Despite their current animosities, Russia and the U.S. need each other to maintain influence in Eastern Europe. For different reasons, neither side wants the crisis to continue, and each has a different read on the situation.
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Despite their current animosities, Russia and the U.S. need each other to maintain influence in Eastern Europe. For different reasons, neither side wants the crisis to continue, and each has a different read on the situation.
Despite their current animosities, Russia and the U.S. need each other to maintain influence in Eastern Europe. For different reasons, neither side wants the crisis to continue, and each has a different read on the situation.
During the Cold War, U.S. secretaries of state and Soviet foreign ministers routinely negotiated the outcome of crises and the fate of countries. It has been a long time since such talks have occurred, but last week a feeling of deja vu overcame me. Americans and Russians negotiated over everyone’s head to find a way to defuse the crisis in Ukraine and, in the course of that, shape its fate.
During the talks, U.S. President Barack Obama made it clear that Washington has no intention of expanding NATO into either Ukraine or Georgia. The Russians have stated that they have no intention of any further military operations in Ukraine. Conversations between Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State John Kerry have been extensive and ongoing. For different reasons, neither side wants the crisis to continue, and each has a different read on the situation.
The Russians are convinced that the uprising in Kiev was fomented by Western intelligence services supporting nongovernmental organizations and that without this, the demonstrations would have died out and the government would have survived. This is not a new narrative on the Russians’ part. They also claimed that the Orange Revolution had the same roots. The West denies this. What is important is that the Russians believe this. That means that they believe that Western intelligence has the ability to destabilize Ukraine and potentially other countries in the Russian sphere of influence, or even Russia itself. This makes the Russians wary of U.S. power.
The Russians also are not convinced that they have to do anything. Apart from their theory on Western intelligence, they know that the Ukrainians are fractious and that mounting an uprising is very different than governing. The Russians have raised the price of natural gas by 80 percent for Ukraine, and the International Monetary Fund’s bailout of Ukrainian sovereign debt carries with it substantial social and economic pain. As this pain sets in this summer, and the romantic recollection of the uprising fades, the Russians expect a backlash against the West and also will use their own influence, overt and covert, to shape the Ukrainian government. Seizing eastern Ukraine would cut against this strategy. The Russians want the pro-Russian regions voting in Ukrainian elections, sending a strong opposition to Kiev. Slicing off all or part of eastern Ukraine would be irrational.
Other options for the Russians are not inviting. There has been talk of action in Moldova from Transdniestria. But while it is possible for Russian forces there to act in Moldova, supplies for the region run through Ukraine. In the event of a conflict, the Russians must assume that the Ukrainians would deny access. The Russians could possibly force their way in, but then a measured action in Moldova would result in an invasion of Ukraine — and put the Russians back where they started.
Action in the Baltics is possible; the Kremlin could encourage Russian minorities to go into the streets. But the Baltics are in NATO, and the response would be unpredictable. The Russians want to hold their sphere of influence in Ukraine without breaking commercial and political ties with Europe, particularly with Germany. Russian troops moving into the Baltics would challenge Russia’s relationship with Europe.
Negotiations to relieve the crisis make sense for the Russians because of the risks involved in potential actions and because they think they can recover their influence in Ukraine after the economic crunch hits and they begin doling out cash to ease the pain.
The United States sees the Russians as having two levers. Militarily, the Russians are stronger than the Americans in their region. The United States had no practical military options in Crimea, just as they had none in Georgia in 2008. The United States would take months to build up forces in the event of a major conflict in Eurasia. Preparation for Desert Storm took six months, and the invasion of Iraq in 2003 took similar preparation. With such a time frame the Russians would have achieved their aims and the only option the Americans would have would be an impossible one: mounting an invasion of Russian-held territory. The Americans do not want the Russians to exercise military options, because it would reveal the U.S. inability to mount a timely response. It would also reveal weaknesses in NATO.
The Americans also do not want to test the Germans since they don’t know which way Berlin will move. In a sense, the Germans began the crisis by confronting the Ukrainians’ refusal to proceed with an EU process and by supporting one of the leaders of the uprising both before and after the protests. But since then, the Germans have fallen increasingly quiet and the person they supported, Vitali Klitschko, has dropped out of the race for the Ukrainian presidency. The Germans have pulled back.
The Germans do not want a little Cold War to break out. Constant conflict to their east would exacerbate the European Union’s instability and could force Germany into more assertive actions that it really does not want to undertake. Berlin is very busy trying to stabilize the European Union and hold together Southern and Central Europe in the face of massive economic dislocation and the emergence of an increasingly visible radical right. It does not need a duel with Russia. The Germans also receive a third of their energy from Russia. This is of mutual benefit, but the Germans are not certain that Russia will see the mutual benefits during a crisis. It is a risk the Germans cannot afford to take.
If Germany is cautious, however the passions in the region flow, the Central Europeans must be cautious as well. Poland cannot simply disregard Germany, for example. The United States might create bilateral relations in the region, as I suggested would happen in due course, but for the moment, the Americans are not ready to act at all, let alone in a region where two powers — Russia and Germany — might oppose American action.
Washington, like Moscow, has limited options. Even assuming the Russian claim about U.S. influence via nongovernmental organizations is true, they have played that card and it will be difficult to play again as austerity takes hold. Therefore, the latest events are logical. The Russians have turned to the Americans to discuss easing the crisis, asking for the creation of a federation in Ukraine, and there have been suggestions of monitors being deployed as well.
What is most interesting in this is that with the next act being played out, the Russians and Americans have reached out to each other. The Russians have talked to the Europeans, of course, but as discussions reach the stage of defining the future and options, Lavrov calls Kerry and Kerry answers the phone.
This tells us something important on how the world works. I have laid out the weakness of both countries, but even in the face of this weakness, the Russians know that they cannot extract themselves from the crisis without American cooperation, and the United States understands that it will need to deal with the Russians and cannot simply impose an outcome as it sometimes did in the region in the 1990s.
Part of this might be habits learned in the Cold War. But it is more than that. If the Russians want to reach a solution to the Ukrainian problem that protects their national interests without forcing them beyond a level of risk they consider acceptable, the only country they can talk to is the United States. There is no single figure in Europe who speaks for the European states on a matter of this importance. The British speak for the British, the French for the French, the Germans for the Germans and the Poles for the Poles. In negotiating with the Europeans, you must first allow the Europeans to negotiate among themselves. After negotiations, individual countries — or perhaps the European Union — might, for example, send monitors. But Europe is an abstraction when it comes to power politics.
The Russians called the Americans because they understood that whatever the weakness of the United States at this moment and in this place, the potential power of the United States is substantially greater than theirs. On a matter of such significance to the Russians, failing to deal with the United States would be dangerous, and dealing with them first would be the best path to solving the problem.
A U.S.-Russian agreement on defusing the crisis likely would bring the Germans and the rest into the deal. Germany wants a solution that does not disrupt relations with Russia and does not strain relations with Central Europe. The Germans need good relations with the Central Europeans in the context of the European Union. The Americans want good relations, but have little dependence on Central Europe at the moment. Thus, the Americans potentially can give more than the Europeans, even if the Europeans could have organized themselves to negotiate.
Finally, the United States has global interests that the Russians can affect. Iran is the most obvious one. Thus, the Russians can link issues in Ukraine to issues in Iran to extract a better deal with the United States. A negotiation with the United States has a minimal economic component and maximum political and military components. There are places where the United States wants Russian help on these sorts of issues. They can deal.
Most important, the United States is not clear on what it wants from the Russians. In part it wants to create a constitutional democracy in Ukraine. The Russians actually do not object to that so long as Ukraine does not join NATO or the European Union, but the Russians are also aware that building a constitutional democracy in Ukraine is a vast and possibly futile undertaking. They know that the government is built on dangerously shifting economic and social sands. There are parts of the U.S. government that are concerned with Russia emerging as a regional hegemon, and there are parts of the U.S. government still obsessed with the Middle East that see the Russians as challengers in the region, while others see them as potential partners.
As sometimes happens in the United States, there is complex ideological and institutional diversity. The State Department and Defense Department rarely see anything the same way, and different offices of each have competing views, and then there is Congress. That makes the United States in some ways as difficult to deal with as the Europeans. But it also opens opportunities for manipulation in the course of the negotiation.
Still, in cases of the highest national significance, whatever the diversity in views, in the end the president or some other dominant figure can speak authoritatively. In this case it appears to be Kerry who, buffeted by the divergent views on human rights and power politics, can still speak for the only power that can enter into an agreement and create the coalition in Europe and in Kiev to accept the agreement.
Russia suffered a massive reversal after former Ukrainian President Viktor Yanukovich fell. It acted not so much to reverse the defeat as to shape perceptions of its power. Moscow’s power is real but insufficient to directly reverse events by occupying Kiev. It will need to use Ukraine’s economic weakness, political fragmentation and time to try to reassert its position. In order to do this, it needs a negotiated solution that it hopes will be superseded by events. To have that solution, Moscow needs a significant negotiating partner. The United States is the only one available. And for all its complexity and oddities, if it can be persuaded to act, it alone can provide the stable platform that Russia now needs.
Related: Russia vs. The US: Superpowers Bluff Over Ukraine?
Related: Why Russia Fears ‘Losing’ Ukraine
Related: Russia Looks East As Relations With West Deteriorate
The United States is not ready to concede that it has entered a period during which competition with Russia will be a defining element in its foreign policy. Its internal logic is not focused on Russia, nor are internal bureaucratic interests aligned. There is an argument to be made that it is not in the U.S. interest to end the Ukrainian crisis, that allowing Russia to go deeper into the Ukrainian morass will sap its strength and abort the emerging competition before it really starts. But the United States operates by its own process, and it is not yet ready to think in terms of weakening Russia, and given the United States’ relative isolation, postponement is not a bad idea.
Therefore, the negotiations show promise. But more important, the Russians have shown us the way the world still works. When something must get done, the number to call is still in the United States.
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Russia and the United States Negotiate the Future of Ukraine is republished with permission of Stratfor.
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]]>The ongoing talks between U.S. and Iran politicians over the Islamic state’s nuclear program – and the resulting sanctions – signal a major shift in their bilateral relations. But there is more at stake for the two countries, rather than just these issues. Iran will need the U.S.’s help to repair its economy, while America sees Iran as an opportunity to manage its interests in the Middle East.
The post Why The US & Iran Need Each Other appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The ongoing talks between U.S. and Iran politicians over the Islamic state’s nuclear program – and the resulting sanctions – signal a major shift in their bilateral relations. But there is more at stake for the two countries, rather than just these issues. Iran will need the U.S.’s help to repair its economy, while America sees Iran as an opportunity to manage its interests in the Middle East.
The ongoing talks between U.S. and Iran politicians over the Islamic state’s nuclear program – and the resulting sanctions – signal a major shift in their bilateral relations. But there is more at stake for the two countries, rather than just these issues. Iran will need the U.S.’s help to repair its economy, while America sees Iran as an opportunity to manage its interests in the Middle East.
The talks between Iran and the Western powers have ended but have not failed. They will reconvene next week. That in itself is a dramatic change from the past, when such talks invariably began in failure.
In my book The Next Decade, I argued that the United States and Iran would move toward strategic alignment, and I think that is what we are seeing take shape. Of course, there is no guarantee that the talks will yield a settlement or that they will evolve into anything more meaningful. But the mere possibility requires us to consider three questions: Why is this happening now, what would a settlement look like, and how will it affect the region if it happens?
It is important to recognize that despite all of the other actors on the stage, this negotiation is between the United States and Iran. It is also important to understand that while this phase of the discussion is entirely focused on Iran’s nuclear development and sanctions, an eventual settlement would address U.S. and Iranian relations and how those relations affect the region.
If the nuclear issue were resolved and the sanctions removed, then matters such as controlling Sunni extremists, investment in Iran and maintaining the regional balance of power would all be on the table. In solving these two outstanding problems, the prospect of a new U.S.-Iranian relationship would have to be taken seriously.
But first, there are great obstacles to overcome.
One is ideology. Iran regards the United States as the Great Satan. The United States regards Iran as part of the Axis of Evil. For the Iranians, memories of a U.S.-sponsored coup in 1953 and Washington’s support for the Shah are vivid. Americans above the age of 35 cannot forget the Iranian hostage crisis, when Iranians seized some 50 U.S. Embassy employees. Iran believes the United States has violated its sovereignty; the United States believes Iran has violated basic norms of international law. Each views the other as barbaric. Add to this that the ideology of radical Islamism regards the United States as corrupt and evil, and the ideology of the United States sees Iran as brutal and repressive, and it would seem that resolution is impossible.
From the American side, there is precedent for reconciling national differences: China. When the United States reached out to China in the 1970s, Beijing was supplying weapons to the North Vietnamese, who used them against American troops. China’s rhetoric about U.S. imperialism, replete with “running dogs,” portrayed the United States as monstrous. The United States saw China, a nuclear power, as a greater threat for nuclear war than the Soviet Union, since Mao had openly stated – and seemed to mean it – that communists ought to welcome nuclear war rather than fear it. Given the extremism and brutality of the Cultural Revolution, the ideological bar seemed insurmountable.
But the strategic interests of both countries superseded ideology. They did not recognize each other, but they did need each other. The relative power of the Soviet Union had risen. There had been heavy fighting between China and the Soviet Union along the Ussuri River in 1969, and Soviet troops were heavily deployed along China’s border. The United States had begun to redeploy troops from Europe to Southeast Asia when it became clear it was losing the Vietnam War.
