming that the West’s interest in the region comes from good intentions. At the same time, the West cannot assume that Russia—if it reclaims Ukraine—will stop there. Therefore, we are in the classic case where two forces assume the worst about each other. But Russia occupies the weaker position, having lost the first tier of the European Peninsula. It is struggling to maintain the physical integrity of the Motherland.
Russia does not have the ability to project significant force because its naval force is bottled up and because you cannot support major forces from the air alone. Although it became involved in the Syrian conflict to demonstrate its military capabilities and gain leverage with the West, this operation is peripheral to Russia’s main interests. The primary issue is the western frontier and Ukraine. In the south, the focus is on the Caucasus.
It is clear that Russia’s economy, based as it is on energy exports, is in serious trouble given the plummeting price of oil in the past year and a half. But Russia has always been in serious economic trouble. Its economy was catastrophic prior to World War II, but it won the war anyway… at a cost that few other countries could bear. Russia may be a landlocked and poor country, but it can nonetheless raise an army of loyal Spartans. Europe is wealthy and sophisticated, but its soldiers have complex souls. As for the Americans, they are far away and may choose not to get involved. This gives the Russians an opportunity. However bad their economy is at the moment, the simplicity of their geographic position in all respects gives them capabilities that can surprise their opponents and perhaps even make the Russians more dangerous.
As of mid-2015, the world’s population stands at 7.3 billion (pdf), according to a new estimate by the United Nations. Over half of the world lives in Asia and a little under a fifth live in Africa.
But in 35 years, that picture will look radically different. Between now and 2050, over half of the global population growth will take place in Africa, with the continent adding 1.3 billion people, compared with Asia’s 0.9 billion. Thus, by 2050, Africa’s share of the global population will reach 25%, as Asia’s share falls to 54%.
Here’s where most of global growth came from so far this decade:
And this is where the majority of growth will come from in a similar period 30 years from now:
As you can see, Nigeria is expected to top the list. The West African country is expected to surpass the size of the United States by 2050 with its population more than doubling from today to reach almost 400 million.
As a result, Nigeria could enjoy the so-called “demographic dividend,” provided that there are enough jobs to absorb the working-age population and sufficient investment in young people’s development, the UN notes. According to the last poverty survey released in 2012 by the government, some 61% of Nigerians lived on less than a dollar a day in 2010.
Sub-Sahara Africa’s population boom is one of the main reasons for optimism about the continent’s economic growth potential. But that doesn’t come without major challenges. Forty-eight countries classified by the UN as “least developed countries” are expected to double in population size by 2050; 33 countries, most of them falling within this category, will triple in size by 2100. The UN details a long list of challenges governments will face as populations expand:
The concentration of population growth in the poorest countries will make it harder for those governments to eradicate poverty and inequality, combat hunger and malnutrition, expand education enrollment and health systems… and implement other elements of a sustainable development agenda to ensure that no-one is left behind.
Greece’s Finance Minister Yanis Varoufakis has come out to reveal the quite shocking and anti-democratic events that took place during the last Eurogroup meeting. First, they do hate Yanis’ guts, for he understands far more about the economy than anyone in Brussels. At their demand, any further discussions will be without him. What led to the EU breaking off was exactly what we reported previously — they do not want any member state to EVER allow the people to vote on the euro. Brussels has become a DICTATORSHIP and is so arrogant without any just cause, believing that they know better than the people.
We are watching the total collapse of Democracy and the birth of a new era — Economic Totalitarianism from arrogant people who are totally clueless beyond their own greed for power and money.
Editor Note: Greece is the end of the beginning for the EZ and the beginning of a long period of political, social and economic instability that co-incides with the topping phase of the upward phase of the Industrial Revolution cycle that began in 1783-85.
Not long ago, I wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem?
Let me explain some of the issues:
Issue 1. If the price of oil is too low, it will simply be left in the ground.
The world badly needs oil for many purposes: to power its cars, to plant it fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics.
If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.
The view is sometimes expressed that once 50% of oil is extracted, the amount of oil we can extract will gradually begin to decline, for geological reasons. This view is only true if high prices prevail, as we hit limits. If our problem is low oil prices because of debt problems or other issues, then the decline is likely to be far more rapid. With low oil prices, even what we consider to be proved oil reserves today may be left in the ground.
Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.
While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November.
3. Shale operations have a huge impact on US employment.
Zero Hedge posted the following chart of employment growth, in states with and without current drilling from shale formations:
Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge.
Clearly, the shale states are doing much better, job-wise. According to the article, since December 2007, shale states have added 1.36 million jobs, while non-shale states have lost 424,000 jobs. The growth in jobs includes all types of employment, including jobs only indirectly related to oil and gas production, such as jobs involved with the construction of a new supermarket to serve the growing population.
It might be noted that even the “Non-Shale” states have benefited to some extent from shale drilling. Some support jobs related to shale extraction, such as extraction of sand used in fracking, college courses to educate new engineers, and manufacturing of parts for drilling equipment, are in states other than those with shale formations. Also, all states benefit from the lower oil imports required.
Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.
With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market, so the amount at risk is substantial.
There are many ways banks might be adversely affected by defaults, including
Directly by defaults on loans held be a bank
Indirectly, by defaults on securities the bank owns that relate to loans elsewhere
By derivative defaults made more likely by sharp changes in interest rates or in currency levels
By liquidity problems, relating to the need to quickly sell or buy securities related to ETFs
After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out “too big to fail” banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1
Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.
Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.
Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.
Oil prices dropped dramatically in the 1980s after the issues that gave rise to the earlier spike were mitigated. The Soviet Union was dependent on oil for its export revenue. With low oil prices, its ability to invest in new production was impaired, and its export revenue dried up. The Soviet Union collapsed for a number of reasons, some of them financial, in late 1991, after several years of low oil prices had had a chance to affect its economy.
Many oil-exporting countries are at risk of collapse if oil prices stay very low very long. Venezuela is a clear risk, with its big debt problem. Nigeria’s economy is reported to be “tanking.” Russia even has a possibility of collapse, although probably not in the near future.
Even apart from collapse, there is the possibility of increased unrest in the Middle East, as oil-exporting nations find it necessary to cut back on their food and oil subsidies. There is also more possibility of warfare among groups, including new groups such as ISIL. When everyone is prosperous, there is little reason to fight, but when oil-related funds dry up, fighting among neighbors increases, as does unrest among those with lower subsidies.
Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise.
When oil prices rose, businesses were quick to add fuel surcharges. They are less quick to offer fuel rebates when oil prices go down. They will try to keep the benefit of the oil price drop for themselves for as long as possible.
Most businesses recognize that the oil price drop is at most a temporary situation, since the cost of extraction continues to rise (because we are getting oil from more difficult-to-extract locations). Because the price drop this is only temporary, few business people are saying to themselves, “Wow, oil is cheap again! I am going to invest a huge amount of money in a new road building company [or other business that depends on cheap oil].” Instead, they are cautious, making changes that require little capital investment and that can easily be reversed. While there may be some jobs added, those added will tend to be ones that can easily be dropped if oil prices rise again.
Issue 7. Hoped for crude and LNG sales abroad are likely to disappear, with low oil prices.
