viernes, noviembre 14, 2014


China Rising

November 10, 2014
Roubini's Edge
I’ve recently returned from Asia, where I met with policy makers and business leaders from Tokyo to Beijing, Hong Kong, and Singapore. 

During our discussions, I was repeatedly struck by how often the conversation would veer from economic analysis into the realm of geostrategy, especially with respect to China’s emergence as a major military power—or, as it is known in polite geopolitical circles, the peaceful rise of China.

As the most populous nation on earth, and the world’s second-largest economy, China is increasingly becoming both a concern and an opportunity for investors. (As an example of China’s influence on the global economy, a recent analysis by The Economist tied more than 10% of American multinational corporate revenue to China.)

A 4,000-year-old culture has begun to reassert itself on the world stage, and investors should arm themselves with a bit of knowledge of the powerful forces at play there.
My goal is to lay a foundation for that understanding.

The concept of a “peaceful rise” is, perhaps, the triumph of hope over experience. During the last hundred years, the rise of great powers has been anything but peaceful: Historically, when a great power rises, there has been an elevated risk of territorial expansion, imperial aggression, and even the looming threat of world war. 

In the case of China, the goal of this peaceful rise is to avoid the fate that has seized other emergent powers, such as the Empire of Japan during the Second World War, and Germany during World War I and World War II.

China has already begun to develop its own blue-water navy, capable of operating in vast expanses of open ocean. The South China Sea, which borders China’s east coast to the south, is crowded with islands. Maintaining security in those shipping lanes is of paramount importance to the Chinese leadership.

More than half of global merchant tonnage, and four-fifths of the oil burned in China, pass through the South China Sea. Clearly, the defense of those shipping lanes is critical not just to China’s economic development, but also to Chinese national security.

An especially important strategic concern in the South China Sea is the security of the Strait of Malacca, a narrow, 500-mile passage between the Malay Peninsula and the island of Sumatra, which serves as the primary point of entry for cargo bound for East Asia.

Whenever I fly into Singapore, I always watch from the window. As the plane begins its descent, you get a bird's-eye view of the strait below, which looks like an endless ribbon of deep blue water, crowded with thousands of cargo ships.

Straights of Malacca from the air, January 2013Strait of Malacca on January 21, 2013. (leogaggl/Flickr)
There are good reasons to be hopeful that China’s rise will be a peaceful one, avoiding the aggression and the terrible conflicts that have followed other rising powers. Of course, a “peaceful rise” must entail the absence of war, but what, beyond avoiding military catastrophe, would success in China look like? Let’s take a look at the long-term risks and opportunities in today’s China.
Roadmap for a Successful Rise
One way to think about the challenges of China’s emergence as a great power is to look at the best-case scenario for a rising China.

First, in geopolitics, a stable China must seek to limit its territorial ambition. The Chinese government must find ways to resolve their current regional-territorial disputes, including the long-simmering conflict with Japan over the disputed Senkaku Islands in the East China Sea. On the other side, the US pivot to Asia should not be designed and perceived as a way to contain China.

Second, on the economic front, China and its regional trading partners must improve trade and financial integration, and increase foreign direct investment among all parties. The US may need to allow China to join the trade-liberalizing Trans Pacific Partnership (TPP), as excluding China may signal that the US pivot to Asia is to counter the rise of China.

Third, China needs to successfully implement its transition from credit-fueled, resource-intensive, highly polluting, capital-intensive growth based on too many investments in real estate, infrastructure, and industrial capacity to labor-intensive, environmentally friendly growth based on consumption and the rise of services.

So far, the reforms needed to achieve this rebalancing have been postponed as President Xi is busy with consolidating his power, cracking down on corruption, and dealing with foreign policy and security issues. But the longer China kicks the can down the road and postpones reforms, the greater is the risk of a hard landing as bad assets, bad investments, and bad debts are mounting.

Ultimately, one would hope to see an easing of diplomatic tension, which would help to create a broader peace and prosperity in Asia. The APEC summit that took place while I was in Beijing in early November is an opportunity to start a dialogue on economic and geopolitical security in Asia.

I recently read an intriguing new book by reporter and analyst Robert Kaplan, which addresses the topic of China’s rise. In Asia’s Cauldron, Kaplan makes a compelling case for a kind of geographic determinism in Asia with respect to a rising China.