Each side was concerned that if the Soviet Union chose to attack China or NATO separately, it could defeat them. However, if China and the United States collaborated, no Soviet attack would be possible, lest Moscow start a two-front war it couldn’t win. It was not necessary to sign a treaty of military alliance or even mention this possibility. Simply meeting, talking and establishing diplomatic relations with China would force the Soviet Union to consider the possibility that Washington and Beijing had a tacit understanding – or that even without an understanding, an attack on one of them would trigger a response by the other. After all, if NATO or China were defeated, the Soviets would be able to overpower the other at its discretion. Therefore, by moving the relationship from total hostility to minimal accommodation, the strategic balance changed.
In looking at Iran, the most important thing to note is the difference between its rhetoric and its actions. If you listened to Iranian government officials in the past, you would think they were preparing for the global apocalypse. In truth, Iranian foreign policy has been extremely measured. Its one major war, which it fought against Iraq in the 1980s, was not initiated by Iran. It has supported third parties such as Hezbollah and Syria, sending supplies and advisers, but it has been extremely cautious in the use of its own overt power. In the early days of the Islamic republic, whenever Tehran was confronted with American interests, it would pull closer to the Soviet Union, an atheistic country making war in neighboring Afghanistan. It needed a counterweight to the United States and put ideology aside, even in its earliest, most radical days.
Ideology is not trivial, but ultimately it is not the arbiter of foreign relations. Like all countries, the United States and Iran have strategic issues that influence their actions. Iran attempted to create an arc of influence from western Afghanistan to Beirut, the key to which was preserving and dominating the Syrian regime. The Iranians failed in Syria, where the regime exists but no longer governs much of the country. The blowback from this failure has been an upsurge in Sunni militant activity against the Shiite-dominated regime.
But the arc of influence was interrupted elsewhere, particularly Iraq, which has proved to be the major national security challenge facing Iran. Coupled with the failures in Syria, the degradation of Iraq has put Iran on the defensive when, just one year earlier, it was poised to change the balance of power in its favor.
At the same time, Iran found that its nuclear program had prompted a seriously detrimental sanctions regime. Stratfor has long argued that the Iranian nuclear program was primarily a bargaining chip to be traded for guarantees on its security and recognition of its regional power. It was meant to appear threatening, not to be threatening. This is why, for years, Iran was “only months” away from a weapon.
The problem was that despite its growing power, Iran could no longer withstand the economic repercussions of the sanctions regime. In light of Syria and Iraq, the nuclear program was a serious miscalculation that produced an economic crisis. The failures in foreign policy and the subsequent economic crisis discredited the policies of former President Mahmoud Ahmadinejad, changed the thinking of the supreme leader and ultimately led to the electoral victory of President Hassan Rouhani. The ideology may not have changed, but the strategic reality had. Rouhani for years had been worried about the stability of the regime and was thus critical of Ahmadinejad’s policies. He knew that Iran had to redefine its foreign policy.
Related: Iran: New Leader, New Hope?
Related: Iran President Vows To “Never” Develop Nuclear Weapons
The United States has also been changing its strategy. During the 2000s, it tried to deal with Sunni radicals through the direct use of force in Afghanistan and Iraq. The United States could not continue to commit its main force in the Islamic world when that very commitment gave other nations, such as Russia, the opportunity to maneuver without concern for U.S. military force. The United States did have a problem with al Qaeda, but it needed a new strategy for dealing with it. Syria provided a model. The United States declined to intervene unilaterally against the al Assad regime because it did not want to empower a radical Sunni government. It preferred to allow Syria’s factions to counterbalance each other such that neither side was in control.
This balance-of-power approach was the alternative to direct military commitment. The United States was not the only country concerned about Sunni radicalism. Iran, a Shiite power ultimately hostile to Sunnis, was equally concerned about jihadists. Saudi Arabia, Iran’s regional rival, at times opposed Islamist radicals (in Saudi Arabia) and supported them elsewhere (in Syria or Iraq). The American relationship with Saudi Arabia, resting heavily on oil, had changed. The United States had plenty of oil now and the Saudis’ complex strategies simply no longer matched American interests. On the broadest level, a stronger Iran, aligned with the United States, would counter Sunni ambitions. It would not address the question of North Africa or other smaller issues, but it would force Saudi Arabia to reshape its policies.
The Arab Spring also was a consideration. A mainstay of Washington’s Iran policy was that at some point there would be an uprising that would overthrow the regime. The 2009 uprising, never really a threat to the regime, was seen as a rehearsal. If there was likely to be an uprising, there was no need to deal with Iran. Then the Arab Spring occurred. Many in the Obama administration misread the Arab Spring, expecting it to yield more liberal regimes. That didn’t happen. Egypt has not evolved, Syria has devolved into civil war, Bahrain has seen Saudi Arabia repress its uprising, and Libya has found itself on the brink of chaos. Not a single liberal democratic regime emerged. It became clear that there would be no uprising in Iran, and even if there were, the results would not likely benefit the United States.
Related: Premature Speculation: The Arab Spring Cannot Be Considered as Democracy’s Fourth Wave. Yet.
Related: Post-Arab Spring: Can The Arab World Revolutionise Their Economies?
A strategy of encouraging uprisings no longer worked. A strategy of large-scale intervention was unsustainable. The idea of attacking Iran was unpalatable. Even if the administration agreed with Israel and thought that the nuclear program was intended to produce a nuclear weapon, it was not clear that the program could be destroyed from the air.
Therefore, in the particular case of Iran’s nuclear program, the United States could only employ sanctions. On the broader issue of managing American interests in the Middle East, the United States had to find more options. It could not rely entirely on Saudi Arabia, which has dramatically different regional interests. It could not rely entirely on Israel, which by itself could not solve the Iranian problem militarily. These realities forced the United States to recalibrate its relationship with Iran at a time when Iran had to recalibrate its relationship with the United States.
The first U.S.-Iranian discussions would obviously be on the immediate issue – the nuclear program and sanctions. There are many technical issues involved there, the most important of which is that both sides must show that they don’t need a settlement. No one negotiating anything will simply accept the first offer, not when they expect the negotiations to move on to more serious issues. Walking away from the table for 10 days gives both sides some credibility.
Related: Iranian Sanctions: US Loss, China Gain?
Related: Are International Sanctions Against Iran Counterproductive?: Gail Tverberg
Related: MAD For Oil: Will US Sanctions On Iran Lead To Mutually Assured Economic Destruction?
The real negotiations will come after the nuclear and sanctions issues are addressed. They will pertain to U.S.-Iranian relations more broadly. Each side will use the other to its advantage. The Iranians will use the United States to repair its economy, and the Americans will use the Iranians to create a balance of power with Sunni states. This will create indirect benefits for both sides. Iran’s financial woes will be an opportunity for American companies to invest. The Americans’ need for a balance of power will give Iran weight against its own enemies, even after the collapse of its strategy.
The region will of course look different but not dramatically so. The balance of power idea does not mean a rupture with Saudi Arabia or Israel. The balance of power only works if the United States maintains strong relationships on all sides. The Saudis and Israelis will not like American rebalancing. Their choices in the matter are limited, but they can take comfort from the fact that a strictly pro-Iranian policy is impossible for the United States.
The American strategy with China in the 1970s was to try to become the power that balanced the Soviet Union and China. After meeting with the Chinese, Henry Kissinger went to Moscow. Thus, in terms of bilateral relationships, U.S.-Saudi and U.S.-Israeli relations can stay the same. But it now creates another relationship and option for the United States. In the end, Iran is still a secondary power and the United States is the primary power. Iran will take advantage of the relationship, and the United States will manage it.
It is hard to imagine this evolution, considering what the United States and Iran have said about each other for the past 34 years. But relations among nations are not about sentiment; they are about interest. If Roosevelt could ally with Stalin, and Nixon with Mao, then it is clear that all things are possible in U.S. foreign policy. For their part, the Persians have endured for millennia, espousing many ideologies but doing what was necessary to survive and prosper. All of this may well fall apart, but there is a compelling logic to believe that it will not, and it will not be as modest a negotiation as it appears now.
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
The U.S.-Iran Talks: Ideology and Necessity is republished with permission of Stratfor.
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]]>The U.S.-Europe “friendship” helped shape the 20th century; but as Europe becomes increasingly fragmented – while showing greater divergence to American foreign policy, as demonstrated with the Syrian issue – does a strong transatlantic relationship still bear any significance in the 21st century?
The post US-Europe Relations: Growing Apart? appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The U.S.-Europe “friendship” helped shape the 20th century; but as Europe becomes increasingly fragmented – while showing greater divergence to American foreign policy, as demonstrated with the Syrian issue – does a strong transatlantic relationship still bear any significance in the 21st century?
The U.S.-Europe “friendship” helped shape the 20th century; but as Europe becomes increasingly fragmented – while showing greater divergence to American foreign policy, as demonstrated with the Syrian issue – does a strong transatlantic relationship still bear any significance in the 21st century?
I am writing this from Greece, having spent the past week in Europe and having moved among various capitals. Most discussions I’ve had in my travels concern U.S. President Barack Obama’s failure to move decisively against Syria and how Russian President Vladimir Putin outmatched him. Of course, the Syrian intervention had many aspects, and one of the most important ones, which was not fully examined, was what it told us about the state of U.S.-European relations and of relations among European countries. This is perhaps the most important question on the table.
We have spoken of the Russians, but for all the flash in their Syria performance, they are economically and militarily weak – something they would change if they had the means to do so. It is Europe, taken as a whole, that is the competitor for the United States. Its economy is still slightly larger than the United States’, and its military is weak, though unlike Russia this is partly by design.
The U.S.-European relationship helped shape the 20th century. American intervention helped win World War I, and American involvement in Europe during World War II helped ensure an allied victory. The Cold War was a transatlantic enterprise, resulting in the withdrawal of Soviet forces from the European Peninsula. The question now is: What will the relationship be between these two great economic entities, which together account for roughly 50 percent of the world’s gross domestic product, in the 21st century? That question towers over all others globally.
The events surrounding the Syria intervention, which never materialized, hint at the answer to this question. The Syrian crisis began not with the United States claiming that action must be taken against al Assad’s use of chemical weapons but with calls to arms from the United Kingdom, France and Turkey. The United States was rather reluctant, but ultimately it joined these and several other European countries. Only then did the Europeans’ opinions diverge. In the United Kingdom, the parliament voted against intervention. In Turkey, the government favored intervention on a much larger scale than the United States wanted. And in France, which actually had the ability to lend a hand, the president favored intervention but faced a less enthusiastic parliament.
Most important to note was the division of Europe. Each country crafted its own response – or lack of response – to the Syrian crisis. The most interesting position was taken by Germany, which was unwilling to participate and until quite late unwilling to endorse participation. I’ve talked about the fragmentation of Europe. Nothing is more striking than the foreign policy split between France and Germany not only on Syria but on Mali and Libya as well. One of the central drivers behind the creation of the European Union and its post-war precursors was the need to bind France and Germany economically. French and German divergence was the root of European wars. It had to be avoided at all costs.
Yet that divergence has returned. Their differences have not manifested as virulently as they did before 1945, but still, it can no longer be said that their foreign policies are synchronized. In fact, the three major powers on the European Peninsula currently are pursuing very different foreign policies. The United Kingdom is moving in its own direction, limiting its involvement in Europe and trying to find its own course between Europe and the United States. France is focused to the south, on the Mediterranean and Africa. Germany is trying to preserve the trade zone and is looking east at Russia.
Nothing has ruptured in Europe, but then Europe as a concept has always been fluid. The European Union is a free trade zone that excludes some European countries. It is a monetary union that excludes some members of the free trade zone. It has a parliament but leaves defense and foreign policy prerogatives to sovereign nation-states. It has not become more organized since 1945; in some fundamental ways, it has become less organized. Where previously there were only geographical divisions, now there are also conceptual divisions.
Differences between the United States and Europe were made clear in the Syrian crisis. Had President Obama chosen to intervene, he could have acted in Syria as he saw fit – he didn’t necessarily need congressional approval but sought it anyway. Europe could not act because there really isn’t a singular European foreign or defense policy. But more important, no individual European nation has the ability by itself to conduct an air attack on Syria. As Libya showed, France and Italy could not execute a sustained air campaign. They needed the United States.
Here in Europe, Obama is criticized for his handling of the Syria intervention. There is also a general belief that Putin’s foreign policy is a failure. But I am old enough to remember that Europeans have always thought of U.S. presidents as either naive, as they did with Jimmy Carter, or as cowboys, as they did with Lyndon Johnson, and held them in contempt in either case. (Richard Nixon’s being honored by the French is an interesting exception.) After some irrational exuberance from the European left, Obama has now been deemed naive, just as George W. Bush was deemed a cowboy.
Europeans obsess much more over U.S. presidents than Americans obsess over European leaders. They have strong opinions, most of them negative, about whomever is in office. My response to such criticism has always been a tricky one. Imagine the fine sophisticates of 1914 and 1939 with nuclear weapons. Do you think the ones responsible for entering two horrible wars could have resisted using nuclear weapons? It is the good fortune of Europe that when leaders were wont to use nuclear weapons, the Europeans didn’t have their fingers on the launch buttons.
These weapons were controlled by American cowboys and fools and by Russian “conspirators” – the European vision of all Russian leaders. Amid profound differences and distrust, U.S. and Soviet leaders managed to avoid the worst. Given their track record, Europe’s leaders might have plunged the world further into disaster. The Europeans think well of the sophistication of their diplomacy. I have never understood why they feel that way.
[quote]We saw this in Syria. First, Europe was all over the place. Then the coalition that coaxed the Americans in fell apart, leaving the United States virtually alone. When Obama went back to his original position, they decided that he had been outfoxed by the Russians. Had he attacked, he would have been dismissed as another cowboy. Whichever way it had gone, and whatever role Europe played in it, it would have been the Americans that simply didn’t understand one thing or another.[/quote]Related: US vs. Russia: The ‘Game’ In Syria Has Only Just Begun
Related: Behind Syria’s Crisis: How Oil & Gas Limits Contributed To The Civil Unrest
The sentiment differs throughout Europe. The British were indifferent to the entire matter; they were far more interested in what the Federal Reserve would say. The Eastern Europeans, feeling the pressure of the Russians – both in reality and in their nightmares – can’t imagine why the Americans would let this happen to them. A friendly diplomat from the Caucasus told me that he wondered if the Americans weren’t aware they were in a showdown with the Russians.