There has been a great deal of publicity about the desire of US oil and gas producers to sell both crude oil and LNG abroad, so as to be able to take advantage of higher oil and gas prices outside the US. With a big drop in oil prices, these hopes are likely to be dashed. Already, we are seeing the story, Asia stops buying US crude oil. According to this story, “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore.”
LNG prices tend to drop if oil prices drop. (Some LNG prices are linked to oil prices, but even those that are not directly linked are likely to be affected by the lower demand for energy products.) At these lower prices, the financial incentive to export LNG becomes much less. Even fluctuating LNG prices become a problem for those considering investment in infrastructure such as ships to transport LNG.
Issue 8. Hoped-for increases in renewables will become more difficult, if oil prices are low.
Many people believe that renewables can eventually take over the role of fossil fuels. (I am not of view that this is possible.) For those with this view, low oil prices are a problem, because they discourage the hoped-for transition to renewables.
Despite all of the statements made about renewables, they don’t really substitute for oil. Biofuels come closest, but they are simply oil-extenders. We add ethanol made from corn to gasoline to extend its quantity. But it still takes oil to operate the farm equipment to grow the corn, and oil to transport the corn to the ethanol plant. If oil isn’t around, the biofuel production system comes to a screeching halt.
Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.
If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.
Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.
The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar.
The big increase in the US dollar index came since June 2014 (Figure 3), which coincides with the drop in oil prices. Those countries with low currency prices, including Japan, Europe, Brazil, Argentina, and South Africa, find it expensive to import goods of all kinds, including those made with oil products. This is part of what reduces demand for oil products.
China’s yuan is relatively closely tied to the dollar. The collapse of other currencies relative to the US dollar makes Chinese exports more expensive, and is part of the reason why the Chinese economy has been doing less well recently. There are no doubt other reasons why China’s growth is lower recently, and thus its growth in debt. China is now trying to lower the level of its currency.
Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.
There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.
(Increasing debt is a big part of pumps up “demand” for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect.)
QE doesn’t work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.
As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the “uplift” needed to keep oil prices high enough to cover production costs.
Figure 4. World “liquids production” (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.
The sharp drop in price in 2008 was credit-related, and was only solved when the US initiated its program of QE started in late November 2008. Oil prices began to rise in December 2008. The US has had three periods of QE, with the last of these, QE3, finally tapering down and ending in October 2014. Since QE seems to have been part of the solution that stopped the drop in oil prices in 2008, we should not be surprised if discontinuing QE is contributing to the drop in oil prices now.
Part of the problem seems to be differential effect that happens when other countries are continuing to use QE, but the US not. The US dollar tends to rise, relative to other currencies. This situation contributes to the situation shown in Figure 3.
QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of un-affordability of oil and other commodities.
The problem we have is that, because we live in a finite world, we reach a point where it becomes more expensive to produce commodities of many kinds: oil (deeper wells, fracking), coal (farther from markets, so more transport costs), metals (poorer ore quality), fresh water (desalination needed), and food (more irrigation needed). Wages don’t rise correspondingly, because more and more labor is needed to provide less and less actual benefit, in terms of the commodities produced and goods made from those commodities. Thus, workers find themselves becoming poorer and poorer, in terms of what they can afford to purchase.
QE allows financiers to disguise growing mismatch between what it costs to produce commodities, and what customers can really afford. Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers’ lack of income is disguised by a continued growth in debt.
Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world’s ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.
There are really two different problems that a person can be concerned about:
Peak oil: the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.
Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.
In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.
The timing of collapse may not be immediate. Low oil prices take a while to work their way through the system. It is also possible that the world’s financiers will put off a major collapse for a while longer, through more QE, or more programs related to QE. For example, actually getting money into the hands of customers would seem to be temporarily helpful.
At some point the debt situation will eventually reach a breaking point. One way this could happen is through an increase in interest rates. If this happens, world economic growth is likely to slow greatly. Oil and commodity prices will fall further. Debt defaults will skyrocket. Not only will oil production drop, but production of many other commodities will drop, including natural gas and coal. In such a scenario, the downslope of all energy use is likely to be quite steep, perhaps similar to what is shown in the following chart.
Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.
 There is of course insurance by the FDIC and the PBGC, but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn’t be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008. Insurance would seem to be available, but in practice, would not pay out much.
 LOCs are required when goods are shipped internationally, before payment has actually been made. They offer a guarantee that a buyer will be able to “make good” on his promise to pay for goods when they arrive.
Japan’s central bank will make another quantitative easing, most probably late in the second half of 2014.
MarketWatch reports: “The central bank expanded the size of its Japanese Government Bond purchases to the equivalent of “about 80 trillion yen” ($727 billion) a year, an increase of ¥30 trillion from the previous pace. It said it would also buy longer-dated JGBs, seeking an average remaining maturity of 7-10 years.
The central bank also said it would triple its purchases of exchange-traded funds and real-estate investment trusts.
Concerns about dwindling inflation appeared to drive the move, with the Bank of Japan saying that “on the price front, somewhat weak developments in demand following the [April 1] consumption-tax hike and a substantial decline in crude-oil prices have been exerting downward pressure recently.” ”
As the reality of QE unfolds we do not expect further QE to occur in Japan at this time. If our bullish scenario in the US occurs, this should be enough to continue to pull the Japanese economy along. In the long term however, demographics, debt and lack of deregulation will kill the Japanese economy.
Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.
Which nation with aspirations of global dominance (i.e. hegemony) has these attributes?
1. The nation’s recent prosperity is based on a vast expansion of credit.
2. The nation has 100+ million obese/diabetic citizens.
3. The citizens have little say over central government policies that favor cronies.
4. The nation faces demographic headwinds as the number of people in the workforce declines and the number of retirees balloons.
5. Large regions of the nation suffer from chronic water shortages.
So, which Global Hegemon Is on shifting sands? Hmm, sounds like the U.S. is a match so far…. Let’s add a few more attributes:
6. The nation’s credit expansion has relied on a largely unregulated shadow banking system.
7. The nation is in the midst of an unprecedented housing bubble.
This could still be the U.S., but America’s unprecedented housing bubble popped in 2006–the current bubble is a mere echo bubble. Let’s add a few more attributes:
8. The nation is beset with unprecedented “external” environmental costs as a result of rapid and largely unregulated industrialization.
9. The nation suffers from large-scale desertification.
10. Over half the nation’s monied Elites have either left the nation or plan to leave and transfer their financial wealth overseas.
The only nation with aspirations of global hegemony that fits all these attributes is China. The conventional China Story holds that the 21st century will be China’s century, much like the 20th century was America’s.
But this story overlooks the vast demographic, health, environmental and financial problems built into China’s land, people, and Central-Planning systems of finance and governance.
China’s shadow banking system, which provided the majority of the credit that fueled the current expansion, is imploding:
Not coincidentally, China’s unprecedented housing bubble is also imploding:
China’s system allows only a limited number of options for savings and investment; other than bank accounts that have lost money when real inflation is accounted for, the primary option available to households is real estate. As a consequence, an enormous percentage of the nation’s household wealth has been sunk into empty apartments which act as “savings.”
