Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Trade Page 13 of 15

Why We Should Want the Return of a Two World System

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On February 16, 2015

47 Comments

Before the collapse of the Soviet Union, there was a two-world system. If you didn’t like the deal that US was offering you, you could go the USSR.  If you didn’t like the deal Russia was offering you could go to the US.

While the US probably offered a better deal, especially in later years, you could have a pretty decent life as a client state to the Soviets.  Cuba under Castro had a higher standard of living in practically every way than it did pre-Castro, when it was an American client state.

Equally, you could play the two off against each other, looking for the best deal.  This made it harder for them to screw you over.

As the USSR weakened, the deals became worse.  The USSR of the 80s could not offer what the USSR of 50s could.  Still, the ability to tell the superpower of your choice, who feared and hated the other superpower, that they had to treat you at least slightly right had benefits.

I certainly don’t want to romanticize the cold-war period.  There were ugly coups, torture regimes and wars.  There was famine.  But while we have less of that today, we don’t have less of it because of the end of the cold war.  Indeed, we have more failed states than we did during the cold war, because it is in no one’s particular interest to pick them up.

So one of the events that I have been tracking since the early 2000’s (as has Stirling) is when a viable second bloc would emerge.

To be viable, a bloc must be able to:

  • Provide relatively high technology;
  • Provide development: power, roads, railways, etc;
  • Provide the consumer goods people want;
  • Provide credit;
  • Feed countries which need food;
  • Provide energy (which still means oil and other hydrocarbons, though that’s changing);
  • Provide some sort of credible military aid or umbrella.

Yesterday I wrote about Russia creating its own bank payments system to compete with the West’s SWIFT. This is important, because since the fall of the USSR, the West (or more accurately, America) has increasingly used this to punish those nations it does not like.  Piss off Washington and they will shut down your ability engage with global credit markets, and even the ability of your citizens to use credit cards.  Pretty soon you can’t buy what you want, even if you have the money, or you pay a huge premium.

So the creation of a Russian SWIFT, while woefully inadequate by itself, was a first step towards meeting one of the needs of a new bloc with rivals the West.

The linchpin nation in any new bloc would be China.  China can credibly provide development, credit and consumer goods (they make much of them anyway.)  But China will also need countries which can supply oil and raw materials: Russia, Venezuela, Iran,  Argentina, and so on.  Much of South America would rather sell food and raw materials to China (or Russia, or whoever) than to the US, because they remember, well, not being treated very well by America during and after the Cold War.

Russia’s military technology, while not as good as America’s, is good enough for most purposes, and China, as is usually the case, has vast amounts of shipbuilding capacity for those who want a navy.  America’s space program is charging forward (mostly privately) but Russia still has plenty of lift capacity for satellites, and China is working hard on its space program.

The BRICS have created their own development bank, as well, so combined with an expansion of the new SWIFT, credit which can be used to buy almost anything you want, or need, will be available.

This, my friends, is the configuration in which the unipolar moment (which has lasted two and a half decades so far) ends.

It was always going to end, for all things do, the question was how soon.  American actions have accelerated what should have taken a couple decades more, significantly, by marginalizing too many countries.  Marginalizing or destroying the occasional country was acceptable, but the number marginalized is just too high, and they have too many resources.  Combined with a great manufacturing nation, they have essentially everything they need: they don’t need the West.

And they may be wondering why they are paying intellectual property taxes (that’s what they are) and interest fees to the West, when the West clearly isn’t acting in their interest.  Why have America and Britain gain all this, when they can reap the money themselves.

Oh, there are still some areas where the West is clearly ahead, from turbines to aerospace.  But they tighten by the year, and they aren’t anything necessary any more. Virtually everything you want, save a few luxury items, you can get without America or Europe being involved.

The question now, then, is the timing and the exact events.  But the broad outline is visible and will accelerate, because it is in too many countries self-interest.

The Great Game, the Great Game never ends.

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Russia Creates Its Own Payment System

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On February 15, 2015

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This is important:

Almost 91 domestic credit institutions have been incorporated into the new Russian financial system, the analogous of SWIFT, an international banking network.