The American view of Europe is a combination of indifference and bafflement. Europe has not mattered all that much to the United States since the end of the Cold War. Since the first Gulf War, what has mattered is the Muslim world, with various levels of intensity. Europe was seen as a prosperous backwater, or as I once put it in 1991, all of Europe became Scandinavia. It was quite prosperous, a pleasure to visit, but not the place in which history was being made.
When Americans can be bothered to think of Europe, they think of it as a continent with strong opinions of what others should do but with little inclination to do something itself. As an American diplomat told me, “I always go to Paris if I want to be told what America should do.” The American perception of Europe is that it is unhelpful and irritating but ultimately weak and therefore harmless. The Europeans are obsessed with the U.S. president because, fool or cowboy or both, he is extraordinarily powerful. The Americans are indifferent to the Europeans not because they don’t have sophisticated leaders but because ultimately their policies matter more to each other than they do to the United States. Americans think little of Europe and then really don’t understand what happens there. It’s not clear to me that Europeans get it either.
But the most profound rift between the Americans and Europeans, however, is not perception or attitude. It is the notion of singularity, and many of the strange impressions or profound indifferences between the two stem from this notion. For example, a friend pointed out that he spoke four languages but Americans seem unable to learn one. I pointed out that if he took a weekend trip he would need to speak four languages. Citizens of the United States don’t need to learn four languages to drive 3,000 miles. The dialogue between the United States and Europe is a dialogue between a single entity and the tower of Babel.
The United States is a unified country with unified economic, foreign and defense policies. Europe never fully came together; in fact, for the past five years it has been disintegrating. Division, as well as a fascinating pride in that division, is one of Europe’s defining characteristics. Unity, as well as fascinating convictions that everything is coming apart, is one of the United States’ defining characteristics.
Related:
Related: Will America’s Middle-Class Crisis Diminish Its Global Superpower Status?: George Friedman
Europe’s past is magnificent, and its magnificence can be seen on the streets of any European capital. Its past haunts and frightens it. Its future is not defined, but its present is characterized by a denial and a distance from its past. U.S. history is much shallower. Americans build shopping malls on top of hallowed battlefields and tear down buildings after 20 years. The United States is a country of amnesia. It is obsessed with its future, and Europe is paralyzed by its past.
Whenever I visit Europe – and I was born in Europe – I am struck by how profoundly different the two places are. I am struck at how the United States is disliked and held in contempt by Europeans. I am also struck at how little Americans notice or care.
[quote]There is talk of the transatlantic relationship. It is not gone, nor even frayed. Europeans come to the United States and Americans go to Europe and both take pleasure in the other. But the connection is thin. Where once we made wars together, we now take vacations. It is hard to build a Syria policy on that framework, let alone a North Atlantic strategy.[/quote]By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Geopolitical Journey: The U.S.-European Relationship, Then and Now is republished with permission of STRATFOR.
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]]>U.S. missions across the Middle East and Africa will remain closed until the end of the week for fear that terrorist cell al Qaeda will launch an attack to mark the end of Ramadan. Calling it one of the most specific and credible threats since 9/11, U.S. lawmakers say the preemptive move would not have been possible if not for electronic intercepts by the National Security Agency. Do such threats legitimise the need for NSA’s surveillance programme which has become hotly debated since the revelations made by former contractor Edward Snowden?
The post Can Fear Necessarily Justify The Violation Of Rights?: George Friedman appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
U.S. missions across the Middle East and Africa will remain closed until the end of the week for fear that terrorist cell al Qaeda will launch an attack to mark the end of Ramadan. Calling it one of the most specific and credible threats since 9/11, U.S. lawmakers say the preemptive move would not have been possible if not for electronic intercepts by the National Security Agency. Do such threats legitimise the need for NSA’s surveillance programme which has become hotly debated since the revelations made by former contractor Edward Snowden?
U.S. missions across the Middle East and Africa will remain closed until the end of the week for fear that terrorist cell al Qaeda will launch an attack to mark the end of Ramadan. Calling it one of the most specific and credible threats since 9/11, U.S. lawmakers say the preemptive move would not have been possible if not for electronic intercepts by the National Security Agency. Do such threats legitimise the need for NSA’s surveillance programme which has become hotly debated since the revelations made by former contractor Edward Snowden?
In June 1942, the bulk of the Japanese fleet sailed to seize the Island of Midway. Had Midway fallen, Pearl Harbor would have been at risk and U.S. submarines, unable to refuel at Midway, would have been much less effective. Most of all, the Japanese wanted to surprise the Americans and draw them into a naval battle they couldn’t win.
The Japanese fleet was vast. The Americans had two carriers intact in addition to one that was badly damaged. The United States had only one advantage: It had broken Japan’s naval code and thus knew a great deal of the country’s battle plan. In large part because of this cryptologic advantage, a handful of American ships devastated the Japanese fleet and changed the balance of power in the Pacific permanently.
This – and the advantage given to the allies by penetrating German codes – taught the Americans about the centrality of communications code breaking. It is reasonable to argue that World War II would have ended much less satisfactorily for the United States had its military not broken German and Japanese codes. Where the Americans had previously been guided to a great extent by Henry Stimson’s famous principle that “gentlemen do not read each other’s mail,” by the end of World War II they were obsessed with stealing and reading all relevant communications.
The National Security Agency evolved out of various post-war organizations charged with this task. In 1951, all of these disparate efforts were organized under the NSA to capture and decrypt communications of other governments around the world — particularly those of the Soviet Union, which was ruled by Josef Stalin, and of China, which the United States was fighting in 1951. How far the NSA could go in pursuing this was governed only by the extent to which such communications were electronic and the extent to which the NSA could intercept and decrypt them.
The amount of communications other countries sent electronically surged after World War II yet represented only a fraction of their communications. Resources were limited, and given that the primary threat to the United States was posed by nation-states, the NSA focused on state communications. But the principle on which the NSA was founded has remained, and as the world has come to rely more heavily on electronic and digital communication, the scope of the NSA’s commission has expanded.
What drove all of this was Pearl Harbor. The United States knew that the Japanese were going to attack. They did not know where or when. The result was disaster. All American strategic thinking during the Cold War was built around Pearl Harbor – the deep fear that the Soviets would launch a first strike that the United States did not know about. The fear of an unforeseen nuclear attack gave the NSA leave to be as aggressive as possible in penetrating not only Soviet codes but also the codes of other nations. You don’t know what you don’t know, and given the stakes, the United States became obsessed with knowing everything it possibly could.
In order to collect data about nuclear attacks, you must also collect vast amounts of data that have nothing to do with nuclear attacks. The Cold War with the Soviet Union had to do with more than just nuclear exchanges, and the information on what the Soviets were doing – what governments they had penetrated, who was working for them – was a global issue. But you couldn’t judge what was important and what was unimportant until after you read it. Thus the mechanics of assuaging fears about a “nuclear Pearl Harbor” rapidly devolved into a global collection system, whereby vast amounts of information were collected regardless of their pertinence to the Cold War.
There was nothing that was not potentially important, and a highly focused collection strategy could miss vital things. So the focus grew, the technology advanced and the penetration of private communications logically followed. This was not confined to the United States. The Soviet Union, China, the United Kingdom, France, Israel, India and any country with foreign policy interests spent a great deal on collecting electronic information. Much of what was collected on all sides was not read because far more was collected than could possibly be absorbed by the staff. Still, it was collected. It became a vast intrusion mitigated only by inherent inefficiency or the strength of the target’s encryption.
The Pearl Harbor dread declined with the end of the Cold War – until Sept. 11, 2001. In order to understand 9/11’s impact, a clear memory of our own fears must be recalled. As individuals, Americans were stunned by 9/11 not only because of its size and daring but also because it was unexpected. Terrorist attacks were not uncommon, but this one raised another question: What comes next? Unlike Timothy McVeigh, it appeared that al Qaeda was capable of other, perhaps greater acts of terrorism. Fear gripped the land. It was a justified fear, and while it resonated across the world, it struck the United States particularly hard.
Part of the fear was that U.S. intelligence had failed again to predict the attack. The public did not know what would come next, nor did it believe that U.S. intelligence had any idea. A federal commission on 9/11 was created to study the defense failure. It charged that the president had ignored warnings. The focus in those days was on intelligence failure. The CIA admitted it lacked the human sources inside al Qaeda. By default the only way to track al Qaeda was via their communications. It was to be the NSA’s job.
Related: A Decade of Hurt – The Economic Legacy of 9/11: Joseph Stiglitz
Related: The Economics of Osama’s Death
Related: The US & China Must Co-Lead The World In Counter-Terrorism: Dan Steinbock
As we have written, al Qaeda was a global, sparse and dispersed network. It appeared to be tied together by burying itself in a vast new communications network: the Internet. At one point, al Qaeda had communicated by embedding messages in pictures transmitted via the Internet. They appeared to be using free and anonymous Hotmail accounts. To find Japanese communications, you looked in the electronic ether. To find al Qaeda’s message, you looked on the Internet.
But with a global, sparse and dispersed network you are looking for at most a few hundred men in the midst of billions of people, and a few dozen messages among hundreds of billions. And given the architecture of the Internet, the messages did not have to originate where the sender was located or be read where the reader was located. It was like looking for a needle in a haystack. The needle can be found only if you are willing to sift the entire haystack. That led to PRISM and other NSA programs.
The mission was to stop any further al Qaeda attacks. The means was to break into their communications and read their plans and orders. To find their plans and orders, it was necessary to examine all communications. The anonymity of the Internet and the uncertainties built into its system meant that any message could be one of a tiny handful of messages. Nothing could be ruled out. Everything was suspect. This was reality, not paranoia.
It also meant that the NSA could not exclude the communications of American citizens because some al Qaeda members were citizens. This was an attack on the civil rights of Americans, but it was not an unprecedented attack. During World War II, the United States imposed postal censorship on military personnel, and the FBI intercepted selected letters sent in the United States and from overseas. The government created a system of voluntary media censorship that was less than voluntary in many ways. Most famously, the United States abrogated the civil rights of citizens of Japanese origin by seizing property and transporting them to other locations. Members of pro-German organizations were harassed and arrested even prior to Pearl Harbor. Decades earlier, Abraham Lincoln suspended the writ of habeas corpus during the Civil War, effectively allowing the arrest and isolation of citizens without due process.
There are two major differences between the war on terror and the aforementioned wars. First, there was a declaration of war in World War II. Second, there is a provision in the Constitution that allows the president to suspend habeas corpus in the event of a rebellion. The declaration of war imbues the president with certain powers as commander in chief – as does rebellion. Neither of these conditions was put in place to justify NSA programs such as PRISM.
Moreover, partly because of the constitutional basis of the actions and partly because of the nature of the conflicts, World War II and the Civil War had a clear end, a point at which civil rights had to be restored or a process had to be created for their restoration. No such terminal point exists for the war on terror. As was witnessed at the Boston Marathon – and in many instances over the past several centuries – the ease with which improvised explosive devices can be assembled makes it possible for simple terrorist acts to be carried out cheaply and effectively. Some plots might be detectable by intercepting all communications, but obviously the Boston Marathon attack could not be predicted.
The problem with the war on terror is that it has no criteria of success that is potentially obtainable. It defines no level of terrorism that is tolerable but has as its goal the elimination of all terrorism, not just from Islamic sources but from all sources. That is simply never going to happen and therefore, PRISM and its attendant programs will never end. These intrusions, unlike all prior ones, have set a condition for success that is unattainable, and therefore the suspension of civil rights is permanent. Without a constitutional amendment, formal declaration of war or declaration of a state of emergency, the executive branch has overridden fundamental limits on its powers and protections for citizens.
Related: U.S. Lawmakers Reject Plan To Curb Controversial Surveillance Programme
Related: French Authorities Using ‘NSA-Style Methods’ To Spy On Citizens: Report
Related: Can Security Be Achieved Through Surveillance And Spying?
Since World War II, the constitutional requirements for waging war have fallen by the wayside. President Harry S. Truman used a U.N resolution to justify the Korean War. President Lyndon Johnson justified an extended large-scale war with the Gulf of Tonkin Resolution, equating it to a declaration of war. The conceptual chaos of the war on terror left out any declaration, and it also included North Korea in the axis of evil the United States was fighting against. Former NSA contractor Edward Snowden is charged with aiding an enemy that has never been legally designated. Anyone who might contemplate terrorism is therefore an enemy. The enemy in this case was clear. It was the organization of al Qaeda but since that was not a rigid nation but an evolving group, the definition spread well beyond them to include any person contemplating an infinite number of actions. After all, how do you define terrorism, and how do you distinguish it from crime?
Three thousand people died in the 9/11 attacks, and we know that al Qaeda wished to kill more because it has said that it intended to do so. Al Qaeda and other jihadist movements – and indeed those unaffiliated with Islamic movements – pose threats. Some of their members are American citizens, others are citizens of foreign nations. Preventing these attacks, rather than prosecuting in the aftermath, is important. I do not know enough about PRISM to even try to guess how useful it is.
At the same time, the threat that PRISM is fighting must be kept in perspective. Some terrorist threats are dangerous, but you simply cannot stop every nut who wants to pop off a pipe bomb for a political cause. So the critical question is whether the danger posed by terrorism is sufficient to justify indifference to the spirit of the Constitution, despite the current state of the law. If it is, then formally declare war or declare a state of emergency. The danger of PRISM and other programs is that the decision to build it was not made after the Congress and the president were required to make a clear finding on war and peace. That was the point where they undermined the Constitution, and the American public is responsible for allowing them to do so.