The backbone of Kaplan’s argument is that a rising China will seek to dominate the South China Sea in a manner similar to the way that the United States sought to dominate the Caribbean in the 19th and early 20th centuries. (In practice, Teddy Roosevelt’s policy of “Speak softly and carry a big stick” often meant fighting wars, changing the regimes of Caribbean governments, and militarily overseeing trade.)

But geography doesn’t need to be destiny, the way Kaplan mechanistically implies. The Pacific stance of the US, the existence of other important powers—such as Japan, other allies of the US, and India—that will resist Chinese expansionism may lead to a more cooperative outcome for the geopolitical balance of Asia.

I mentioned the Strait of Malacca earlier, and China’s build-up of a blue-water navy to ensure its access to shipping lanes there and elsewhere. As a matter of international law, the Chinese have no territorial rights to the strait. (The strait lies hundreds of miles to the south of mainland China, on the far side of Thailand, Cambodia, and Vietnam, between the island nations of Malaysia and Indonesia.) However, the waterway is clearly vital to China’s national interests and crucial to its economy.  

In addition to those questions posed by the region’s geography, there is also the issue of China’s ideology. Or, perhaps more accurately stated, China’s absence of a Soviet-style grand ideology. The current Chinese leadership doesn’t seem interested in philosophical debate about economic philosophy: Their focus lies on pragmatic questions of competition for power and influence. While this may be something of a negative insight, it may prove to be a useful conceptual lens for investors to view China’s rising economic power.
The Role of the United States
In the short to medium term, the United States is almost certain to maintain its naval superiority in the Pacific region. (The US now has 10 aircraft carriers in its fleet. China has only one—and it’s an obsolete, secondhand vessel at that.)
Over the longer term, however, China will continue to make steady advances in ballistic missiles and other military technologies, potentially allowing its navy to one day pose a significant strategic challenge to the US in the Asia-Pacific region.

Diplomatically, the West has a delicate balancing act to maintain in its relations with China.

If Beijing perceives that China has become the target of a US containment policy, similar to the policy by which the West sought to isolate the Soviet Union during the Cold War, the Chinese would likely interpret this policy as an act of aggression. It is equally dangerous for the West to assume a posture of mechanical appeasement, deferring to too many of China’s economic and diplomatic demands.

The Chinese leadership, if it were to meet with such a permissive policy, might be inclined to stretch toward evermore territorial ambitions. So, the US and its allies in Asia need to find a right balance between cooperation and competition with China and avoid both containment and unconditional appeasement.
What’s in the Air?
Beijing is ringed by coal-fired power plants and heavy industry—unseen sources of the smog that choke China’s capital. Coal, quite literally, fuels China’s industrial growth—accounting for nearly 70% of its total energy production.

When you drive around the city of Beijing, you can see people on the street wearing surgical masks, or with scarves covering their nose and mouth to try to reduce the pollution they are forced to inhale. The situation is so severe that the Chinese government continually monitors the count of particles in the air. On some days, when the particle count is particularly high, cars are banned from the city.

When the number rises above 100, it’s considered dangerous. When I was in Beijing, the readings were at 300. However, my hosts assured me that things weren’t so bad—since the particulate count had recently risen as alarmingly high as 550. Paradoxically, the carbon emissions that have fueled China’s ascent may prove to be one of the biggest challenges to China’s peaceful rise.

Some Beijing residents have attempted to fight back against the pollution by installing air filtration systems in their homes and offices, but this option is only available to those with the financial means to do so. Similarly, the city’s priciest private schools have air filtration systems and covered gyms, allowing students to play without being exposed to the outside air, although most schools can’t afford such accommodations.

Chinese officials often talk about the need to stress quality over quantity when it comes to economic growth—but when you’re on the ground in China, you don’t see much of a shift in the country’s development strategy. Air, water, and land are all polluted, with serious risks to the safety of the food chain. Health costs from environmental damage could seriously strain the Chinese budget for decades to come. (Perhaps this isn’t surprising: It’s easier for an official from the Ministry of Commerce to make a speech than it is to reduce carbon emissions in a rapidly developing economy.)

In any case, the pollution is now so severe that it’s creating a political backlash by a rising middle class against the Chinese leadership, for obvious reasons.