But a physical flat in a high-rise building is not a financial asset like a savings account: it is a physical object that degrades with time and whose value is set by supply, demand and the availability and cost of credit.
If the building is not maintained properly, elevators break down, pipes start leaking and fixtures corrode, and the value of an unmaintained building drops to zero in terms of habitability within a decade or so.
100 million apartments become an enormous mal-investment of one-time wealth as they slowly become uninhabitable due to poor construction and/or maintenance.
China has been building infrastructure at a break-neck pace for 30 years, and this has created the mindset that almost every structure will be torn down and replaced with something grander every 20 years or so.
As a result of this mindset, very few structures are maintained. Why bother if it will be torn down and replaced a few years down the road?
But tens of millions of apartments cannot replaced every decade or two.
In effect, China has squandered its one-time wealth generated by rapid industrialization, and absorbed the still-uncounted environmental and health costs of this industrialization that must be paid in shortened lives, higher healthcare costs and environmental cleanups for decades to come.
Few promoters of the China Hegemony-in-the-21st-century Story mention the estimated 114 million people in China with diabetes–over one third the population of the U.S.– or the roughly 500 million people in China with elevated blood-sugar levels that put them at risk of developing diabetes or related lifestyle diseases. China ‘Catastrophe’ Hits 114 Million as Diabetes Spreads.
How much of the nation’s surplus wealth will be devoted to fixing the environmental and health costs that are already visible? How much of the wealth is actually phantom wealth that will vanish as the housing bubble based on an unprecedented credit bubble pops?
The China Story based on demographics, health, environmental damage and financial Central Planning is a quite different one from the China will be the global hegemon in the 21st century story. Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.
The man who trained more than 66 countries in open source methods calls for re-invention of intelligence to re-engineer Earth
Robert David Steele, former Marine, CIA case officer, and US co-founder of the US Marine Corps intelligence activity, is a man on a mission. But it’s a mission that frightens the US intelligence establishment to its core.
With 18 years experience working across the US intelligence community, followed by 20 more years in commercial intelligence and training, Steele’s exemplary career has spanned almost all areas of both the clandestine world.
Steele started off as a Marine Corps infantry and intelligence officer. After four years on active duty, he joined the CIA for about a decade before co-founding the Marine Corps Intelligence Activity, where he was deputy director. Widely recognised as the leader of the Open Source Intelligence (OSINT) paradigm, Steele went on to write the handbooks on OSINT for NATO, the US Defense Intelligence Agency and the U.S. Special Operations Forces. In passing, he personally trained 7,500 officers from over 66 countries.
In 1992, despite opposition from the CIA, he obtained Marine Corps permission to organise a landmark international conference on open source intelligence – the paradigm of deriving information to support policy decisions not through secret activities, but from open public sources available to all. The conference was such a success it brought in over 620 attendees from the intelligence world.
But the CIA wasn’t happy, and ensured that Steele was prohibited from running a second conference. The clash prompted him to resign from his position as second-ranking civilian in Marine Corps intelligence, and pursue the open source paradigm elsewhere. He went on to found and head up the Open Source Solutions Network Inc. and later the non-profit Earth Intelligence Network which runs the Public Intelligence Blog.
Steele’s book is a must-read, a powerful yet still pragmatic roadmap to a new civilisational paradigm that simultaneously offers a trenchant, unrelenting critique of the prevailing global order. His interdisciplinary ‘whole systems’ approach dramatically connects up the increasing corruption, inefficiency and unaccountability of the intelligence system and its political and financial masters with escalating inequalities and environmental crises. But he also offers a comprehensive vision of hope that activist networks like Reclaim are implementing today.
“We are at the end of a five-thousand-year-plus historical process during which human society grew in scale while it abandoned the early indigenous wisdom councils and communal decision-making,” he writes in The Open Source Everything Manifesto. “Power was centralised in the hands of increasingly specialised ‘elites’ and ‘experts’ who not only failed to achieve all they promised but used secrecy and the control of information to deceive the public into allowing them to retain power over community resources that they ultimately looted.”
Today’s capitalism, he argues, is inherently predatory and destructive:
“Over the course of the last centuries, the commons was fenced, and everything from agriculture to water was commoditised without regard to the true cost in non-renewable resources. Human beings, who had spent centuries evolving away from slavery, were re-commoditised by the Industrial Era.”
Open source everything, in this context, offers us the chance to build on what we’ve learned through industrialisation, to learn from our mistakes, and catalyse the re-opening of the commons, in the process breaking the grip of defunct power structures and enabling the possibility of prosperity for all.
“Sharing, not secrecy, is the means by which we realise such a lofty destiny as well as create infinite wealth. The wealth of networks, the wealth of knowledge, revolutionary wealth – all can create a nonzero win-win Earth that works for one hundred percent of humanity. This is the ‘utopia’ that Buckminster Fuller foresaw, now within our reach.”
The goal, he concludes, is to reject:
“… concentrated illicitly aggregated and largely phantom wealth in favor of community wealth defined by community knowledge, community sharing of information, and community definition of truth derived in transparency and authenticity, the latter being the ultimate arbiter of shared wealth.”
Despite this unabashedly radical vision, Steele is hugely respected by senior military intelligence experts across the world. As a researcher at the US Army War College’s Strategic Studies Institute, he has authored several monographs advocating the need for open source methods to transform the craft of intelligence. He has lectured to the US State Department and Department of Homeland Security as well as National Security Councils in various countries, and his new book has received accolades from senior intelligence officials across multiple countries including France and Turkey.
Yet he remains an outspoken critic of US intelligence practices and what he sees as their integral role in aggravating rather than ameliorating the world’s greatest threats and challenges.
This week, I had the good fortune of being able to touch base with Steele to dig deeper into his recent analysis of the future of US politics in the context of our accelerating environmental challenges. The first thing I asked him was where he sees things going over the next decade, given his holistic take.
“Properly educated people always appreciate holistic approaches to any challenge. This means that they understand both cause and effect, and intertwined complexities,” he said. “A major part of our problem in the public policy arena is the decline in intelligence with integrity among key politicians and staff at the same time that think tanks and universities and non-governmental organisations have also suffered a similar intellectual diminishment.
“My early graduate education was in the 1970’s when Limits to Growth and World Federalism were the rage. Both sought to achieve an over-view of systemic challenges, but both also suffered from the myth of top-down hubris. What was clear in the 1970s, that has been obscured by political and financial treason in the past half-century, is that everything is connected – what we do in the way of paving over wetlands, or in poisoning ground water ‘inadvertently’ because of our reliance on pesticides and fertilisers that are not subject to the integrity of the ‘Precautionary Principle,’ ultimately leads to climate catastrophes that are acts of man, not acts of god.”
He points me to his tremendous collection of reviews of books on climate change, disease, environmental degradation, peak oil, and water scarcity. “I see five major overlapping threats on the immediate horizon,” he continues. “They are all related: the collapse of complex societies, the acceleration of the Earth’s demise with changes that used to take 10,000 years now taking three or less, predatory or shock capitalism and financial crime out of the City of London and Wall Street, and political corruption at scale, to include the west supporting 42 of 44 dictators. We are close to multiple mass catastrophes.”