The emergence of programs such as PRISM was not the result of despots seeking to control the world. It had a much more clear, logical and defensible origin in our experiences of war and in legitimate fears of real dangers. The NSA was charged with stopping terrorism, and it devised a plan that was not nearly as secret as some claim. Obviously it was not as effective as hoped, or the Boston Marathon attack wouldn’t have happened. If the program was meant to suppress dissent it has certainly failed, as the polls and the media of the past weeks show.
The revelations about PRISM are far from new or interesting in themselves. The NSA was created with a charter to do these things, and given the state of technology it was inevitable that the NSA would be capturing communications around the world. Many leaks prior to Snowden’s showed that the NSA was doing this. It would have been more newsworthy if the leak revealed the NSA had not been capturing all communications. But this does give us an opportunity to consider what has happened and to consider whether it is tolerable.
The threat posed by PRISM and other programs is not what has been done with them but rather what could happen if they are permitted to survive. But this is not simply about the United States ending this program. The United States certainly is not the only country with such a program. But a reasonable start is for the country that claims to be most dedicated to its Constitution to adhere to it meticulously above and beyond the narrowest interpretation. This is not a path without danger. As Benjamin Franklin said, “They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Keeping the NSA in Perspective is republished with permission of Stratfor.
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]]>The mainstream debate on China has shifted from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be. Following weeks of financial drama and weak economic data, the signs are now unmistakable: China is in big trouble, and the problems in its economy are deeper and even more fundamental than previously thought.
The post Has The Chinese Growth Miracle Hit A Wall?: George Friedman appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The mainstream debate on China has shifted from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be. Following weeks of financial drama and weak economic data, the signs are now unmistakable: China is in big trouble, and the problems in its economy are deeper and even more fundamental than previously thought.
The mainstream debate on China has shifted from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be. Following weeks of financial drama and weak economic data, the signs are now unmistakable: China is in big trouble, and the problems in its economy are deeper and even more fundamental than previously thought.
Major shifts underway in the Chinese economy that Stratfor has forecast and discussed for years have now drawn the attention of the mainstream media. Many have asked when China would find itself in an economic crisis, to which we have answered that China has been there for awhile — something not widely recognized outside China, and particularly not in the United States. A crisis can exist before it is recognized. The admission that a crisis exists is a critical moment, because this is when most others start to change their behavior in reaction to the crisis. The question we had been asking was when the Chinese economic crisis would finally become an accepted fact, thus changing the global dynamic.
Last week, the crisis was announced with a flourish. First, The New York Times columnist and Nobel Prize-recipient Paul Krugman penned a piece titled “Hitting China’s Wall.” He wrote:
[quote] The signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be. [/quote]Later in the week, Ben Levisohn authored a column in Barron’s called “Smoke Signals from China.” He wrote, “In the classic disaster flick ‘The Towering Inferno’ partygoers ignored a fire in a storage room because they assumed it has been contained. Are investors making the same mistake with China?” He goes on to answer his question, saying, “Unlike three months ago, when investors were placing big bets that China’s policymakers would pump cash into the economy to spur growth, the markets seem to have accepted the fact that sluggish growth for the world’s second largest economy is its new normal.“
Related: China’s Growth Unsustainable Without Reforms: IMF
Related: China Hints At Growth Below 7%
Meanwhile, Goldman Sachs — where in November 2001 Jim O’Neil coined the term BRICs and forecast that China might surpass the United States economically by 2028 — cut its forecast of Chinese growth to 7.4 percent.
The New York Times, Barron’s and Goldman Sachs are all both a seismograph of the conventional wisdom and the creators of the conventional wisdom. Therefore, when all three announce within a few weeks that China’s economic condition ranges from disappointing to verging on a crash, it transforms the way people think of China. Now the conversation is moving from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be.
Suddenly finding Stratfor amid the conventional wisdom regarding China does feel odd, I must admit. Having first noted the underlying contradictions in China’s economic growth years ago, when most viewed China as the miracle Japan wasn’t, and having been scorned for not understanding the shift in global power underway, it is gratifying to now have a lot of company. Over the past couple of years, the ranks of the China doubters had grown. But the past few months have seen a sea change. We have gone from China the omnipotent, the belief that there was nothing the Chinese couldn’t work out, to the realization that China no longer works.
It has not been working for some time. One of the things masking China’s weakening has been Chinese statistics, which Krugman referred to as “even more fictional than most.” China is a vast country in territory and population. Gathering information on how it is doing would be a daunting task, even were China inclined to do so. Instead, China understands that in the West, there is an assumption that government statistics bear at least a limited relationship to truth. Beijing accordingly uses its numbers to shape perceptions inside and outside China of how it is doing. The Chinese release their annual gross domestic product numbers in the third week of January (and only revise them the following year). They can’t possibly know how they did that fast, and they don’t. But they do know what they want the world to believe about their growth, and the world has believed them — hence, the fantastic tales of economic growth.
China in fact has had an extraordinary period of growth. The last 30 years have been remarkable, marred only by the fact that the Chinese started at such a low point due to the policies of the Maoist period. Growth at first was relatively easy; it was hard for China to do worse. But make no mistake: China surged. Still, basing economic performance on consumption, Krugman notes that China is barely larger economically than Japan. Given the compounding effects of China’s guesses at GDP, we would guess it remains behind Japan, but how can you tell? We can say without a doubt that China’s economy has grown dramatically in the past 30 years but that it is no longer growing nearly as quickly as it once did.
China’s growth surge was built on a very unglamorous fact: Chinese wages were far below Western wages, and therefore the Chinese were able to produce a certain class of products at lower cost than possible in the West. The Chinese built businesses around this, and Western companies built factories in China to take advantage of the differential. Since Chinese workers were unable to purchase many of the products they produced given their wages, China built its growth on exports.
[quote] For this to continue, China had to maintain its wage differential indefinitely. But China had another essential policy: Beijing was terrified of unemployment and the social consequences that flow from it. This was a rational fear, but one that contradicted China’s main strength, its wage advantage. Because the Chinese feared unemployment, Chinese policy, manifested in bank lending policies, stressed preventing unemployment by keeping businesses going even when they were inefficient. China also used bank lending to build massive infrastructure and commercial and residential property. Over time, this policy created huge inefficiencies in the Chinese economy. Without recessions, inefficiencies develop. Growing the economy is possible, but not growing profitability. Eventually, the economy will be dragged down by its inefficiency. [/quote]As businesses become inefficient, production costs rise. And that leads to inflation. As money is lent to keep inefficient businesses going, inflation increases even more markedly. The increase in inefficiency is compounded by the growth of the money supply prompted by aggressive lending to keep the economy going. As this persisted over many years, the inefficiencies built into the Chinese economy have become staggering.
The second thing to bear in mind is the overwhelming poverty of China, where 900 million people have an annual per capita income around the same level as Guatemala, Georgia, Indonesia or Mongolia ($3,000-$3,500 a year), while around 500 million of those have an annual per capita income around the same level as India, Nicaragua, Ghana, Uzbekistan or Nigeria ($1,500-$1,700). China’s overall per capita GDP is around the same level as the Dominican Republic, Serbia, Thailand or Jamaica. Stimulating an economy where more than a billion people live in deep poverty is impossible. Economic stimulus makes sense when products can be sold to the public. But the vast majority of Chinese cannot afford the products produced in China, and therefore, stimulus will not increase consumption of those products. As important, stimulating demand so that inefficient factories can sell products is not only inflationary, it is suicidal. The task is to increase consumption, not to subsidize inefficiency.
Related: China Issues 35-Point Plan To Tackle Income Inequality
Related: China to Put Consumption Growth at Centre of Economic Reforms
Related: Can China Continue To Spend Its Way To Growth?: Michael Pettis
The Chinese are thus in a trap. If they continue aggressive lending to failing businesses, they get inflation. That increases costs and makes the Chinese less competitive in exports, which are also falling due to the recession in Europe and weakness in the United States. Allowing businesses to fail brings unemployment, a massive social and political problem. The Chinese have zigzagged from cracking down on lending by regulating informal lending and raising interbank rates to loosening restrictions on lending by removing the floor on the benchmark lending rate and by increasing lending to small- and medium-sized businesses. Both policies are problematic.
The Chinese have maintained a strategy of depending on exports without taking into account the operation of the business cycle in the West, which means that periodic and substantial contractions of demand will occur. China’s industrial plant is geared to Western demand. When Western demand contracted, the result was the mess you see now.
The Chinese economy could perhaps be growing at 7.4 percent, but I doubt the number is anywhere near that. Some estimates place growth at closer to 5 percent. Regardless of growth, the ability to maintain profit margins is rarely considered. Producing and selling at or even below cost will boost GDP numbers but undermines the financial system. This happened to Japan in the early 1990s. And it is happening in China now.
The Chinese can prevent the kind of crash that struck East Asia in 1997. Their currency isn’t convertible, so there can’t be a run on it. They continue to have a command economy; they are still communist, after all. But they cannot avoid the consequences of their economic reality, and the longer they put off the day of reckoning, the harder it will become to recover from it. They have already postponed the reckoning far longer than they should have. They would postpone it further if they could by continuing to support failing businesses with loans. They can do that for a very long time — provided they are prepared to emulate the Soviet model’s demise. The Chinese don’t want that, but what they do want is a miraculous resolution to their problem. There are no solutions that don’t involve agony, so they put off the day of reckoning and slowly decline.
The Chinese are not going to completely collapse economically any more than the Japanese or South Koreans did. What will happen is that China will behave differently than before. With no choices that don’t frighten them, the Chinese will focus on containing the social and political fallout, both by trying to target benefits to politically sensitive groups and by using their excellent security apparatus to suppress and deter unrest. The Chinese economic performance will degrade, but crisis will be avoided and political interests protected. Since much of China never benefited from the boom, there is a massive force that has felt marginalized and victimized by coastal elites. That is not a bad foundation for the Communist Party to rely on.
The key is understanding that if China cannot solve its problems without unacceptable political consequences, it will try to stretch out the decline. Japan had a lost decade only in the minds of Western investors, who implicitly value aggregate GDP growth over other measures of success such as per capita GDP growth or full employment. China could very well face an extended period of intense inwardness and low economic performance. The past 30 years is a tough act to follow.
The obvious economic impact on the rest of the world will fall on the producers of industrial commodities such as iron ore. The extravagant expectations for Chinese growth will not be met, and therefore expectations for commodity prices won’t be met. Since the Chinese economic failure has been underway for quite awhile, the degradation in prices has already happened. Australia in particular has been badly hit by the Chinese situation, just as it was by the Japanese situation a generation ago.
[quote] The Chinese are, of course, keeping a great deal of money in U.S. government instruments and other markets. Contrary to fears, that money will not be withdrawn. The Chinese problem isn’t a lack of capital, and repatriating that money would simply increase inflation. Had the Chinese been able to put that money to good use, it would have never been invested in the United States in the first place. The outflow of money from China was a symptom of the disease: Lacking the structure to invest in China, the government and private funds went overseas. In so doing, Beijing sought to limit destabilization in China, while private Chinese funds looked for a haven against the storm that was already blowing. [/quote]Related: Chinese Investors Moved More than $3.79 Trillion Out of Country Illegally
Related: Chinese Companies Investing in US at Record Pace
Related: China Now Owns A $17 Billion Stake In North America’s Energy Industry
Rather than the feared repatriation of funds, the United States will continue to be the target of major Chinese cash inflows. In a world where Europe is still reeling, only the United States is both secure and large enough to contain Chinese appetites for safety. Just as Japanese investment in the 1990s represented capital flight rather than a healthy investment appetite, so the behavior we have seen from Chinese investors in recent years is capital flight: money searching for secure havens regardless of return. This money has underpinned American markets; it is not going away, and in fact more is on the way.
The major shift in the international order will be the decline of China’s role in the region. China’s ability to project military power in Asia has been substantially overestimated. Its geography limits its ability to project power in Eurasia, an endeavor that would require logistics far beyond China’s capacity. Its naval capacity is still limited compared with the United States. The idea that it will compensate for internal economic problems by genuine (as opposed to rhetorical) military action is therefore unlikely. China has a genuine internal security problem that will suck the military, which remains a domestic security force, into actions of little value. In our view, the most important shift will be the re-emergence of Japan as the dominant economic and political power in East Asia in a slow process neither will really want.
Related: Asia to Eclipse West in Economic and Military Power by 2030: US Report
China will continue to be a major power, and it will continue to matter a great deal economically. Being troubled is not the same as ceasing to exist. China will always exist. It will, however, no longer be the low-wage, high-growth center of the world. Like Japan before it, it will play a different role.
In the global system, there are always low-wage, high-growth countries because the advanced industrial powers’ consumers want to absorb goods at low wages. Becoming a supplier of those goods is a major opportunity for, and disruptor to, those countries. No one country can replace China, but China will be replaced. The next step in this process is identifying China’s successors.
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Recognizing the End of the Chinese Economic Miracle is republished with permission of Stratfor.
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The post Has The Chinese Growth Miracle Hit A Wall?: George Friedman appeared first on Economy Watch.
]]>Since announcing the Cyprus bailout on March 25, the European Union, and by de facto Germany, have been keen to emphasise the uniqueness of Nicosia’s situation – downplaying a repeat for any other eurozone nation. The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. Indeed, we must ask ourselves why the Germans would have created this risk in the first place.
The post Germany’s Dangerous Gamble On The Cyprus Bailout: George Friedman appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Since announcing the Cyprus bailout on March 25, the European Union, and by de facto Germany, have been keen to emphasise the uniqueness of Nicosia’s situation – downplaying a repeat for any other eurozone nation. The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. Indeed, we must ask ourselves why the Germans would have created this risk in the first place.