The challenges of pollution within China are, of course, not limited to Beijing. The pollution in Shanghai is steadily getting worse. Expatriates working for multinational corporations are becoming increasingly less willing to live in these cities, even though their companies are offering progressively higher salaries to do so. Expats who remain are, understandably, sending their families back home.

The problems of pollution are no longer just a domestic issue for the Chinese. When I visited Korea, on my way to China, there were Korean officials who complained that air pollution from China was being carried into Seoul by the wind. Some studies now suggest that Chinese pollution is traveling as far as Hawaii and even California.

China is the world’s largest source of carbon emissions. If there is a silver lining to this toxic cloud, it may be that China’s pollution crisis has forced it to search for green alternatives to its coal addiction.

Several independent reports in the last few years, including studies done by the United Nations, Pew Research, and Bloomberg, have cited China’s investment in green energy as the largest in the world.

Chinese government officials have begun to tout green energy as part of their economic strategy. While the environmental results of China’s green-energy policy remain to be seen, Chinese investment in renewable energy is simply a fact, and one that investors should consider.

Recent studies show global investment in renewable energy production nearing a quarter of a trillion dollars annually. China seems poised to remain a world leader in that space—driven by political necessity, perhaps, more than deep environmental conviction.
My Final Thoughts
In addition to being the world’s second-largest overall economy, China is the largest economy in Asia. From the perspective of investors, the size and scope of the Chinese economy mean great potential for both risk and opportunity: the risk is more short term as China needs to rebalance its economy and avoid a hard landing; while the opportunity is medium and long term as China will—in a few years—become the largest economy in the world and the largest market. A rising China is, perhaps, the key center of gravity in developing Asia, which is now the fastest-growing region of the world.

Under such circumstances, it’s reasonable to assume that China will assert itself defensively—for example, to maintain the security of vital international shipping lanes in the region.

Without the ability to defend its trade routes, it would be possible for a regional rival to strangle China’s economic growth, which is a proposition that neither the Chinese leadership nor the broader population would be willing to accept. China will continue to project its power in the region in a way that is consistent with its national interest. And we will continue to watch their progress.

As I project forward to the future of Asia in 10 or 20 years, I envision a China that will continue to stretch its economic and international trading power. A China that will assert itself more broadly in the political sphere. A China that will exert increasing influence in its own geographic region. A China that will continue to project its geopolitical power, as it rises to address the challenges of a great world power in 21st-century Asia.

And, ultimately, a China that will open a door to long-term opportunities for astute investors.

Nouriel Roubini
Nouriel Roubini
Roubini's Edge

November 10, 2014 2:34 pm

Russia is a bigger problem than Isis for Obama

A nuclear-armed Moscow, intent on challenging US, poses risks we are only starting to understand
Ingram Pinn illustration©Ingram Pinn
This weekend America announced that it was sending more troops to Iraq, Russia allegedly sent more troops into Ukraine and President Barack Obama set off for Beijing.
Ask policy makers in Washington which of these different parts of the world should be America’s top priority and the first response is usually a variant of – “We’ve got to be able to chew gum and walk at the same time.” Press on, and the replies get more interesting.

Broadly speaking, the Washington consensus seems to be that, of the two immediate crises, the one in the Middle East is more urgent than the one in Ukraine. One US national security official, whose responsibilities include both Russia and the Middle East, looked incredulous when I asked him, last week, which was the more important: “The Middle East, by far,” he replied.

The argument for prioritising the Middle East is threefold. First, there is an actual war going on, with the US involved in daily bombing raids – landing “warheads on foreheads”, in the disconcertingly jaunty phrase used in the Pentagon. Second, if national security is defined as protecting civilian populations from harm, the Americans see a much more immediate threat from jihadist terrorism than from Russia. Third, the Americans believe an entire regional order is unravelling in the Middle East and that the reordering could take decades. By contrast, the order in Europe is only fraying at the edges.
Some even worry that America’s preoccupation with Russia distracted its attention from Iraq and Syria, at a vital time. One official muses: “I do wonder whether historians will record that, in the spring of 2014, we were too focused on Ukraine, just as [Isis] was grabbing control of huge swaths of territory.”
The phenomenon of policy makers looking in the wrong direction is certainly not unknown in history. In the month before the outbreak of the first world war, 100 years ago, the British government spent far more time discussing the prospect of civil conflict in Ireland than the threat of war in Europe.