What about the claim that the US is on the brink of revolution? “Revolution is overthrow – the complete reversal of the status quo ante. We are at the end of centuries of what Lionel Tiger calls ‘The Manufacture of Evil,’ in which merchant banks led by the City of London have conspired with captive governments to concentrate wealth and commoditise everything including humans. What revolution means in practical terms is that balance has been lost and the status quo ante is unsustainable. There are two ‘stops’ on greed to the nth degree: the first is the carrying capacity of Earth, and the second is human sensibility. We are now at a point where both stops are activating.”
It’s not just the US, he adds. “The preconditions of revolution exist in the UK, and most western countries. The number of active pre-conditions is quite stunning, from elite isolation to concentrated wealth to inadequate socialisation and education, to concentrated land holdings to loss of authority to repression of new technologies especially in relation to energy, to the atrophy of the public sector and spread of corruption, to media dishonesty, to mass unemployment of young men and on and on and on.”
So why isn’t it happening yet?
“Preconditions are not the same as precipitants. We are waiting for our Tunisian fruit seller. The public will endure great repression, especially when most media outlets and schools are actively aiding the repressive meme of ‘you are helpless, this is the order of things.’ When we have a scandal so powerful that it cannot be ignored by the average Briton or American, we will have a revolution that overturns the corrupt political systems in both countries, and perhaps puts many banks out of business. Vaclav Havel calls this ‘The Power of the Powerless.’ One spark, one massive fire.”
But we need more than revolution, in the sense of overthrow, to effect change, surely. How does your manifesto for ‘open source everything’ fit into this? “The west has pursued an industrialisation path that allows for the privatisation of wealth from the commons, along with the criminalisation of commons rights of the public, as well as the externalisation of all true costs. Never mind that fracking produces earthquakes and poisons aquifers – corrupt politicians at local, state or province, and national levels are all too happy to take money for looking the other way. Our entire commercial, diplomatic, and informational systems are now cancerous. When trade treaties have secret sections – or are entirely secret – one can be certain the public is being screwed and the secrecy is an attempt to avoid accountability. Secrecy enables corruption. So also does an inattentive public enable corruption.”
Is this a crisis of capitalism, then? Does capitalism need to end for us to resolve these problems? And if so, how? “Predatory capitalism is based on the privatisation of profit and the externalisation of cost. It is an extension of the fencing of the commons, of enclosures, along with the criminalisation of prior common customs and rights. What we need is a system that fully accounts for all costs. Whether we call that capitalism or not is irrelevant to me. But doing so would fundamentally transform the dynamic of present day capitalism, by making capital open source. For example, and as calculated by my colleague JZ Liszkiewicz, a white cotton T-shirt contains roughly 570 gallons of water, 11 to 29 gallons of fuel, and a number of toxins and emissions including pesticides, diesel exhaust, and heavy metals and other volatile compounds – it also generally includes child labor. Accounting for those costs and their real social, human and environmental impacts has totally different implications for how we should organise production and consumption than current predatory capitalism.”
So what exactly do you mean by open source everything? “We have over 5 billion human brains that are the one infinite resource available to us going forward. Crowd-sourcing and cognitive surplus are two terms of art for the changing power dynamic between those at the top that are ignorant and corrupt, and those across the bottom that are attentive and ethical. The open source ecology is made up of a wide range of opens – open farm technology, open source software, open hardware, open networks, open money, open small business technology, open patents – to name just a few. The key point is that they must all develop together, otherwise the existing system will isolate them into ineffectiveness. Open data is largely worthless unless you have open hardware and open software. Open government demands open cloud and open spectrum, or money will dominate feeds and speeds.”
On 1st May, Steele sent an open letter to US vice president Joe Biden requesting him to consider establishing an Open Source Agency that would transform the operation of the intelligence community, dramatically reduce costs, increasing oversight and accountability, while increasing access to the best possible information to support holistic policy-making. To date, he has received no response.
I’m not particularly surprised. Open source everything pretty much undermines everything the national security state stands for. Why bother even asking vice president Biden to consider it? “The national security state is rooted in secrecy as a means of avoiding accountability. My first book, On Intelligence: Spies and Secrecy in an Open World – which by the way had a foreword from Senator David Boren, the immediate past chairman of the Senate Select Committee for Intelligence – made it quite clear that the national security state is an expensive, ineffective monstrosity that is simply not fit for purpose. In that sense, the national security state is it’s own worst enemy – it’s bound to fail.”
Given his standing as an intelligence expert, Steele’s criticisms of US intelligence excesses are beyond scathing – they are damning. “Most of what is produced through secret methods is not actually intelligence at all. It is simply secret information that is, most of the time, rather generic and therefore not actually very useful for making critical decisions at a government level. The National Security Agency (NSA) has not prevented any terrorist incidents. CIA cannot even get the population of Syria correct and provides no intelligence – decision-support – to most cabinet secretaries, assistant secretaries, and department heads. Indeed General Tony Zinni, when he was commander in chief of the US Central Command as it was at war, is on record as saying that he received, ‘at best,’ a meagre 4% of what he needed to know from secret sources and methods.”
So does open source mean you are calling for abolition of intelligence agencies as we know them, I ask. “I’m a former spy and I believe we still need spies and secrecy, but we need to redirect the vast majority of the funds now spent on secrecy toward savings and narrowly focused endeavors at home. For instance, utterly ruthless counterintelligence against corruption, or horrendous evils like paedophilia.
“Believe it or not, 95% of what we need for ethical evidence-based decision support cannot be obtained through the secret methods of standard intelligence practices. But it can be obtained quite openly and cheaply from academics, civil society, commerce, governments, law enforcement organisations, the media, all militaries, and non-governmental organisations. An Open Source Agency, as I’ve proposed it, would not just meet 95% of our intelligence requirements, it would do the same at all levels of government and carry over by enriching education, commerce, and research – it would create what I called in 1995 a ‘Smart Nation.’
“The whole point of Open Source Everything is to restore public agency. Open Source is the only form of information and information technology that is affordable to the majority, interoperable across all boundaries, and rapidly scalable from local to global without the curse of overhead that proprietary corporations impose.”
It’s clear to me that when Steele talks about intelligence as ‘decision-support,’ he really does intend that we grasp “all information in all languages all the time” – that we do multidisciplinary research spanning centuries into the past as well as into the future. His most intriguing premise is that the 1% are simply not as powerful as they, and we, assume them to be. “The collective buying power of the five billion poor is four times that of the one billion rich according to the late Harvard business thinker Prof C. K. Prahalad – open source everything is about the five billion poor coming together to reclaim their collective wealth and mobilise it to transform their lives. There is zero chance of the revolution being put down. Public agency is emergent, and the ability of the public to literally put any bank or corporation out of business overnight is looming. To paraphrase Abe Lincoln, you cannot screw all of the people all of the time. We’re there. All we lack is a major precipitant – our Tunisian fruit seller. When it happens the revolution will be deep and lasting.”