Since announcing the Cyprus bailout on March 25, the European Union, and by de facto Germany, have been keen to emphasise the uniqueness of Nicosia’s situation – downplaying a repeat for any other eurozone nation. The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. Indeed, we must ask ourselves why the Germans would have created this risk in the first place.
The European economic crisis has taken different forms in different places, and Cyprus is the latest country to face the prospect of financial ruin. Overextended banks in Cyprus are teetering on the brink of failure for issuing loans they cannot repay, which has prompted the tiny Mediterranean country, a member of the European Union, to turn to Brussels for help. Late Sunday, the European Union and Cypriot president announced new terms for a bailout that would provide the infusion of cash necessary to prevent bankruptcies in Cyprus’ banking sector and, more important, prevent a banking panic from spreading to the rest of Europe.
What makes this crisis different from the previous bailouts for Greece, Ireland or elsewhere are the conditions Brussels has attached for its assistance. Due to circumstances unique to Cyprus, namely the questionable origin of a large chunk of the deposits in its now-stricken banking sector and that sector’s small size relative to the overall European economy, the European Union, led by Germany, has taken a harder line with the country.
Cyprus has few sources of capital besides its capacity as a banking shelter, so Brussels required that the country raise part of the necessary funds from its own banking sector – possibly by seizing money from certain bank deposits and putting it toward the bailout fund. The proposal has not yet been approved, but if enacted it would undermine a formerly sacred principle of banking in most industrial nations – the security of deposits – setting a new and possibly destabilizing precedent in Europe.
For years before the crisis, Cyprus promoted itself as an offshore financial center by creating a tax structure and banking rules that made depositing money in the country attractive to foreigners. As a result, Cyprus’ financial sector grew to dwarf the rest of the Cypriot economy, accounting for about eight times the country’s annual gross domestic product and employing a substantial portion of the nation’s work force. A side effect of this strategy, however, was that if the financial sector experienced problems, the rest of the domestic economy would not be big enough to stabilize the banks without outside help.
Related: Cyprus: More Worrisome Than Greece?
Related: Cyprus Bailout: The Death Of National Sovereignty?
[quote]Europe’s economic crisis spawned precisely those sorts of problems for the Cypriot banking sector. This was not just a concern for Cyprus, though. Even though Cyprus’ banking sector is tiny relative to the rest of Europe’s, one Cypriot bank defaulting on what it owed other banks could put the whole European banking system in question, and the last thing the European Union needs now is a crisis of confidence in its banks.[/quote]The Cypriots were facing chaos if their banks failed because the insurance system was insufficient to cover the claims of depositors. For its part, the European Union could not risk the financial contagion. But Brussels could not simply bail out the entire banking system, both because of the precedent it would set and because the political support for a total bailout wasn’t there. This was particularly the case for Germany, which would carry much of the financial burden and is preparing for elections in September 2013 before an electorate that is increasingly hostile to bailouts.
Even though the German public may oppose the bailouts, it benefits immensely from what those bailouts preserve. As I have pointed out many times, Germany is heavily dependent on exports and the European Union is critical to those exports as a free trade zone. Although Germany also imports a great deal from the rest of the bloc, a break in the free trade zone would be catastrophic for the German economy. If all imports were cut along with exports, Germany would still be devastated because what it produces and exports and what it imports are very different things. Germany could not absorb all its production and would experience massive unemployment.
Currently, Germany’s unemployment rate is below 6 percent while Spain’s is above 25 percent. An exploding financial crisis would cut into consumption, which would particularly hurt an export-dependent country like Germany.
[quote]Berlin’s posture through much of the European economic crisis has been to pretend it is about to stop providing assistance to other countries, but the fact is that doing so would inflict pain on Germany, too. Germany will make its threats and its voters will be upset, but in the end, the country would not be enjoying high employment if the crisis got out of hand. So the German game is to constantly threaten to let someone sink, while in the end doing whatever has to be done.[/quote]Cyprus was a place where Germany could show its willingness to get tough but didn’t carry any of the risks that would arise in pushing a country such as Spain too hard, for example. Cyprus’ economy was small enough and its problems unique enough that the rest of Europe could dismiss any measures taken against the country as a one-off. Here was a case where the German position appears enormously more powerful than usual. And in isolation, this is true – if we ignore the question of what conclusion the rest of Europe, and the world, draws from the treatment of Cyprus.
Under German guidance, the European Union made an extraordinary demand on the Cypriots. It demanded that a tax be placed on deposits in the country’s two largest banks. The tax would be about 10 percent and would, under the initial terms, be applied to all accounts, regardless of their size. This was an unprecedented solution. Since the global financial crisis of the 1920s, all advanced industrial countries – and many others – had been operating on a fundamental principle that deposits in banks were utterly secure. They were not regarded as bonds paying certain interest, whose value would disappear if the bank failed. Deposits were regarded as riskless placements of money, with the risk covered by deposit insurance for smaller deposits, but in practical terms, guaranteed by the national wealth.
This guarantee meant that individual savings would be safe and that working capital parked by corporations in a bank was safe as well. The alternative was not only uncertainty, but also people hoarding cash and preventing it from entering the financial system. It was necessary to have a secure place to put money so that it was available for lending. The runs on banks in the 1920s and 1930s drove home the need for total security for deposits.
Brussels demanded that the bailout for Cypriot banks be partly paid for by depositors in those banks. That demand essentially violated the social contract on the sanctity of bank deposits and did so in a country that was a member of the European Union – one of the world’s major economic blocs. Proponents of the measure pointed out that many of the depositors were not Cypriot nationals but rather foreigners, many of whom were Russian. Moreover, it was suggested that the only reason for a Russian to be putting money in a Cypriot bank was to get it out of Russia, and the only motive for that had to be nefarious. It followed that the confiscation was not targeted against ordinary people but against shady Russians.
There is no question that there are shady Russians putting money into Cyprus. But ordinary Cypriots had their money in the same banks and so did many Cypriot and foreign companies, including European companies, who were doing business in Cyprus and need money for payroll and so on. The proposal might look like an attempt to seize Russian money, but it would pinch the bank accounts of all Cypriots as well as a sizable amount of legitimate Russian money. Confiscating 10 percent of all deposits could devastate individuals and the overall economy and likely would prompt companies operating in Cyprus to move their cash elsewhere. The measure would have been devastating and the Cypriot parliament rejected it.
Another deal, the one currently up for approval, tried to mitigate the problem but still broke the social contract. Accounts smaller than 100,000 euros (about $128,000) would not be touched. However, accounts larger than 100,000 euros would be taxed at an uncertain rate, currently estimated at 20 percent, while bondholders would lose up to 40 percent. These numbers will likely shift again, but assuming they are close to the final figures, depositors putting money into banks beyond this amount are at risk depending on the financial condition of the bank.
The impact on Cyprus is more than Russian mafia money being taxed. All corporations doing business in Cyprus could have 20 percent of their operating cash seized. Regardless of precisely how the Cypriot banking system is restructured, the fact is that the European Union demanded that Cyprus seize portions of bank accounts from large depositors. From a business’ perspective, 100,000 euros is not all that much when you are running a supermarket or a car dealership or a construction company, but this arbitrary level could easily be raised in the future and the mere existence of the measure will make attracting investment more difficult.
The more significant development was the fact that the European Union has now made it official policy, under certain circumstances, to encourage member states to seize depositors’ assets to pay for the stabilization of financial institutions. To put it simply, if you are a business, the safety of your money in a bank depends on the bank’s financial condition and the political considerations of the European Union. What had been a haven – no risk and minimal returns – now has minimal returns and unknown risks.
Brussels’ emphasis that this was mostly Russian money is not assuring, either. More than just Russian money stands to be taken for the bailout fund if the new policy is approved. Moreover, the point of the global banking system is that money is safe wherever it is deposited. Europe has other money centres, like Luxembourg, where the financial system outstrips gross domestic product. There are no problems there right now, but as we have learned, the European Union is an uncertain place. If Russian deposits can be seized in Nicosia, why not American deposits in Luxembourg?
This was why it was so important to emphasize the potentially criminal nature of the Russian deposits and to downplay the effect on ordinary law-abiding Cypriots. Brussels has worked very hard to make the Cyprus case seem unique and non-replicable: Cyprus is small and its banking system attracted criminals, so the principle that deposits in banks are secure doesn’t necessarily apply there.
[quote]Another way to look at it is that an EU member, like some other members of the bloc, could not guarantee the solvency of its banks so Brussels forced the country to seize deposits in order to receive help stabilizing the system. Viewed that way, the European Union has established a new option for itself in dealing with depositors in troubled banks, and that principle now applies to all of Europe, particularly to those countries with financial institutions potentially facing similar problems.[/quote]The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. If they decide that it isn’t obvious, then foreign corporations – and even European corporations – could start pulling at least part of their cash out of European banks and putting it elsewhere. They can minimize the amount of cash on hand in Europe by shifting to non-European banks and transferring as needed.
Those withdrawals, if they occur, could create a massive liquidity crisis in Europe. At the very least, every reasonable CFO will now assume that the risk in Europe has risen and that an eye needs to be kept on the financial health of institutions where they have deposits. In Europe, depositing money in a bank is no longer a no-brainer.
Now we must ask ourselves why the Germans would have created this risk. One answer is that they were confident they could convince depositors that Cyprus was one of a kind and not to be repeated. The other answer was that they had no choice. The first explanation was undermined March 25, when Eurogroup President Jeroen Dijsselbloem said that the model used in Cyprus could be used in future bank bailouts.
Locked in by an electorate that does not fully understand Germany’s vulnerability, the German government decided it had to take a hard line on Cyprus regardless of risk. Or Germany may be preparing a new strategy for the management of the European financial crisis.
Related: Why Germany Has No Choice But To Save Europe: Mohamed El-Erian
Related: Money Matters: Why Germany Wants to Keep the EU Together
[quote]The banking system in Europe is too big to salvage if it comes to a serious crisis. Any solution will involve the loss of depositors’ money. Contemplating that concept could lead to a run on banks that would trigger the crisis Europe fears. Solving a crisis and guaranteeing depositors may be seen as having impossible consequences. Setting the precedent in Cyprus has the advantage of not appearing to be a precedent.[/quote]It’s not clear what the Germans or the EU negotiators are thinking, and all these theories are speculative. What is certain is that an EU country, facing a crisis in its financial system, is now weighing whether to pay for that crisis by seizing depositors’ money. And with that, the Europeans have broken a barrier that has been in place since the 1930s. They didn’t do that casually and they didn’t do that because they wanted to. But they did it.
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Europe’s Disturbing Precedent in the Cyprus Bailout is republished with permission of STRATFOR.
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The post Germany’s Dangerous Gamble On The Cyprus Bailout: George Friedman appeared first on Economy Watch.
]]>As domestic issues continue to weigh heavily on the minds of American and Israeli leaders, the foundations for their alliance have gradually withered ahead of Barack Obama’s first visit to Israel as president this week. There has therefore been a very real, if somewhat subtle shift, in the U.S.-Israeli relationship. Neither party is what it once was; and in the end, each has its own fate, linked by history to each other but no longer united.
The post Is The US-Israel ‘Marriage’ Breaking Up?: George Friedman appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
As domestic issues continue to weigh heavily on the minds of American and Israeli leaders, the foundations for their alliance have gradually withered ahead of Barack Obama’s first visit to Israel as president this week. There has therefore been a very real, if somewhat subtle shift, in the U.S.-Israeli relationship. Neither party is what it once was; and in the end, each has its own fate, linked by history to each other but no longer united.
As domestic issues continue to weigh heavily on the minds of American and Israeli leaders, the foundations for their alliance have gradually withered ahead of Barack Obama’s first visit to Israel as president this week. There has therefore been a very real, if somewhat subtle shift, in the U.S.-Israeli relationship. Neither party is what it once was; and in the end, each has its own fate, linked by history to each other but no longer united.
U.S. President Barack Obama is making his first visit to Israel as president. The visit comes in the wake of his re-election and inauguration to a second term and the formation of a new Israeli government under Prime Minister Benjamin Netanyahu. Normally, summits between Israel and the United States are filled with foreign policy issues on both sides, and there will be many discussed at this meeting, including Iran, Syria and Egypt. But this summit takes place in an interesting climate, because both the Americans and Israelis are less interested in foreign and security matters than they are in their respective domestic issues.
In the United States, the political crisis over the federal budget and the struggle to grow the economy and reduce unemployment has dominated the president’s and the country’s attention. The Israeli elections turned on domestic issues, ranging from whether the ultra-Orthodox would be required to serve in Israel Defense Forces, as other citizens are, to a growing controversy over economic inequality in Israel.
Inwardness is a cyclic norm in most countries. Foreign policy does not always dominate the agenda and periodically it becomes less important. What is interesting is at this point, while Israelis continue to express concern about foreign policy, they are most passionate on divisive internal social issues. Similarly, although there continues to be a war in Afghanistan, the American public is heavily focused on economic issues. Under these circumstances the interesting question is not what Obama and Netanyahu will talk about but whether what they discuss will matter much.
For the United States, the focus on domestic affairs is compounded by an emerging strategic shift in how the United States deals with the world. After more than a decade of being focused on the Islamic world and moving aggressively to try to control threats in the region militarily, the United States is moving toward a different stance.
The bar for military intervention has been raised. Therefore, the United States has, in spite of recent statements, not militarily committed itself to the Syrian crisis, and when the French intervened in Mali the United States played a supporting role. The intervention in Libya, where France and the United Kingdom drew the United States into the action, was the first manifestation of Washington’s strategic re-evaluation.
The desire to reduce military engagement in the region though was not the result of Libya. That desire was there from the U.S. experience in Iraq and was the realization that the disposal of an unsavory regime does not necessarily – or even very often – result in a better regime. Even the relative success of the intervention in Libya drove home the point that every intervention has both unintended consequences and unanticipated costs.