The new service, will allow Russian banks to communicate seamlessly through the Central Bank of Russia. It should be noted that Russia’s Central Bank initiated the development of the country’s own messaging system in response to repeated threats voiced by Moscow’s Western partners to disconnect Russia from SWIFT.

Much of the West’s power comes from our financial hegemony. Our ability to cut people off from loans, payments and so on.  Since this new system is Russian only, it isn’t, right now, that big a deal.

But start connecting other countries to it, say China, Iran, India and so on, and it becomes a way of breaking financial blockades.  Include some calculable financial law (less of a challenge than it used to be as New York and London courts make increasingly punitive decisions), and start lending in Yuan (with which one can buy much of what one needs in the world, since the Chinese make so much of it), and you have a fully credible financial system.

The key is to get one major manufacturing country in.  Most of the nations the West is punishing these days, financially, are oilarchies ( Venezuela, Iran, Argentina).  They need the ability to buy manufactured goods.  The obvious country is China.  If China agrees to go in, Western financial hegemony is broken.  Japan could work; India could almost work, and Japan or India have a lot more to gain from it than it might seem (as we watch the Japanese economy implode.)

Even before then there are deals which can be cut.  Say Greece wants to buy Russian oil.  Russia can lend them Rubles, the use those rubles to buy Russian oil, in exchange Russia gets use of Greek ships and ports and access to the EU.

This is, then, in one sense, not a big deal.  As long as its only Russia, it’s a defensive move of somewhat limited utility.

But if it expands beyond Russia, well then, it’s earth-shaking.

Get out the popcorn and watch it develop.

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The Greek Pivot East and the Future of Greece In Europe

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On February 3, 2015

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In my most recent article on Greece and Syriza’s options I pointed out that cutting deals with other pariah nations might be wise.

Practically the first thing Greece did was say that they will not be onside for any more Russian sanctions.

Russia said they would consider, if asked, bailing out Greece.  (This is a way of saying, “go ahead, ask”.) Given Russia’s own reserve problems, one wonders where it would find the money, BUT my guess this is a “if you default” scenario.  Russia won’t pay off European banks for Greece, but if Greece defaults, it will help Greece running. (Not least, most likely, by selling them heavily discounted hydrocarbons, and probably even loaning them the rubles to buy them with.)

That takes care of one of Greek’s main problems: food, oil/gas, and medicine—what they MUST have which they MUST buy from other countries.

A few words on Greece’s negotiations with Europe are also in order.  First, note that the “bailouts” given to Greece mostly weren’t — 89% just went back to lenders.  Worse, the imposed austerity conditions caused an actual collapse in GDP and employment, which means that the cost of the bailouts was far more to the Greek government and economy than the actual amount of money received.

In other words, this was all just a bullshit way of bailing out banks, and as the FT notes, only because bailing them out direct was “embarrassing”.  To avoid embarrassment, millions were impoverished, people set themselves on fire, and Greece was devastated.

This, people, is why I say, and mean, that Merkel is monster.  A disgusting, rotting excuse for a human being, let alone a statesman.  Millions suffered, not just in Greece but in the other peripheral countries, for no good reason.  Austerity is just the voodoo economics of the modern day, but even more devastating.

The deal Greece wants is more than fair to “lenders”.  And I mean “more than fair” literally.  They deserve to be defaulted on, because they didn’t do their due diligence, and all loans since the financial crisis at the very least, should NEVER have been made.

An independent Bloc is desperately needed in the world.  BRICS plus allies, with their own payment system, reserve currency and international trade and settlement system.  Until it exists, countries like Greece will feel (and often be right) that they have no choice but to buckle under to whatever terms the West sets.

Enough.  This suffering is not required in any world which runs on rational economics AND has as its goals the welfare of everyone.  It never was required.  All of the deaths, job losses, homelessness, hunger and so on was optional.  It was chosen because it suited oligarchs and politicians like Merkel.

This is the world you live in. It must be changed.  Since core westerners are unwilling to change it from withing in time to save millions and millions from suffering; it will have to be changed by those it is most severely impoverishing.

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The Venezuela edition of “imports will kill’ya”

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On January 30, 2015

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So, the New York Times has an article on how Venezuelan stores are running out of basic goods, because they import so much, and with the drop in oil prices, they don’t have enough hard currency to buy what they need.