The Arab spring analogy has its negatives. So far, there really isn’t much to root for. I want to know what’s to stop this revolution from turning into a violent, destructive mess. Steele is characteristically optimistic. “I have struggled with this question. What I see happening is an end to national dictat and the emergence of bottom-up clarity, diversity, integrity, and sustainability. Individual towns across the USA are now nullifying federal and state regulations – for example gag laws on animal cruelty, blanket permissions for fracking. Those such as my colleague Parag Khanna that speak to a new era of city-states are correct in my view. Top down power has failed in a most spectacular manner, and bottom-up consensus power is emergent. ‘Not in my neighborhood’ is beginning to trump ‘Because I say so.’ The one unlimited resource we have on the planet is the human brain – the current strategy of 1% capitalism is failing because it is killing the Golden Goose at multiple levels. Unfortunately, the gap between those with money and power and those who actually know what they are talking about has grown catastrophic. The rich are surrounded by sycophants and pretenders whose continued employment demands that they not question the premises. As Larry Summers lectured Elizabeth Warren, ‘insiders do not criticise insiders.'”
But how can activists actually start moving toward the open source vision now? “For starters, there are eight ‘tribes’ that among them can bring together all relevant information: academia, civil society including labor unions and religions, commerce especially small business, government especially local, law enforcement, media, military, and non-government/non-profit. At every level from local to global, across every mission area, we need to create stewardship councils integrating personalities and information from all eight tribes. We don’t need to wait around for someone else to get started. All of us who recognise the vitality of this possibility can begin creating these new grassroots structures from the bottom-up, right now.”
So how does open source everything have the potential to ‘re-engineer the Earth’? For me, this is the most important question, and Steele’s answer is inspiring. “Open Source Everything overturns top-down ‘because I say so at the point of a gun’ power. Open Source Everything makes truth rather than violence the currency of power. Open Source Everything demands that true cost economics and the indigenous concept of ‘seventh generation thinking’ – how will this affect society 200 years ahead – become central. Most of our problems today can be traced to the ascendance of unilateral militarism, virtual colonialism, and predatory capitalism, all based on force and lies and encroachment on the commons. The national security state works for the City of London and Wall Street – both are about to be toppled by a combination of Eastern alternative banking and alternative international development capabilities, and individuals who recognise that they have the power to pull their money out of the banks and not buy the consumer goods that subsidise corruption and the concentration of wealth. The opportunity to take back the commons for the benefit of humanity as a whole is open – here and now.”
For Steele, the open source revolution is inevitable, simply because the demise of the system presided over by the 1% cannot be stopped – and because the alternatives to reclaiming the commons are too dismal to contemplate. We have no choice but to step up.
“My motto, a play on the CIA motto that is disgraced every day, is ‘the truth at any cost lowers all other costs'”, he tells me. “Others wiser than I have pointed out that nature bats last. We are at the end of an era in which lies can be used to steal from the public and the commons. We are at the beginning of an era in which truth in public service can restore us all to a state of grace.”
It’s the great taboo of our age – and the inability to discuss the pursuit of perpetual growth will prove humanity’s undoing
Let us imagine that in 3030BC the total possessions of the people of Egypt filled one cubic metre. Let us propose that these possessions grew by 4.5% a year. How big would that stash have been by the Battle of Actium in 30BC? This is the calculation performed by the investment banker Jeremy Grantham.
Go on, take a guess. Ten times the size of the pyramids? All the sand in the Sahara? The Atlantic ocean? The volume of the planet? A little more? It’s 2.5 billion billion solar systems. It does not take you long, pondering this outcome, to reach the paradoxical position that salvation lies in collapse.
To succeed is to destroy ourselves. To fail is to destroy ourselves. That is the bind we have created. Ignore if you must climate change, biodiversity collapse, the depletion of water, soil, minerals, oil; even if all these issues miraculously vanished, the mathematics of compound growth make continuity impossible.
Economic growth is an artefact of the use of fossil fuels. Before large amounts of coal were extracted, every upswing in industrial production would be met with a downswing in agricultural production, as the charcoal or horse power required by industry reduced the land available for growing food. Every prior industrial revolution collapsed, as growth could not be sustained. But coal broke this cycle and enabled – for a few hundred years – the phenomenon we now call sustained growth.
It was neither capitalism nor communism that made possible the progress and pathologies (total war, the unprecedented concentration of global wealth, planetary destruction) of the modern age. It was coal, followed by oil and gas. The meta-trend, the mother narrative, is carbon-fuelled expansion. Our ideologies are mere subplots. Now, with the accessible reserves exhausted, we must ransack the hidden corners of the planet to sustain our impossible proposition.
The trajectory of compound growth shows that the scouring of the planet has only just begun. As the volume of the global economy expands, everywhere that contains something concentrated, unusual, precious, will be sought out and exploited, its resources extracted and dispersed, the world’s diverse and differentiated marvels reduced to the same grey stubble.
Some people try to solve the impossible equation with the myth of dematerialisation: the claim that as processes become more efficient and gadgets are miniaturised, we use, in aggregate, fewer materials. There is no sign that this is happening. Iron ore production has risen 180% in 10 years. The trade body Forest Industries tells us that “global paper consumption is at a record high level and it will continue to grow”. If, in the digital age, we won’t reduce even our consumption of paper, what hope is there for other commodities?
Look at the lives of the super-rich, who set the pace for global consumption. Are their yachts getting smaller? Their houses? Their artworks? Their purchase of rare woods, rare fish, rare stone? Those with the means buy ever bigger houses to store the growing stash of stuff they will not live long enough to use. By unremarked accretions, ever more of the surface of the planet is used to extract, manufacture and store things we don’t need. Perhaps it’s unsurprising that fantasies about colonising space – which tell us we can export our problems instead of solving them – have resurfaced.
As the philosopher Michael Rowan points out, the inevitabilities of compound growth mean that if last year’s predicted global growth rate for 2014 (3.1%) is sustained, even if we miraculously reduced the consumption of raw materials by 90%, we delay the inevitable by just 75 years. Efficiency solves nothing while growth continues.
The inescapable failure of a society built upon growth and its destruction of the Earth’s living systems are the overwhelming facts of our existence. As a result, they are mentioned almost nowhere. They are the 21st century’s great taboo, the subjects guaranteed to alienate your friends and neighbours. We live as if trapped inside a Sunday supplement: obsessed with fame, fashion and the three dreary staples of middle-class conversation: recipes, renovations and resorts. Anything but the topic that demands our attention.
Statements of the bleeding obvious, the outcomes of basic arithmetic, are treated as exotic and unpardonable distractions, while the impossible proposition by which we live is regarded as so sane and normal and unremarkable that it isn’t worthy of mention. That’s how you measure the depth of this problem: by our inability even to discuss it.
Last week’s European Central Bank decision to lower their interest rate to -0.1% has the effect of forcing banks to lend funds or be penalized for holding cash. This is another attempt to stimulate economic activity and alleviate the fear held in the Euro Zone that the EU was at risk of slipping into a deflationary spiral.
At the same time the ECB also announced it will cease sterilizing it’s security asset purchases in managing liquidity. Until now, when the ECB issued cash by buying government bonds in the market it would, at the same time, make a corresponding sale of bond securities in a process that effectively had a net nil effect on liquidity to the economy. The ECB at the same time however was able to sterilize it’s bond purchases and secure the quality of its portfolio.