[quote]The United States’ new stance ought to frighten the Israelis. In Israel’s grand strategy, the United States is the ultimate guarantor of its national security and underwrites a portion of its national defense. If the United States becomes less inclined to involve itself in regional adventures, the question is whether the guarantees implicit in the relationship still stand.[/quote]The issue is not whether the United States would intervene to protect Israel’s existence; save from a nuclear-armed Iran, there is no existential threat to Israel’s national interest. Rather, the question is whether the United States is prepared to continue shaping the dynamics of the region in areas where Israel lacks political influence and is not able to exert military control.
Related: Is A New US Foreign Policy Doctrine Emerging?: George Friedman
Related: The Economic Consequences Of An Israel-Iran War
Israel wants a division of labour in the region, where it influences its immediate neighbours while the United States manages more distant issues. To put it differently, the Israelis’ understanding of the American role is to control events that endanger Israel and American interests under the assumption that Israeli and American interests are identical. The idea that they are always identical has never been as true as politicians on both sides have claimed, but more important, the difficulties of controlling the environment have increased dramatically for both sides.
The problem for Israel at this point is that it is not able to do very much in the area that is its responsibility. For example, after the relationship with the United States, the second-most important strategic foundation for Israel is its relationship – and peace treaty – with Egypt. Following the fall of Egyptian President Hosni Mubarak, the fear was that Egypt might abrogate the peace treaty, reopening at some distant point the possibility of conventional war. But the most shocking thing to Israel was how little control it actually had over events in Egypt and the future of its ties to Egypt. With good relations between Israel and the Egyptian military and with the military still powerful, the treaty has thus far survived. But the power of the military will not be the sole factor in the long-term sustainability of the treaty. Whether it survives or not ultimately is not a matter that Israel has much control over.
The Israelis have always assumed that the United States can control areas where they lack control. And some Israelis have condemned the United States for not doing more to manage events in Egypt. But the fact is that the United States also has few tools to control the evolution of Egypt, apart from some aid to Egypt and its own relationship with the Egyptian military. The first Israeli response is that the United States should do something about problems confronting Israel. It may or may not be in the American interest to do something in any particular case, but the problem in this case is that although a hostile Egypt is not in the Americans’ interest, there is actually little the United States can do to control events in Egypt.
The Syrian situation is even more complex, with Israel not even certain what outcome is more desirable. Syrian President Bashar al Assad is a known quantity to Israel. He is by no means a friend, but his actions and his father’s have always been in the pursuit of their own interest and therefore have been predictable. The opposition is an amorphous entity whose ability to govern is questionable and that is shot through with Islamists who are at least organized and know what they want. It is not clear that Israel wants al Assad to fall or to survive, and in any case Israel is limited in what it could do even if it had a preference. Both outcomes frighten the Israelis. Indeed, the hints of American weapons shipments to the rebels at some point concern Israel as much as no weapons shipments.
The Iranian situation is equally complex. It is clear that the Israelis, despite rhetoric to the contrary, will not act unilaterally against Iran’s nuclear weapons. The risks of failure are too high, and the consequences of Iranian retaliation against fundamental American interests, such as the flow of oil through the Strait of Hormuz, are too substantial. The American view is that an Iranian nuclear weapon is not imminent and Iran’s ultimate ability to build a deliverable weapon is questionable. Therefore, regardless of what Israel wants, and given the American doctrine of military involvement as a last resort when it significantly affects U.S. interests, the Israelis will not be able to move the United States to play its traditional role of assuming military burdens to shape the region.
Related: MAD For Oil: Will US Sanctions On Iran Lead To Mutually Assured Economic Destruction?
Related: Has ‘Partial Intervention’ In Syria Failed?
For the United States, there are now more important issues than the Middle East, such as the domestic economy. The United States is looking inward both because it has to and because it has not done well in trying to shape the Islamic world. From the Israeli point of view, for the moment, its national security is not at risk, and its ability to control its security environment is limited, while its ability to shape American responses in the region has deteriorated due to the shifting American focus. It will continue to get aid that it no longer needs and will continue to have military relations with the United States, particularly in developing military technology. But for reasons having little to do with Israel, Washington’s attention is not focused on the region or at least not as obsessively as it had been since 2001.
Therefore Israel has turned inward by default. Frightened by events on its border, it realizes that it has little control there and lacks clarity on what it wants. In the broader region, Israel’s ability to rely on American control has declined. Like Israel, the United States has realized the limits and costs of such a strategy, and Israel will not talk the United States out of it, as the case of Iran shows. In addition, there is no immediate threat to Israel that it must respond to. It is, by default, in a position of watching and waiting without being clear as to what it wants to see. Therefore it should be no surprise that Israel, like the United States, is focused on domestic affairs.
It also puts Israel in a reactive position. The question of the Palestinians is always there. Israel’s policy, like most of its strategic policy, is to watch and wait. It has no inclination to find a political solution because it cannot predict what the consequences of either a solution or an attempt to find one would be. Its policy is to cede the initiative to the Palestinians. Last month, there was speculation that increased demonstrations in the West Bank could spark a third intifada. There was not one. There might be another surge of rockets from Gaza, or there might not be. That is a decision that Hamas will make.
Israel has turned politically inward because its strategic environment has become not so much threatening as beyond its control. Enemies cannot overwhelm it, nor can it control what its enemies and potential enemies might do. Israel has lost the initiative and, more important, it now knows it has lost the initiative. It has looked to the United States to take the initiative, but on a much broader scale Washington faces the same reality as Israel with less at stake and therefore less urgency. Certainly, the Israelis would like to see the United States take more aggressive stands and more risks, but they fully understand that the price and dangers of aggressive stands in the region have grown out of control.
Therefore it is interesting to wonder what Obama and Netanyahu will discuss. Surely Iran will come up and Obama will say there is no present danger and no need to take risks. Netanyahu will try to find some way to convince him that the United States should undertake the burden at a time suitable to Israel. The United States will decline the invitation.
[quote]This is not a strain in the U.S.-Israeli relationship in the sense of anger and resentment, although those exist on both sides. Rather it is like a marriage that continues out of habit but whose foundation has withered. [/quote]Related: The Shifting Sands of Power In The Middle East: George Friedman
Related: Will Politics Continue To Dominate The World Economy In 2013?: Mohamed El-Erian
The foundation was the Israeli ability to control events in its region and the guarantee that where the Israelis fail, U.S. interests dictate that Washington will take action. Neither one has the ability, the appetite or the political basis to maintain that relationship on those terms. Obama has economics to worry about. Netanyahu has the conscription of the ultra-Orthodox on his mind. National security remains an issue for both, but their ability to manage it has declined dramatically.
In private I expect a sullen courtesy and in public an enthusiastic friendship, much as an old, bored married couple, not near a divorce, but far from where they were when they were young. Neither party is what it once was; each suspects that it is the other’s fault. In the end, each has its own fate, linked by history to each other but no longer united.
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
A New Reality in U.S.-Israeli Relations is republished with permission of STRATFOR.
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The post Is The US-Israel ‘Marriage’ Breaking Up?: George Friedman appeared first on Economy Watch.
]]>Fascism had its roots in Europe, during the 1920s and 1930s, in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. While history may not repeat itself so neatly, the emergence of new political parties speaking for the unemployed and the newly poor could lead to governments who enclose their economies from the world and manage their performance through directive and manipulation.
The post Will Europe’s Unemployment Crisis Spark A Return For Fascism? : George Friedman appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Fascism had its roots in Europe, during the 1920s and 1930s, in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. While history may not repeat itself so neatly, the emergence of new political parties speaking for the unemployed and the newly poor could lead to governments who enclose their economies from the world and manage their performance through directive and manipulation.
Fascism had its roots in Europe, during the 1920s and 1930s, in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. While history may not repeat itself so neatly, the emergence of new political parties speaking for the unemployed and the newly poor could lead to governments who enclose their economies from the world and manage their performance through directive and manipulation.
The global financial crisis of 2008 has slowly yielded to a global unemployment crisis. This unemployment crisis will, fairly quickly, give way to a political crisis. The crisis involves all three of the major pillars of the global system – Europe, China and the United States. The level of intensity differs, the political response differs and the relationship to the financial crisis differs. But there is a common element, which is that unemployment is increasingly replacing finance as the central problem of the financial system.
Europe is the focal point of this crisis. Last week Italy held elections, and the party that won the most votes – with about a quarter of the total – was a brand-new group called the Five Star Movement that is led by a professional comedian. Two things are of interest about this movement. First, one of its central pillars is the call for defaulting on a part of Italy’s debt as the lesser of evils. The second is that Italy, with 11.2 percent unemployment, is far from the worst case of unemployment in the European Union. Nevertheless, Italy is breeding radical parties deeply opposed to the austerity policies currently in place.
The core debate in Europe has been how to solve the sovereign debt crisis and the resulting threat to Europe’s banks. The issue was who would bear the burden of stabilizing the system. The argument that won the day, particularly among Europe’s elites, was that what Europe needed was austerity, that government spending had to be dramatically restrained so that sovereign debt – however restructured it might be – would not default.
One of the consequences of austerity is recession. The economies of many European countries, especially those in the eurozone, are now contracting, since austerity obviously means that less money will be available to purchase goods and services. If the primary goal is to stabilize the financial system, it makes sense. But whether financial stability can remain the primary goal depends on a consensus involving broad sectors of society.
[quote]When unemployment emerges, that consensus shifts and the focus shifts with it. When unemployment becomes intense, then the entire political system can shift. From my point of view, the Italian election was the first, but expected, tremor.[/quote]
Related: Europe’s Austerity ‘Cure’ Will Never Work: Joseph Stiglitz
Related: Europe’s Man-Made Disaster – An Austerity Tragedy: Joseph Stiglitz
Related: Forget Finance, Europe’s Next Crisis Will Be Political In Nature: George Friedman
Consider the geography of unemployment. Only four countries in Europe are at or below 6 percent unemployment: the geographically contiguous countries of Germany, Austria, the Netherlands and Luxembourg. The immediate periphery has much higher unemployment; Denmark at 7.4 percent, the United Kingdom at 7.7 percent, France at 10.6 percent and Poland at 10.6 percent. In the far periphery, Italy is at 11.7 percent, Lithuania is at 13.3 percent, Ireland is at 14.7 percent, Portugal is at 17.6 percent, Spain is at 26.2 percent and Greece is at 27 percent.
Germany, the world’s fourth-largest economy, is at the center of gravity of Europe. Exports of goods and services are the equivalent of 51 percent of Germany’s gross domestic product, and more than half of Germany’s exports go to other European countries. Germany sees the European Union’s free trade zone as essential for its survival. Without free access to these markets, its exports would contract dramatically and unemployment would soar. The euro is a tool that Germany, with its outsized influence, uses to manage its trade relations – and this management puts other members of the eurozone at a disadvantage. Countries with relatively low wages ought to have a competitive advantage over German exports. However, many have negative balances of trade. Thus, when the financial crisis hit, their ability to manage was insufficient and led to sovereign debt crises, which in turn further undermined their position via austerity, especially as their membership in the eurozone doesn’t allow them to apply their own monetary policies.
[quote]This doesn’t mean that they were not profligate in their social spending, but the underlying cause of their failure was much more complex. Ultimately it was rooted in the rare case of a free trade zone being built around a massive economy that depended on exports. (Germany is the third-largest exporter in the world, ranking after China and the United States.) The North American Free Trade Agreement is built around a net importer. Britain was a net importer from the Empire. German power unbalances the entire system. Comparing the unemployment rate of the German bloc with that of Southern Europe, it is difficult to imagine these countries are members of the same trade group. [/quote]Even France, which has a relatively low unemployment rate, has a more complex story. Unemployment in France is concentrated in two major poles in the north and the south, with the southeast of France being the largest of them. Thus, if you look at the map, the southern tier of Europe has been hit extraordinarily hard with unemployment, and Eastern Europe not quite as badly, but Germany, Austria, the Netherlands and Luxembourg have been left relatively unscathed. How long this will last, given the recession in Germany, is another matter, but the contrast tells us a great deal about the emerging geopolitics of the region.
Related: Why Germany Has No Choice But To Save Europe: Mohamed El-Erian
Related: Europe’s Woes Stem From A Crisis Of Nationalism: George Friedman
Related: Europe Trapped In Economic War Of Attrition: Mohamed El-Erian
Portugal, Spain and Greece are in a depression. Their unemployment rate is roughly that of the United States in the midst of the Great Depression. A rule I use is that for each person unemployed, three others are affected, whether spouses, children or whomever. That means that when you hit 25 percent unemployment virtually everyone is affected. At 11 percent unemployment about 44 percent are affected.
It can be argued that the numbers are not quite as bad as they seem since people are working in the informal economy. That may be true, but in Greece, for example, pharmaceuticals are now in short supply since cash for importing goods has dried up. Spain’s local governments are about to lay off more employees. These countries have reached a tipping point from which it is difficult to imagine recovering. In the rest of Europe’s periphery, the unemployment crisis is intensifying. The precise numbers matter far less than the visible impact of societies that are tottering.
It is important to understand the consequences of this kind of unemployment. There is the long-term unemployment of the underclass. This wave of unemployment has hit middle and upper-middle class workers. Consider an architect I know in Spain who lost his job. Married with children, he has been unemployed for so long that he has plunged into a totally different and unexpected lifestyle. Poverty is hard enough to manage, but when it is also linked to loss of status, the pain is compounded and a politically potent power arises.