Repeat after me for the 100th time, “all resource booms end.”

All of them.  Always.  Gold, oil, rubber: it always ends.  Period.  The question is only when.

Back around 2004, myself and Stirling pointed on the late (and defunct) BOP News that Chavez was screwing up his revolution.  That’s not a way of saying I disapprove of his goals, I very much agree with what he was doing in general terms. But in specific, he was not making his country independent of high oil prices.

What a country needs it must either be able to produce, or have product it knows it can sell to someone who can produce what it needs, and who is a reliable partner. (No Western country is a reliable partner to an actual left wing revolutionary government.)

Period.

If you do not, things may go well for a long time, but you are ALWAYS vulnerable to the hegemonic economic state and its allies.  Right now that’s the West.  For a long time, if the West were jerks to you, you could run to the USSR, but right now there is no complete replacement, though China, as leader of the BRICS, is coming on strong.

Note that when the USSR fell, Russian support for Cuba almost entirely went away.

It was a huge shock, but Cuba survived it.

Chavez was a great friend of Castro’s, but he did not learn from Castro.  He did not figure out how his country could survive being cut off from what amounted to essentially it’s only source of support (in his case, oil sales).

Now Venezuelans pay the price.

Learn the lesson.

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Exchange Rates 101

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On December 18, 2014

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In light of the collapse of the Ruble I think it’s worth revisiting what controls exchange rates.

Supply and Demand.

Yeah, if you know something about the subject you’re probably shaking your head.

Supply and Demand doesn’t set prices in many cases in the way that an Economics 101 course tells you.

Such texts will say that the exchange rate is based on exports and imports.

For many countries, that isn’t true; or not all the time.  The US dollar can move up even when the trade balance is south (as it has been for decades now.)  The same is true of many other economies.

Britain hardly exports anything any more.  But people want to live in London.  Or they want the city to invest their money, or they want to buy art at Sothebys, or they just want a relatively safe place they can run to if the politics in their country go south.

People likewise want Manhattan real-estate; a US passport, and so on.  A vacation or home in Paris or the South of France.

They want to buy stocks in important companies which are defining the future, like Apple, or Tesla, or Google, even if those companies manufacture overseas.

They want money in China to take advantage of China’s high growth rate and returns, while Chinese want money out for diversification and to have a safe place to go if the politics turn against them.

People don’t want vacation homes in Russia, by and large.  They may want to take advantage of growth opportunities (which exist in certain sectors), but before the sanctions they were scared of corruption (with good reason) and post sanctions they are worried about getting returns out.  Since most of Russia’s exports are of hydrocarbons, and since people don’t want to move money into Rubles otherwise, the value of the Ruble in terms of other currencies moves up and down with the price of hydrocarbons.

There are other factors, for example if you offer high returns, that can matter (raising returns didn’t matter to Russia, because the potential value was swamped by fears of further ruble and oil devaluation.) Speculation of future gain or loss in the futures and options markets can raise or lower the value of your currency as well.  You can fix your currency and you can make it stick if your economy is strong enough in specific ways (mostly having to do with producing what you need).  China did this for years, and so have many other countries.  This can lead to black market currency markets and problems, but that can be better than the alternatives (as Russia may now be finding out.)

But if you float your currency, the bottom line is that excahnge rates (with a few exceptions) to rise and fall based on how much people want from  your country which they have to buy with your currency.

Japan refuses to eliminate agricultural tariffs, and spikes the TPP (Take 2)

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On October 13, 2014

6 Comments

The Trans Pacific Partnership trade agreement in in trouble, and one of the reasons is Japan has refused to eliminate agricultural tariffs.  Japan is entirely correct in this.

Japan’s agriculture is not efficient: it costs more to grow food in Japan than it does in many other nations.  If Japan removed its tariffs, its agricultural sector would either be eliminated or forced to consolidate and specialize in crops it has a comparative advantage in.  Whatever these are (perhaps silk), they wouldn’t be staple food crops.  Japan would thus lose what ability it has to feed itself and would have to buy even more food on world markets than it does today.