The impact of these two decisions is to release the ECB in order that it can now issue new money (read print money) to the economy. It has embarked on the same money printing process used by all other major central banks.
The consequence of this is to bring the risk of price inflation to the EU and engage the EU in a currency war with all other major economies as their central banks duel to depreciate their currency against the others. What can possibly go wrong?
Simon Black from SovereignMan writes about the formation of nations and how the rise of independence/secessionist movements and nationalism in places like the UK and EU are a reflection of the changing zeitgeist of the times:
Did you ever hear the urban legend about how Winston Churchill carved up a map of Africa in a drunken stupor?
There’s actually no evidence to support this assertion.
But what is true is that European imperialists conjured entire nations in Africa out of thin air from their palaces in Brussels, Paris, and London.
And all of this was done without any regard for ethnic, linguistic, religious, and historical divisions among the various tribes that inhabited Africa.
But what few people realize is that Europe is no different.
Think about it—the United Kingdom consists of England, Wales, Scotland, and Northern Ireland lumped together in a political union.
Each is entirely different from the others. And secessionist movements are alive and well.
Scotland will hold a referendum about its independence in September. And the troubles in Northern Ireland have plagued the region for decades.
Belgium is a completely artificial country, and the Flemish are actively pursuing independence from the Walloons.
In the late 19th century, Germany and Italy were both unified into modern countries from diverse fiefdoms and city-states with strong regional identities.
Those regional identities are still present today. Just a few weeks ago, a vote was held in Venice over independence for the wider region.
The Basque separatist movements in Spain are stronger than ever. The Balkans were an absurd experiment. I could go on and on.
Europe is the best example that borders and countries are completely arbitrary.
They are created to serve one purpose—consolidating authority over a piece of land and the people living upon it.
Today just happens to be “Europe Day”, a holiday in which Europeans are supposed to commemorate the Schuman Declaration that jump started today’s European Union.
This is a continent that has a long history of constantly going to war with itself.
They slapped lines on a map, formed some new countries, and expected that everything would be OK.
Then they made those lines even broader when they consolidated everything into the European Union. And EU politicians are trying to make things even bigger.
History shows that when economic times are good, people are happy about unity.
But when times are tough as they are now, divisions start creeping up. People look around and say “this system isn’t working”.
They demand change. Sometimes violently. And we would be foolish to presume that this time is any different.
The immediate avenue for this conflict to play out is still through peaceful means—referendums and the rise of nationalist and Eurosceptic political parties.
But it’s clear that the trend is to get smaller, not bigger. And for the system to change entirely.
Like feudalism before it, the nation state is a failed experiment that will ultimately be replaced. It’s already happening.
Many places around the world from Panama to Puerto Rico to Chile are actively competing for productive residents.
They welcome foreigners and provide incentives to live and invest there, instead of treating people like milk cows.
Modern technology and transportation make geography almost irrelevant.
You don’t need to be tied to a single piece of land anymore, and certainly not in a country conjured by politicians.
There’s a world of opportunity out there. And every part of your life can ‘live’ in the best place for it.
For example, you and your family can live in a beautiful place like Bali, which may have the best lifestyle for you.
But your savings can ‘live’ in Hong Kong which has strong, stable banks. And your investments can ‘live’ in South America to capitalize on farmland deals.
All of this is already possible today. And soon, as more people realize the opportunities out there, it’s going to be the norm for everyone.
Editors Note: It is becoming increasingly apparent that large scale 20-21st century democracy is failing. One potential solution which is already floating about is the birth of smaller democratic states or communities similar to nation cities like medieval Venice and Antwerp, modern Singapore, Hong Kong and others.
Emerging Events predicts we will see the emergence of smaller self regulated communities seeking independence and freedom from large state authoritarianism in the years ahead. This will probably occur on the back of economic breakdown and the political chaos resulting. Whether these experiments in human self realization can succeed will be fascinating but reflects the innate desire by humans to live free and self determined lives.
The crisis happening in Ukraine is not the crisis you think it is. In global economics and politics, the Ukraine situation will be seen as a tiny blip in a few short years. Fears that it would escalate into a full blown crisis with serious repercussions for the western world have been blown out of proportion painful as it may be to the Ukrainian people. The social mood of the times suggest that events in Ukraine and between Russia and the US and EU will blow over. Social mood is upbeat and compromise and forbearance are the order of this time.
Unfortunately for the Ukrainian people Russia is re-establishing its boundaries. Distance is its security. From the Ukrainian border to Moscow is only 300 kilometers. Russia simply cannot afford to own the Ukraine as it did after WW2. Having access to warm water ports and the Mediterranean and establishing a pro-Russian influence in the Ukraine satisfies Russian imperialism on it’s western border.
We see the Ukraine situation as now having largely played out and and attention will soon divert elsewhere. Russian stock market prices are heavily discounted as well as it’s currency and are probably a good buy looking for a strong bounce.
Updating the main theme of this website we showed in our last lead article ‘A Generation of Correction’ how the big picture view had resolved itself into two clear scenarios. We painted the broad brush strokes showing those scenarios. Now the picture has advanced sufficiently enough to reveal the direction ahead.
To recap firstly, we are witnessing in our lifetime the completion of large scale cycles of human endeavor and activity with the attendant dislocation and reallocation of social, economic and political activity. The article does not attempt to make trading or investment recommendations, however an understanding of the broad brush strokes both economically and politically may serve to enhance your perspective on what emerges next. The scale of forces at work in societies and economies is so huge that the current social, economic and political drama is taking decades to unfold. This is the topping and completion process of an economic cycle that has been going on for over 200 hundred years. By the time it is finished, it may well have spanned generations of people. On a historical note, we are witnessing the completion of the growth phase of the industrial revolution that began around 1783-5. These cycles affect all industrialized nations including China which joined the industrial revolution much later. Given the length of time involved we anticipate this having a generational impact and may not be completed for decades to come.
We had seen our previous forecast, ‘The Five Act Drama’, invalidated as the so called economic recovery since 2009 continued. The phase 2000 to 2009 which included the dotcom bubble collapse, the post 9/11 recovery and Iraq War followed by the subprime mortgage debacle were all part of a major degree of correction occurring in the late stages of the Industrial Revolution Cycle that began around 1785. We had concluded that the logical outcome of the economic peak in 2007 and the following financial crisis (GFC), that a major downturn with attendant declines in asset values and income levels was underway and that this process would continue into 2016 and possibly as late as 2024. The tenacious strength of the recovery since the GFC surprised us but also revealed alternative cyclic viewpoints. The ‘animal spirits’ that drove bull markets and buoyed economic activity from the 80’s to 2000 along withthe animal spirits of the central bankers whose hubris has now reached giddying heights illustrates the scope of those bull markets and gives rise to what is happening now with a clear scenario emerging.
In the first quarter of 2014 we observed stock markets pushing to new highs. At the same time, the massive US Federal Reserve intervention known as quantitative easing (QE) had started to be wound back. Unemployment levels have continued to fall modestly and economic activity has continued to sputter along in the US and other liberal democratic nations. The effect of QE has had the effect of fuelling asset prices with only marginal improvement in economic activity. The effect of not allowing spontaneous ordering to take place with the required liquidation of malinvestments of the last 20-30 years has been to stall the potential of a recovery that is founded on real growth and productivity.