The idea that the Germany-mandated austerity regime will be able to survive politically is difficult to imagine. In Italy, with “only” 11.7 percent unemployment, the success of the Five Star Movement represents an inevitable response to the crisis. Until recently, default was the primary fear of Europeans, at least of the financial, political and journalistic elite. They have come a long way toward solving the banking problem. But they have done it by generating a massive social crisis. That social crisis generates a political backlash that will prevent the German strategy from being carried out. For Southern Europe, where the social crisis is settling in for the long term, as well as for Eastern Europe, it is not clear how paying off their debt benefits them. They may be frozen out of the capital markets, but the cost of remaining in it is shared so unequally that the political base in favor of austerity is dissolving.
This is compounded by deepening hostility to Germany. Germany sees itself as virtuous for its frugality. Others see it as rapacious in its aggressive exporting, with the most important export now being unemployment. Which one is right is immaterial. The fact that we are seeing growing differentiation between the German bloc and the rest of Europe is one of the most significant developments since the crisis began.
The growing tension between France and Germany is particularly important. Franco-German relations were not only one of the founding principles of the European Union but one of the reasons the union exists. After the two world wars, it was understood that the peace of Europe depended on unity between France and Germany. The relationship is far from shattered, but it is strained. Germany wants to see the European Central Bank continue its policy of focusing on controlling inflation. This is in Germany’s interest. France, with close to 11 percent unemployment, needs the European Central Bank to stimulate the European economy in order to reduce unemployment.
[quote]This is not an arcane debate. It is a debate over who controls the European Central Bank, what the priorities of Europe are and, ultimately, how Europe can exist with such vast differences in unemployment. [/quote]One answer may be that Germany’s unemployment rate will surge. That might mitigate anti-German feeling, but it won’t solve the problem. Unemployment at the levels many countries are reaching and appear to be remaining at undermines the political power of the governments to pursue policies needed to manage the financial system. The Five Star Movement’s argument in favor of default is not coming from a marginal party. The elite may hold the movement in contempt, but it won 25 percent of the vote. And recall that the hero of the Europhiles, Mario Monti, barely won 10 percent of the vote just a year after Europe celebrated him.
Fascism had its roots in Europe in massive economic failures in which the financial elites failed to recognize the political consequences of unemployment. They laughed at parties led by men who had been vagabonds selling post cards on the street and promising economic miracles if only those responsible for the misery of the country were purged. Men and women, plunged from the comfortable life of the petite bourgeoisie, did not laugh, but responded eagerly to that hope. The result was governments who enclosed their economies from the world and managed their performance through directive and manipulation.
[quote]This is what happened after World War I. It did not happen after World War II because Europe was occupied. But when we look at the unemployment rates today, the differentials between regions, the fact that there is no promise of improvement and that the middle class is being hurled into the ranks of the dispossessed, we can see the patterns forming.[/quote]History does not repeat itself so neatly. Fascism in the 1920s and 1930s sense is dead. But the emergence of new political parties speaking for the unemployed and the newly poor is something that is hard to imagine not occurring. Whether it is the Golden Dawn party in Greece or the Catalan independence movements, the growth of parties wanting to redefine the system that has tilted so far against the middle class is inevitable. Italy was simply, once again, the first to try it out.
It is difficult to see not only how this is contained within countries, but also how another financial crisis can be avoided, since the political will to endure austerity is broken. It is even difficult to see how the free trade zone will survive in the face of the urgent German need to export as much as it can to sustain itself. The divergence between German interests and those of Southern and Eastern Europe has been profound and has increased the more it appeared that a compromise was possible to save the banks. That is because the compromise had the unintended consequence of triggering the very force that would undermine it: unemployment.
Related: Could Europe’s Social Crisis Overshadow Its Economic Woes In 2013?: George Friedman
Related: Will Politics Continue To Dominate The World Economy In 2013?: Mohamed El-Erian
Related: Another Eurozone Crisis In 2014?: Nouriel Roubini
It is difficult to imagine a common European policy at this point. There still is one, in a sense, but how a country with 5.2 percent unemployment creates a common economic policy with one that has 11 or 14 or 27 percent unemployment is hard to see. In addition, with unemployment comes lowered demand for goods and less appetite for German exports. How Germany deals with that is also a mystery.
[quote]The crisis of unemployment is a political crisis, and that political crisis will undermine all of the institutions Europe has worked so hard to craft. For 17 years Europe thrived, but that was during one of the most prosperous times in history. It has now encountered one of the nightmares of all countries and an old and deep European nightmare: unemployment on a massive scale. The test of Europe is not sovereign debt. It is whether it can avoid old and bad habits rooted in unemployment.[/quote]By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Europe, Unemployment and Instability is republished with permission of Stratfor.
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]]>For years, North Korea has been using nuclear tests as an existential ‘threat’ against its neighbours and the United States. Yet despite the nation’s weak economy and technologically inferior military, successive leaders have somehow managed to manoeuvre themselves into powerful bargaining positions with the world’s superpowers.
The post North Korea’s Brilliant Bluff – Why Kim Still Holds All The Trump Cards: George Friedman appeared first on Economy Watch.
]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
For years, North Korea has been using nuclear tests as an existential ‘threat’ against its neighbours and the United States. Yet despite the nation’s weak economy and technologically inferior military, successive leaders have somehow managed to manoeuvre themselves into powerful bargaining positions with the world’s superpowers.
For years, North Korea has been using nuclear tests as an existential ‘threat’ against its neighbours and the United States. Yet despite the nation’s weak economy and technologically inferior military, successive leaders have somehow managed to manoeuvre themselves into powerful bargaining positions with the world’s superpowers. The North Korean strategy is simple and ingenious: by portraying itself as weak, yet ferocious and crazy, international players are unable to predict the result of any engagement – allowing the North Korean regime to survive another day.
North Korea’s state-run media reported Sunday that North Korean leader Kim Jong Un has ordered the country’s top security officials to take “substantial and high-profile important state measures,” which has been widely interpreted to mean that North Korea is planning its third nuclear test. Kim said the orders were retaliation for the U.S.-led push to tighten U.N. sanctions on Pyongyang following North Korea’s missile test in October. A few days before Kim’s statement emerged, the North Koreans said future tests would target the United States, which North Korea regards as its key adversary along with Washington’s tool, South Korea.
North Korea has been using the threat of tests and the tests themselves as weapons against its neighbours and the United States for years. On the surface, threatening to test weapons does not appear particularly sensible. If the test fails, you look weak. If it succeeds, you look dangerous without actually having a deliverable weapon. And the closer you come to having a weapon, the more likely someone is to attack you so you don’t succeed in actually getting one. Developing a weapon in absolute secret would seem to make more sense. When the weapon is ready, you display it, and you have something solid to threaten enemies with.
North Korea, of course, has been doing this for years and doing it successfully, so what appears absurd on the surface quite obviously isn’t. On the contrary, it has proved to be a very effective manoeuvre.
North Korea is estimated to have a gross domestic product of about $28 billion, about the same as Latvia or Turkmenistan. Yet it has manoeuvred itself into a situation where the United States, Japan, China, Russia and South Korea have sat down with it at the negotiating table in a bid to persuade it not to build weapons. Sometimes, the great powers give North Korea money and food to persuade it not to develop weapons. It sometimes agrees to a halt, but then resumes its nuclear activities. It never completes a weapon, but it frequently threatens to test one. And when it carries out such tests, it claims its tests are directed at the United States and South Korea, as if the test itself were a threat.
There is brilliance in North Korea’s strategy. When the Soviet Union collapsed, North Korea was left in dire economic straits. There were reasonable expectations that its government would soon collapse, leading to the unification of the Korean Peninsula. Naturally, the goal of the North Korean government was regime survival, so it was terrified that outside powers would invade or support an uprising against it. It needed a strategy that would dissuade anyone from trying that. Being weak in every sense, this wasn’t going to be easy, but the North Koreans developed a strategy that we described more than 10 years ago as ferocious, weak and crazy. North Korea has pursued this course since the 1990s, and the latest manifestation of this strategy was on display last week. The strategy has worked marvellously and is still working.
First, the North Koreans positioned themselves as ferocious by appearing to have, or to be on the verge of having, devastating power. Second, they positioned themselves as being weak such that no matter how ferocious they are, there would be no point in pushing them because they are going to collapse anyway. And third, they positioned themselves as crazy, meaning pushing them would be dangerous since they were liable to engage in the greatest risks imaginable at the slightest provocation.
In the beginning, Pyongyang’s ability to appear ferocious was limited to the North Korean army’s power to shell Seoul. It had massed artillery along the border and could theoretically devastate the southern capital, assuming the North had enough ammunition, its artillery worked and air power didn’t lay waste to its massed artillery. The point was not that it was going to level Seoul but that it had the ability to do so.
There were benefits to outsiders in destabilizing the northern regime, but Pyongyang’s ferocity – uncertain though its capabilities were – was enough to dissuade South Korea and its allies from trying to undermine the regime. Its later move to develop missiles and nuclear weapons followed from the strategy of ferocity – since nothing was worth a nuclear war, enraging the regime by trying to undermine it wasn’t worth the risk.
Many nations have tried to play the ferocity game, but the North Koreans added a brilliant and subtle twist to it: being weak. The North Koreans advertised the weakness of their economy, particularly its food insecurity, by various means. This was not done overtly, but by allowing glimpses of its weakness. Given the weakness of its economy and the difficulty of life in North Korea, there was no need to risk trying to undermine the North. It would collapse from its own defects.
[quote]This was a double inoculation. The North Koreans’ ferocity with weapons whose effectiveness might be questionable, but still pose an unquantifiable threat, caused its enemies to tread carefully. Why risk unleashing its ferocity when its weakness would bring it down? Indeed, a constant debate among Western analysts over the North’s power versus its weakness combines to paralyze policymakers.[/quote]Related: The Time To Re-Engage North Korea Is Now: Dan Steinbock
Related: North Korean Leader Calls For “Radical” Economic Shift, Improved Ties With South
Related: North Korea: Who says they don’t want Foreign Investment?
The North Koreans added a third layer to perfect all of this. They portrayed themselves as crazy, working to appear unpredictable, given to extravagant threats and seeming to welcome a war. Sometimes, they reaffirmed they were crazy via steps like sinking South Korean ships for no apparent reason. As in poker, so with the North: You can play against many sorts of players, from those who truly understand the odds to those who are just playing for fun, but never, ever play poker against a nut. He is totally unpredictable, can’t be gamed, and if you play with his head you don’t know what will happen.
So long as the North Koreans remained ferocious, weak and crazy, the best thing to do was not irritate them too much and not to worry what kind of government they had. But being weak and crazy was the easy part for the North; maintaining its appearance of ferocity was more challenging. Not only did the North Koreans have to keep increasing their ferocity, they had to avoid increasing it so much that it overpowered the deterrent effect of their weakness and craziness.
Hence, we have North Korea’s eternal nuclear program. It never quite produces a weapon, but no one can be sure whether a weapon might be produced. Due to widespread perceptions that the North Koreans are crazy, it is widely believed they might rush to complete their weapon and go to war at the slightest provocation. The result is the United States, Russia, China, Japan and South Korea holding meetings with North Korea to try to persuade it not to do something crazy.
Interestingly, North Korea never does anything significant and dangerous, or at least not dangerous enough to break the pattern. Since the Korean War, North Korea has carefully calculated its actions, timing them to avoid any move that could force a major reaction. We see this caution built into its nuclear program. After more than a decade of very public ferocity, the North Koreans have not come close to a deliverable weapon. But since if you upset them, they just might, the best bet has been to tread lightly and see if you can gently persuade them not to do something insane.
[quote]The North’s positioning is superb: Minimal risky action sufficient to lend credibility to its ferocity and craziness plus endless rhetorical threats manoeuvres North Korea into being a major global threat in the eyes of the great powers. Having won themselves this position, the North Koreans are not about to risk it, even if a 20-something leader is hurling threats.[/quote]There is, however, a somewhat more interesting dimension emerging. Over the years, the United States, Japan and South Korea have looked to the Chinese to intercede and persuade the North Koreans not to do anything rash. This diplomatic pattern has established itself so firmly that we wonder what the actual Chinese role is in all this. China is currently engaged in territorial disputes with U.S. allies in the South and East China seas. Whether anyone would or could go to war over islands in these waters is dubious, but the situation is still worth noting.
The Chinese and the Japanese have been particularly hostile toward one another in recent weeks in terms of rhetoric and moving their ships around. A crisis in North Korea, particularly one in which the North tested a nuclear weapon, would inevitably initiate the diplomatic dance whereby the Americans and Japanese ask the Chinese to intercede with the North Koreans. The Chinese would oblige. This is not a great effort for them, since having detonated a nuclear device, the North isn’t interested in doing much more. In fact, Pyongyang will be drawing on the test’s proverbial fallout for some time. The Chinese are calling in no chits with the North Koreans, and the Americans and Japanese – terribly afraid of what the ferocious, weak, crazy North Koreans will do next – will be grateful to China for defusing the “crisis.” And who could be so churlish as to raise issues on trade or minor islands when China has used its power to force North Korea to step down?
It is impossible for us to know what the Chinese are thinking, and we have no overt basis for assuming the Chinese and North Koreans are collaborating, but we do note that China has taken an increasing interest in stabilizing North Korea. For its part, North Korea has tended to stage these crises – and their subsequent Chinese interventions – at quite useful times for Beijing.
Related: China Sees “Great Potential” in Economic Cooperation with North Korea
Related: China Reaffirms ‘Friendship’ With North Korea
Related: North Korea Increases Trade Dependency on China
It should also be noted that other countries have learned the ferocious, weak, crazy maneuver from North Korea. Iran is the best pupil. It has convincingly portrayed itself as ferocious via its nuclear program, endlessly and quite publicly pursuing its program without ever quite succeeding. It is also persistently seen as weak, perpetually facing economic crises and wrathful mobs of iPod-wielding youths. Whether Iran can play the weakness card as skilfully as North Korea remains unclear – Iran just doesn’t have the famines North Korea has.