Regular readers will recognize this pattern from the article on why the third world is even more impoverished today than it was 40 years ago. Now Japan is by no means a third world country, and money would be loaned to it to buy said food, but Japan is not a healthy economy either.  The Japanese recently lowered the value of the Yen significantly, and  their exports didn’t increase.

Contrary to economic dogma that sort of thing happens fairly often: people simply are already buying as much of what Japan makes as they want.

Japan is not what it was 30 years ago, or even 10.  It runs an export deficit and it is barely running a current account surplus any more . Even when the economy was healthy, having to buy much of its energy was painful, having to buy its food would be even more so.

But more importantly, it would make Japan vulnerable to anyone who controlled foreign currency loans they need to buy the food, and to the major food producers.  Japan can print money, to be sure, and has, but there comes a point where you can’t, where people won’t take it.  Japan isn’t there yet, but they risk being there someday soon.  And bear in mind that as global warming bites, food will become more and more scarce. Right now we have a huge food surplus, that will not remain the case.

Countries which cannot produce what the rest of the world needs, nor produce what they need, are always in great danger from other nations which can cut them off.  They give up power over their own fate, and others will take advantage of it to force them to do as they wish, including opening up their markets to allow the commanding heights of the economy to be purchased.

Japan has been badly run for decades, and made the same mistake the US did when its bubble collapsed: they did not wipe the debts off the books, but instead extended and pretended.  That lead to the long “bright depression”, but it is now leading them into a much worse period.

They are, however, doing something right in refusing to remove their tariffs.  To be sure, they are doing so for domestic political reasons (the small rural farmers are politically powerful), but that doesn’t mean it isn’t still the correct thing to do.

Since the TPP is, overall, a terrible trade agreement (they virtually all are) let us hope the Japanese stick to their guns and that it does scupper the agreement.  It’ll be best for them, and for us.

(An earlier article on the same topic disappeared except for the title.  This is a rewrite, but with additional detail.)

(Article changed to indicate that Japan is still (barely) running a current account surplus, not a deficit.) -10/14/2014)

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The Result of Austerity and Neo-Liberalism is the Rise of the Neo-Fascist Right

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On May 27, 2014

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includes, as expected, the rise of the neo-fascist right.  The UK Independence Party and France’s National Front won national elections to the European Parliament.

This doesn’t mean they would win national elections proper, the EU vote is often a protest vote, but the results are still impressive.

This the natural reaction to austerity.  When times get tough, and when the “mainstream” parties have no answers which work, people will vote for alternatives.  In Greece, to the Greek’s credit, this was SYRIZA, an actual left wing party (though the fascist Golden Dawn party did do reasonably well).

When I was a child, living in the city of Vancouver, I told my father I didn’t see a lot of racism.  I’ve always remembered his response “wait till times get bad.  People will  hate those who are different.”

My father was a child of the Great Depression.

The neo-liberal left of Europe and North America offer no solutions.  They cannot offer solutions, it is not possible under neo-liberalism to fix the problems neo-liberalism has created: they are a result of neo-liberalism’s genuine beliefs about how the world economy should be run.

You can not, under the neo-liberal model of globalization, tax the rich effectively: they can go somewhere else.  You cannot hold wages up, because jurisdictions can always be played against each other.  You cannot fix the environment and stop the mass wiping out of species and the probable death of a billion humans, because jurisdictions can be played against each other.  That countries no longer produce the majority goods they need themselves, nor in many cases even the food, means jurisdictions cannot unilterally do the right thing, even if they wanted to (which they don’t.)

Because the oligarchs also control the means of ideological dissemination, you also can’t effectively communicate either the problems or good solutions.  Because the oligarchs control the means of political production (ie. the process of producing and nominating political candidates), you can’t get into power the people who would actually want to change the neo-liberal political order (and if by some miracle you could, expect them to be treated as Argentina or Venezuela have been treated or destroyed as Howard Dean was.)

Neo-liberalism is an effective ideology and set of policy prescriptions: not because it produces good outcomes for the majority of people (that’s not its purpose), but because it creates a constituency (oligarchs and their supporters/retainers) who are able to maintain it in power.

All ideologies eventually come to an end, however.  The oligarchs hate real left-wingism far more than they do fascism.  They have crushed the left.  Because no new coherent ideology can arise due to oligarchical control over the mechanisms of dissemination, all that remain are old ideologies.