Realignments normally occur with structural economic or political realisations and to this end there is no shortage of potential factors. These include the potential for significantly higher bond interest rates, political scandal, general economic failure, student loans, China, Europe, etc. Despite all the worries of Main Street underperformance compared to stock and commodity markets, it appears QE is having the effect of distorting all relationships between markets and their ability to fairly price. Ultimately this too will result in unintended consequences and only prolongs the inevitable. One result will be the utter demolition of the myth that is Keynesian economics.
Our previous scenario was based on the assumption that the beginning of the correction (and completion of the growth phase) of the Industrial Revolution Cycle began in 2000 with the bursting of the Dotcom bubble. Since then asset values have effectively moved sideways to higher in a broad band and currently stand at the upper levels of those bands. In real terms however, asset values are broadly lower reflecting the massive money printing that has occurred. This is also reflected in sputtering global economic activity and rising political and social frustration about the political-economic situation. From another perspective this may be seen as the result of 40 years of fiat money and the economic and social dislocation that occurs when money has no store of value.
At time of writing, US money supply growth figures indicate the potential in 2014 for a mild correction of asset values due to weakening US M2 money supply growth. In effect the US Federal Reserve has failed to transfer money printing to Main Street as banks still remain resistant to large scale lending. This is in part due to distorted interest rates making it unprofitable and risky to lend.This mild correction is merely a pause in the asset appreciation we have witnessed over the last 5 years caused by QE programs. Any excessive fall in asset values will be met by significant QE stimulus in the short term.
The fact is, the largest investment bubble in the history of humankind is unfolding right on schedule. By schedule we don’t mean time dependent but that what is unfolding is form dependent. All economic bubbles return to the starting point from whence they came. The massive money printing undertaken by central banks, the dislocation of market pricing shows a growing divergence between stocks for example and the rest of the stock market and the relentless chase for yield. Whilst divergence is indicative of major stock market tops, the topping phase can go on for a long time. We have already seen the breaking from the uptrend of many markets including gold and silver, base metals, interest rates and currencies. Human history is littered with examples of failed nations, whose prosperity and future was cut short by depreciation of money values. What makes this era any different? The modern fiat money experiment has been going on for a mere 42 years. The economic system of industrialized nations resets or reforms roughly every 40 years and so it appears we are right on time for the next reset. Given the culmination of history, cycles, accumulation of knowledge and human hubris it appears technology changes but the nature of humankind does not.
One aspect worth considering is the level of political hubris maintained by many liberal democratic countries whose politicians firmly believe that they have the skill and tools necessary to engineer recovery. Until this hubris is totally wiped away along with the hopes and dreams of the people represented, there is not much scope for real change at a societal, political or economic level. Indeed one factor contributing to the economic malaise is the inability of most markets to clear out the malinvestment most industrialized nations suffer. Typical of this is the gridlock in the US political system where entrenched self-interest stops any real or meaningful change. The weight of US economic recovery has been placed firmly on the shoulders of the Fed. US politicians are incapable of undertaking any real economic restructuring and this has the effect of prolonging the contraction phase of the cycle. Meanwhile the hubris continues, restructuring remains on the side-lines and most industrial nations face high unemployment and debt levels, unaffordable social security programs and large ageing populations starting their transition to retirement.
Interestingly, in this next phase, all of this will come to a head. In the last cyclic correction of the same magnitude – 1710 to 1785, great things were achieved with the advance of the sciences, arts and many new inventions and discoveries. That phase concluded however with the French Revolution and Napoleonic Wars. This next phase will end the same way as humanity forgets itself and its past. It will also be accompanied by many new inventions, discoveries and advances along with the wars and other upheavals. Like all plays (the world is certainly a stage), this year 2014/15 is where the drama reveals the direction and thrust of things to come for the next 20 – 30 years or so.
In effect the recovery from the GFC is the last gasp of the fiat money boom that has been in effect since Nixon left the gold standard. Economic growth since the late sixties has been largely sponsored by credit that has left the liberal democratic economies bloated with debt, regulation and fiat money. To see how this pans out graphically, refer to the accompanying chart. The recovery since 2009 has been boosted by massive cash injections (read printing) of money into the industrialised economies boosting asset prices (read inflationary) as Keynesian orthodoxy suggests boosting asset prices will eventually lead to a follow through in consumer spending. Industrial nation governments are doing their best to boost spending in the finest tradition of neo-Keynes. The printing however is having the harmful effect of dislocating markets and the traditional matrix of pricing set by the markets is breaking down, together with a worrying disconnect between Wall St (stock market prices) and Main St (economic activity, employment). Anticipate the main buzzword to be stagflation through 2015. Commodity markets are spiking up, interest rates are starting to rise and yet, in spite of that, stock markets continue to climb a wall of worries and this gives rise to our predictions.
Our scenario suggests that quality performing stocks, commodities and real estate will continue to climb even as incomes decline and other assets peel away. Translating that into index levels implies, for example seeing the DJIA advancing to new highs from late 2014 onwards, in excess of 20,000 whilst the S&P500 reaches towards 2000-2200. Given the QE printing stimulus to asset prices over the last few years, such a move could be characterized by a final exponential rise followed by a collapse of these two indexes any time from late 2015 onwards. Such a top would mark the completion of the entire Industrial Revolution upward phase of the cycle and indicate we are entering into a prolonged period of economic, social and political stagnation and upheaval. Whilst these highs are being made the discrepancy between Wall Street and Main Street will be acutely emphasized with further deterioration of the economic, social and political fabric of the industrialized nations. At the same time, this may well be accompanied by dramatic movements in interest rates, commodities, currencies, gold and silver. The upward spike in these markets is the result of the massive QE programs flowing through to asset prices. You can also anticipate the emerging market economies to suffer as more cash gets sucked into the leading economies – the US, UK, Germany and Japan. Japan will be forced to make another QE intervention later in 2014.
In economic history this present phase may well be a replication of the 1921-29 phase also known as the “Roaring Twenties”. This culminated of course in the Crash of 1929 and we are suggesting that the circumstances are building for a repeat performance. The scale and scope however of the coming crash still years away will dwarf the events of 1929-33. Using the stock market as a barometer or benchmark of prosperity is a recent development by the US Federal Reserve and illustrates how far we have traveled from orthodox economics in justifying the level of intervention by government and the Fed. The severity, speed and relentlessness of the events following will shock. For this scenario to unfold there needs to be a further consolidation of stock and commodity markets during 2014 before the final advance begins. We believe however that the time scale to complete the End Game is small, measured in, at most, a few years, before the next major sell off phase.
To summarize, let us be very clear about what is happening or about to happen in the final phase of the End Game:
·Expect stock markets to correct over most of 2014 before beginning an upward surge leading to an exponential rise in stock, commodity, gold and silver prices. For example anticipate the DJIA correcting to 13784 – 15341 and not below 12876.
·Anticipate central banks to respond to this correction by escalating their QE programs.
·Anticipate inflation to break out in an unprecedented way especially in the US, UK and Japan and central banks will be unable to contain it. At the same time higher than normal unemployment and stagnant economic activity will prevail. This is called stagflation.