Additionally, Iran’s rhetoric at times can certainly be considered crazy: Tehran has carefully cultivated perceptions that it would wage nuclear war even if this meant the death of all Iranians. Like North Korea, Iran also has managed to retain its form of government and its national sovereignty. Endless predictions of the fall of the Islamic republic to a rising generation have proved false.
I do not mean to appear to be criticizing the “ferocious, weak and crazy” strategy. When you are playing a weak hand, such a strategy can yield demonstrable benefits. It preserves regimes, centres one as a major international player and can wring concessions out of major powers. It can be pushed too far, however, when the fear of ferocity and craziness undermines the solace your opponents find in your weakness.
[quote]Diplomacy is the art of nations achieving their ends without resorting to war. It is particularly important for small, isolated nations to survive without going to war. As in many things, the paradox of appearing willing to go to war in spite of all rational calculations can be the foundation for avoiding war. It is a sound strategy, and for North Korea and Iran, for the time being at least, it has worked.[/quote]By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
Ferocious, Weak and Crazy: The North Korean Strategy is republished with permission of STRATFOR.
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]]>Besides its economic and social implications, the persistent decline of the American middle-class also poses a significant geopolitical threat: Can the U.S. really maintain its status as a global superpower when half of the country is either stagnant or already losing ground to the rest of the world?
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]]>Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Besides its economic and social implications, the persistent decline of the American middle-class also poses a significant geopolitical threat: Can the U.S. really maintain its status as a global superpower when half of the country is either stagnant or already losing ground to the rest of the world?
Besides its economic and social implications, the persistent decline of the American middle-class also poses a significant geopolitical threat: Can the U.S. really maintain its status as a global superpower when half of the country is either stagnant or already losing ground to the rest of the world?
Last week I wrote about the crisis of unemployment in Europe. I received a great deal of feedback, with Europeans agreeing that this is the core problem and Americans arguing that the United States has the same problem, asserting that U.S. unemployment is twice as high as the government’s official unemployment rate. My counterargument is that unemployment in the United States is not a problem in the same sense that it is in Europe because it does not pose a geopolitical threat. The United States does not face political disintegration from unemployment, whatever the number is. Europe might.
At the same time, I would agree that the United States faces a potentially significant but longer-term geopolitical problem deriving from economic trends. The threat to the United States is the persistent decline in the middle class’ standard of living, a problem that is reshaping the social order that has been in place since World War II and that, if it continues, poses a threat to American power.
The median household income of Americans in 2011 was $49,103. Adjusted for inflation, the median income is just below what it was in 1989 and is $4,000 less than it was in 2000. Take-home income is a bit less than $40,000 when Social Security and state and federal taxes are included. That means a monthly income, per household, of about $3,300. It is urgent to bear in mind that half of all American households earn less than this. It is also vital to consider not the difference between 1990 and 2011, but the difference between the 1950s and 1960s and the 21st century. This is where the difference in the meaning of middle class becomes most apparent.
In the 1950s and 1960s, the median income allowed you to live with a single earner – normally the husband, with the wife typically working as homemaker – and roughly three children. It permitted the purchase of modest tract housing, one late model car and an older one. It allowed a driving vacation somewhere and, with care, some savings as well. I know this because my family was lower-middle class, and this is how we lived, and I know many others in my generation who had the same background. It was not an easy life and many luxuries were denied us, but it wasn’t a bad life at all.
Someone earning the median income today might just pull this off, but it wouldn’t be easy. Assuming that he did not have college loans to pay off but did have two car loans to pay totaling $700 a month, and that he could buy food, clothing and cover his utilities for $1,200 a month, he would have $1,400 a month for mortgage, real estate taxes and insurance, plus some funds for fixing the air conditioner and dishwasher. At a 5 percent mortgage rate, that would allow him to buy a house in the $200,000 range. He would get a refund back on his taxes from deductions but that would go to pay credit card bills he had from Christmas presents and emergencies. It could be done, but not easily and with great difficulty in major metropolitan areas. And if his employer didn’t cover health insurance, that $4,000-5,000 for three or four people would severely limit his expenses. And of course, he would have to have $20,000-40,000 for a down payment and closing costs on his home. There would be little else left over for a week at the seashore with the kids.
[quote]And this is for the median. Those below him – half of all households – would be shut out of what is considered middle-class life, with the house, the car and the other associated amenities. Those amenities shift upward on the scale for people with at least $70,000 in income. The basics might be available at the median level, given favorable individual circumstance, but below that life becomes surprisingly meager, even in the range of the middle class and certainly what used to be called the lower-middle class.[/quote]Related: Rich Nations, Poor People: The Cause For Rising Poverty In The Western World
Related: US Poverty Hits Record High: 1 in 6 Americans Living Below Poverty Line
I should pause and mention that this was one of the fundamental causes of the 2007-2008 subprime lending crisis. People below the median took out loans with deferred interest with the expectation that their incomes would continue the rise that was traditional since World War II. The caricature of the borrower as irresponsible misses the point. The expectation of rising real incomes was built into the American culture, and many assumed based on that that the rise would resume in five years. When it didn’t they were trapped, but given history, they were not making an irresponsible assumption.
American history was always filled with the assumption that upward mobility was possible. The Midwest and West opened land that could be exploited, and the massive industrialization in the late 19th and early 20th centuries opened opportunities. There was a systemic expectation of upward mobility built into American culture and reality.
The Great Depression was a shock to the system, and it wasn’t solved by the New Deal, nor even by World War II alone. The next drive for upward mobility came from post-war programs for veterans, of whom there were more than 10 million. These programs were instrumental in creating post-industrial America, by creating a class of suburban professionals. There were three programs that were critical:
The GI Bill, which allowed veterans to go to college after the war, becoming professionals frequently several notches above their parents.
The part of the GI Bill that provided federally guaranteed mortgages to veterans, allowing low and no down payment mortgages and low interest rates to graduates of publicly funded universities.
The federally funded Interstate Highway System, which made access to land close to but outside of cities easier, enabling both the dispersal of populations on inexpensive land (which made single-family houses possible) and, later, the dispersal of business to the suburbs.
There were undoubtedly many other things that contributed to this, but these three not only reshaped America but also created a new dimension to the upward mobility that was built into American life from the beginning. Moreover, these programs were all directed toward veterans, to whom it was acknowledged a debt was due, or were created for military reasons (the Interstate Highway System was funded to enable the rapid movement of troops from coast to coast, which during World War II was found to be impossible). As a result, there was consensus around the moral propriety of the programs.
The subprime fiasco was rooted in the failure to understand that the foundations of middle class life were not under temporary pressure but something more fundamental. Where a single earner could support a middle class family in the generation after World War II, it now took at least two earners. That meant that the rise of the double-income family corresponded with the decline of the middle class. The lower you go on the income scale, the more likely you are to be a single mother. That shift away from social pressure for two parent homes was certainly part of the problem.
But there was, I think, the crisis of the modern corporation. Corporations provided long-term employment to the middle class. It was not unusual to spend your entire life working for one. Working for a corporation, you received yearly pay increases, either as a union or non-union worker. The middle class had both job security and rising income, along with retirement and other benefits. Over the course of time, the culture of the corporation diverged from the realities, as corporate productivity lagged behind costs and the corporations became more and more dysfunctional and ultimately unsupportable. In addition, the corporations ceased focusing on doing one thing well and instead became conglomerates, with a management frequently unable to keep up with the complexity of multiple lines of business.
Related: Fix The Enterprises, Fix The Economy: Henry Mintzberg
Related: Capitalism’s Pallbearers: The Companies That Run, & Could Destroy, The Global Economy
For these and many other reasons, the corporation became increasingly inefficient, and in the terms of the 1980s, they had to be re-engineered – which meant taken apart, pared down, refined and refocused. And the re-engineering of the corporation, designed to make them agile, meant that there was a permanent revolution in business. Everything was being reinvented. Huge amounts of money, managed by people whose specialty was re-engineering companies, were deployed. The choice was between total failure and radical change. From the point of view of the individual worker, this frequently meant the same thing: unemployment. From the view of the economy, it meant the creation of value whether through breaking up companies, closing some of them or sending jobs overseas. It was designed to increase the total efficiency, and it worked for the most part.
[quote]This is where the disjuncture occurred. From the point of view of the investor, they had saved the corporation from total meltdown by redesigning it. From the point of view of the workers, some retained the jobs that they would have lost, while others lost the jobs they would have lost anyway. But the important thing is not the subjective bitterness of those who lost their jobs, but something more complex.[/quote]As the permanent corporate jobs declined, more people were starting over. Some of them were starting over every few years as the agile corporation grew more efficient and needed fewer employees. That meant that if they got new jobs it would not be at the munificent corporate pay rate but at near entry-level rates in the small companies that were now the growth engine. As these companies failed, were bought or shifted direction, they would lose their jobs and start over again. Wages didn’t rise for them and for long periods they might be unemployed, never to get a job again in their now obsolete fields, and certainly not working at a company for the next 20 years.
The restructuring of inefficient companies did create substantial value, but that value did not flow to the now laid-off workers. Some might flow to the remaining workers, but much of it went to the engineers who restructured the companies and the investors they represented. Statistics reveal that, since 1947 (when the data was first compiled), corporate profits as a percentage of gross domestic product are now at their highest level, while wages as a percentage of GDP are now at their lowest level. It was not a question of making the economy more efficient – it did do that – it was a question of where the value accumulated. The upper segment of the wage curve and the investors continued to make money. The middle class divided into a segment that entered the upper-middle class, while another faction sank into the lower-middle class.
American society on the whole was never egalitarian. It always accepted that there would be substantial differences in wages and wealth. Indeed, progress was in some ways driven by a desire to emulate the wealthy. There was also the expectation that while others received far more, the entire wealth structure would rise in tandem. It was also understood that, because of skill or luck, others would lose.
[quote]What we are facing now is a structural shift, in which the middle class’ center, not because of laziness or stupidity, is shifting downward in terms of standard of living. It is a structural shift that is rooted in social change (the breakdown of the conventional family) and economic change (the decline of traditional corporations and the creation of corporate agility that places individual workers at a massive disadvantage).[/quote]The inherent crisis rests in an increasingly efficient economy and a population that can’t consume what is produced because it can’t afford the products. This has happened numerous times in history, but the United States, excepting the Great Depression, was the counterexample.
Obviously, this is a massive political debate, save that political debates identify problems without clarifying them. In political debates, someone must be blamed. In reality, these processes are beyond even the government’s ability to control. On one hand, the traditional corporation was beneficial to the workers until it collapsed under the burden of its costs. On the other hand, the efficiencies created threaten to undermine consumption by weakening the effective demand among half of society.
The greatest danger is one that will not be faced for decades but that is lurking out there. The United States was built on the assumption that a rising tide lifts all ships. That has not been the case for the past generation, and there is no indication that this socio-economic reality will change any time soon. That means that a core assumption is at risk. The problem is that social stability has been built around this assumption – not on the assumption that everyone is owed a living, but the assumption that on the whole, all benefit from growing productivity and efficiency.
[quote]If we move to a system where half of the country is either stagnant or losing ground while the other half is surging, the social fabric of the United States is at risk, and with it the massive global power the United States has accumulated. Other superpowers such as Britain or Rome did not have the idea of a perpetually improving condition of the middle class as a core value. The United States does. If it loses that, it loses one of the pillars of its geopolitical power.[/quote]Related: Inequality Has Exposed The ‘American Dream’ As A Myth: Joseph Stiglitz
Related: Inequality In Retrospective – The Hidden Effects Of The Income Gap: Raghuram Rajan
The left would argue that the solution is for laws to transfer wealth from the rich to the middle class. That would increase consumption but, depending on the scope, would threaten the amount of capital available to investment by the transfer itself and by eliminating incentives to invest. You can’t invest what you don’t have, and you won’t accept the risk of investment if the payoff is transferred away from you.
The agility of the American corporation is critical. The right will argue that allowing the free market to function will fix the problem. The free market doesn’t guarantee social outcomes, merely economic ones. In other words, it may give more efficiency on the whole and grow the economy as a whole, but by itself it doesn’t guarantee how wealth is distributed. The left cannot be indifferent to the historical consequences of extreme redistribution of wealth. The right cannot be indifferent to the political consequences of a middle-class life undermined, nor can it be indifferent to half the population’s inability to buy the products and services that businesses sell.
The most significant actions made by governments tend to be unintentional. The GI Bill was designed to limit unemployment among returning serviceman; it inadvertently created a professional class of college graduates. The VA loan was designed to stimulate the construction industry; it created the basis for suburban home ownership. The Interstate Highway System was meant to move troops rapidly in the event of war; it created a new pattern of land use that was suburbia.
It is unclear how the private sector can deal with the problem of pressure on the middle class. Government programs frequently fail to fulfill even minimal intentions while squandering scarce resources. The United States has been a fortunate country, with solutions frequently emerging in unexpected ways.
It would seem to me that unless the United States gets lucky again, its global dominance is in jeopardy. Considering its history, the United States can expect to get lucky again, but it usually gets lucky when it is frightened. And at this point it isn’t frightened but angry, believing that if only its own solutions were employed, this problem and all others would go away. I am arguing that the conventional solutions offered by all sides do not yet grasp the magnitude of the problem – that the foundation of American society is at risk – and therefore all sides are content to repeat what has been said before.
People who are smarter and luckier than I am will have to craft the solution. I am simply pointing out the potential consequences of the problem and the inadequacy of all the ideas I have seen so far.
By George Friedman
George Friedman is the founder, chief intelligence officer, financial overseer, and CEO of the private intelligence corporation Stratfor. He has authored several books, including The Next 100 Years, The Next Decade, America’s Secret War, The Intelligence Edge, and The Future of War.
The Crisis of the Middle Class and American Power is republished with permission of STRATFOR.
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