Given no real and viable left-wing parties to vote for; given the failure of what they are told are left-wing policies (as with Obama being called a left-winger when his economic policy has been to give trillions to oligarchs); people will vote for the only other option: the hard right—the neo-fascists.

They are, at least, against the status quo.  The UK-IP wants to leave the EU.  They want less “free” trade.  And so on.  Given no other option for actual change, people opt for the parties actually offering it, even if those parties are noxious.

And so, the hard right rises because of the failure of the so-called center-left, which is not left wing at all, but is for more slightly less cruel neo-liberalism.

But neo-liberalism cannot be made kind. It is antithetical to one of the fundamental purpose sof neo-liberalism, which is to drive down wage rises and inflation by playing jurisdictions against each other.

And so the hard right rises.

Remember, the economies in Germany and Italy under Hitler and Mussolini, for ordinary people, improved immensely.  (Unless you were a Jew, gay, a socialist, a gypsy, etc…  But that’s a price those who won’t pay it, are willing to pay.)

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Why Nations Can’t Resist Austerity

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On April 25, 2014

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Free trade, as practiced, is designed to destroy local autonomy by making nations dependent on foreign goods, and by removing decision making from democratically elected bodies and pushing them to transnational tribunals, secret courts and laws which cannot be changed without opting out from treaties, something most countries are reluctant to do, because they need the trade once they are enmeshed.

Keynes believed that most production of basics should be local: you should manufacture most of what your country needs, in your country.  You should also, ideally, be able to feed your own population.

If you can’t make what you need or what your people (and more importantly, elites) really want, then you’re screwed.  In the modern world you need hydrocarbons, you need food, and you need the machinery which turns hydrocarbons into the industrialized lifestyle.

Your prosperous citizens probably want food your country doesn’t produce: summer vegetables in winter, possibly meat you can’t provide in large enough quantities, and so on.  They want electronic goods like smartphones that due to patents are quite expensive, and which you probably can’t make domestically.

Your elites want a vacation in Paris, a home in London, a German car, a French mistress, a New York Apartment, and a variety of luxuries that their own country doesn’t make.

If you want or need these things; if you do not have a taste for what your country can produce, in terms of basics and luxuries; if you do not ensure your country can feed itself, generate electricity and make cars or other forms of transit, you MUST do what those who control the trade regime want you to, or you will find yourself cut off from all these things.

Distributed production of necessities (which includes basic lifestyle goods and luxuries and machine goods) is anti-democratic and anti-national control in a world where the primary decision making units which are amenable to pressure from the commons, whether democratic or not, is exerted almost entirely on national and local units.

If you want to not do austerity when the Troika demands it, you must be in a position to tell the Troika to go stuff itself. If you have made yourself vulnerable, by losing your ability to feed yourself; by not developing local industry or exporting it; by your citizens acquiring a a perceived or real need for foreign goods; or by your local elites wanting to be “transnational elites” who want foreign luxuries and who feel as at home in Paris, New York and London as in their own country, then you cannot refuse to do what those who control the trade and international monetary regime tell you to do.

This is always the devil’s bargain offered in international regimes: “you can get all the stuff we have if only you open up”.  It’s true, and for many countries it works for a while.  The less you had, the shorter period it works for (countries who only have to be convinced to give up their ability to feed themselves by switching to cash crops and forcing subsistence farmers get a few years), but once you’ve given away your autonomy, the deal will, at some point, always turn bad.  Those with the whip hand, will always eventually drive you down unless you have as much power over them as they have over you.

And knowing that your elites are no longer yours, but theirs, they will always find someone to do it for them, because your elites will be eager to sell you out for the flat in New York, the vacations in the south of France, the German automobile, the French mistress, the Swiss boarding school for their children, and for the fine luxury goods their own country cannot make.

If you get yourself into this position, you must overthrow your elites, and you must figure out how to become independent again.  You must make deals with other blocs: the Russians and the Chinese, for the transition period, and figure out how to move your production of what matters back to local, and if you no longer can, how to feed yourself. You must inculcate in your elites and peoples a desire for what you make locally – local lovers, the food of your nation, the luxuries you can produce.

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