·Expect credit markets will seek to re-price themselves in light of emergent inflation creating a liquidity trap for central banks.
·Anticipate the US, Japan, UK and German stock markets to benefit at the expense of emerging markets as cash gets sucked from the periphery to the centre.
·Expect a collapse in stock and commodity prices followed by economic contraction where both inflation and high unemployment are experienced at the same time after this spike in stock and commodity markets prices.
·Anticipate ongoing social and political dislocation in many countries.
Near the peak or shortly after it will also be possible to predict more accurately how long the ensuing economic contraction will last. Suffice to say, that from now ‘til anytime out to 2030 we are in for some tough times punctuated with attempts at recovery. By then the writing will be clear for everyone to see. And of course the generation of correction will not merely be confined to asset prices and the vagaries of fiat money and bad economics, but also to societies and politics both domestic and geo-political, where a generation of people will learn about long forgotten natural law and how it applies to human behavior. Social mood will have become dark and this will also be expressed right through music, the arts, fashion, crime, political and social mood and drama. The last phase will set the stage for a new beginning for people from which a new and sustained economic recovery will slowly begin. By the time that moment has arrived however, the nature of our societies and the way we relate with people and between nations will have changed. The wrangling about why it had to happen will be well underway.
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We have updated the main theme of the Emerging Events website. Click on the title to read how larger trends and cycles are moving to complete within the next few years and the implications this brings to to people and nations ……… Find it here: http://www.emergingevents.com/?p=2761Continue reading →
If China becomes the world’s most powerful country, it won’t be satisfied being America’s number two.
Over at The Week, Think Progress’s Zack Beauchamp has a provocative piece arguing that “China is not replacing the United States as the global hegemon. And it never will.” Specifically, Beauchamp posits that “China faces too many internal problems and regional rivals to ever make a real play for global leadership. And even if Beijing could take the global leadership mantle soon, it wouldn’t. China wants to play inside the existing global order’s rules, not change them.”
The piece is well-argued and certainly worth a read. In particular, Beauchamp does us a service in combating the myth of the inevitability of China’s rise. He usefully points out that China’s economy faces a multitude of challenges that may prevent it from reaching the potential many currently foresee. He also points out that China faces powerful neighbors that won’t stand by idly if Beijing seeks to construct a new regional order, much less a global one.
Still, on balance, I think Beauchamp’s piece does more to confuse than to inform. The first issue is that even though he discusses the regional balance of power in the piece, his overall argument is that China will not be capable of replacing the United States as the “global hegemon.” Unfortunately, there are many who would claim that America is a global hegemon. However, that argument is preposterous under any reasonable definition of hegemony. It is true that in the post-Cold War (if not earlier) the U.S. has been the only power capable of projecting military power in any region of the world. But this has not allowed it to dictate the regional order of every continent as it largely can in the Western Hemisphere.
Moreover, even if America really is a global hegemon, this would just make it more unlikely that any rising power could replace it as a global hegemon. After all, America’s primacy in the post-Cold War era was only made possible because no other great power existed. Since China’s rise won’t stop the U.S. from being a great power, unless the two go to war and China wins, Beijing’s relative power will be far less than America’s at the end of the Cold War. And of course, America’s relative power will also be far less than what it enjoyed in 1991.
There are other issues with Beauchamp’s analysis of China’s relative power. For example, he notes that “one analysis suggests China’s GDP may not surpass America’s until the 2100s.” To begin with, while possible, this view seems to be decidedly in the minority among serious economists. Even if China’s economy crashes before 2018—around the time many believe China’s absolute GDP will surpass America’s—it still seems likely that it will find a more sustainable economic model before 80 years pass. And given that China has about four times as many people as the United States, it could easily surpass the U.S. in absolute GDP terms in less than 80 years.
But even if China’s economy doesn’t surpass the United States, this hardly suggests it won’t present a major strategic challenge to Washington. Consider that, according to Paul Kennedy , in 1938 Japan’s share of world manufacturing was just 3.8 percent while America’s was 28.7 percent and the U.K.’s was 9.2 percent. A year earlier, according to the same source, the U.S. national income was $68 billion while the British Empire’s was $22 billion. Japan’s, comparison, was just $4 billion. Yet, in the initial battles of the Pacific War Japan decisively defeated the U.S., England, and the Dutch across the region.
Similarly, the Soviet Union’s GDP was only ever about half as large as the United States, and many times much less than that. This doesn’t mean that America and its allies didn’t face a real strategic threat in the Soviet Union during the Cold War.
The more egregious part of Beauchamp’s case, however, is his contention that China does not seek to challenge the U.S.-led order. In his own words: “Even if this economic gloom and doom is wrong, and China really is destined for a prosperous future, there’s one simple reason China will never displace America as global leader: It doesn’t want to.”
He goes on to explain: “China is content to let the United States and its allies keep the sea lanes open and free ride off of their efforts. A powerful China, in other words, would most likely to be happy to pursue its own interests inside the existing global order rather than supplanting it.”
Beauchamp isn’t alone in holding this view, which has many faithful adherents in the West. In fact, not too long ago it was the running consensus in the United States, as well as the foundation of U.S. China policy in both the George W. Bush and the early Barack Obama administrations.
One place where this view has not been very popular is in China itself. Indeed, far from being happy to allow the U.S. Navy to keep its sea lanes open, Chinese leaders have been warning about their country’s “Malacca Dilemma” for over a decade now. They have also been actively trying to reduce America’s ability to cut off China’s energy and raw material imports. As they should be—it would be irresponsible for China’s leaders to allow their country’s economy to be at the mercy of a potential competitor if they have the realistic opportunity to allow China to secure its own shipping lanes. This is doubly true in light of the fact that the U.S. has been known to impose sanctions on many countries, including China itself after Tiananmen Square.
But the issue goes much deeper than that. In fact, it goes to the heart of the Chinese Communist Party’s legitimacy at home. At its core, the CCP’s claim to power is based on its ability to restore China to its past glory. Again, neither China nor its leaders have ever made any secret about this. For example, the CCP has always emphasized that it saved China from its “century of humiliation” at the hands of the Western and Japanese colonial powers.
Similarly, since coming to power in 2012, Xi Jinping has repeatedly stressed that, because of the CCP’s rule, the “great rejuvenation of the Chinese nation” is now within China’s grasp.As Zheng Wang points out , the term “rejuvenation is deeply rooted in Chinese history and the national experience.”
“As proud citizens of the ‘Middle Kingdom’ the Chinese feel a strong sense of chosenness and are extremely proud of their ancient and modern achievements. This pride is tempered, however, by the lasting trauma seared into the national conscious as a result of the country’s humiliating experiences at the hands of Western and Japanese imperialism. After suffering a humiliating decline in national strength and status, the Chinese people are unwavering in their commitment to return China to its natural state of glory, thereby achieving the Chinese Dream.”
Thus, the CCP would lose all its legitimacy at home if it voluntarily subordinated China to the United States despite being the more powerful country. The CCP treasures its grip on power above all else, and therefore it should come as no surprise that it has already ruled out taking this risk.