But for those who worry most about Vladimir Putin’s Russia, it is the Middle East that is the dangerous distraction. The “Russia first” crowd is stronger in Warsaw and Berlin than in Washington. It worries that the US has been drawn back into the “war on terror” and the conflicts of the Middle East, just as the dangers in Europe are mounting.

According to this analysis, the US has still not recognised the radicalism of the challenge posed by Russia. The annexation of Crimea and incursions into eastern Ukraine are, it is feared, just the start. At some point, Russia is likely to threaten more of Ukraine, or even the Baltic states. The very fact that America has ruled out military action over Ukraine – which makes the crisis seem less urgent in Washington – has inadvertently raised the stakes. As one senior European diplomat puts it: “Putin knows that he can always escalate to places we won’t go.”

The darkest scenarios, being discussed behind closed doors, include Russian escalation up to and including the use of tactical nuclear weapons. If that were to happen it would, of course, be the biggest international security crisis in decades – far more significant and dangerous than another round in the 25 years of fighting in Iraq.

Most experts still dismiss the nuclear scenarios as far-fetched. It is more common to worry that Mr Putin may launch an all-out conventional war in Ukraine – or encourage uprisings by Russian-speakers in the Baltic states, which are members of Nato. If Russia then intervened in the Baltic states and Nato did not respond, the Kremlin would have achieved the huge prize of demonstrating that the western military alliance is a paper tiger.

Some hope that the growing pressure on the Russian economy and the rouble might dissuade the Kremlin from escalation. But an economic crisis could also make Russian behaviour more unpredictable and reckless.

Amid all this angst, President Obama has set off for a summit in China. For believers in America’s “pivot to Asia” it remains true that – over the longer term – the biggest challenge to US power is still a rising China, rather than a declining Russia or a disintegrating Middle East. They worry that the more the US gets sucked into the crises of the moment, the easier it will be for China to achieve primacy in East Asia – the region that is increasingly the core of the global economy.

The Obama administration is determined that this will not happen, and is shifting US military resources so that in future, 60 per cent of the American navy will be based in the Pacific.

It will be up to historians to decide whether the Obama administration got its strategic priorities right, or whether it charged off in the wrong direction at a crucial moment.

My own instinct is that Russia is now the most important challenge. The rise of China is hugely significant but, for the moment, it feels like a long-term process – without any immediate risk of conflict with the US.

Failing states in the Middle East and the risk of terrorism are dangers that, sadly, now feel almost normal. But an angry, nuclear-armed Russia, intent on challenging US power, poses risks that we are only beginning to understand. Peace in Europe may depend on Washington striking exactly the right balance between deterrence and diplomacy.

Russia braces for long economic war with the West

Russia's central bank warns that capital outflows will reach $128bn this year and slashes its growth forecast to zero for 2015 as the ceasefire collapses in Ukraine

By Ambrose Evans-Pritchard, International Business Editor

8:45PM GMT 10 Nov 2014

Russia is battening down the hatches for a long battle with the West, expecting sanctions to last until at least 2017 and admitting that capital flight has been significantly higher than previously claimed. 

The central bank slashed its growth forecast for next year to zero and warned of near-recession conditions until late in the decade. It said capital outflows would reach $128bn this year.
The new realism ends the pretence that Russia is strong enough to weather the end of the commodity supercycle without suffering serious damage, or that Western sanctions are little more than an irritation. President Vladimir Putin had previously said the effect would dissipate within months.
It comes as the ceasefire in eastern Ukraine disintegrates and international monitors (OSCE) report large incursions of heavy weapons, tanks and troops moving into the Donbass region, clearly from Russia. The White House called it a “blatant violation” of the Minsk accord agreed in September.

The rouble soared 3pc despite the bad news after Mr Putin vowed to “take action” to stabilise the currency and denied any plans to impose capital controls. The rouble closed at 45.74 against the dollar, still down 32pc this year and clearly still in danger.

The central bank ditched its strategy of defending the currency with half-hearted measures, instead threatening liquidity curbs and a lightning strike on speculators to prevent an exchange rate crash. 
The bank said the rouble would be allowed to float freely. This ends Russia’s dual-currency basket and its attempts to stem the currency slide with fixed dollops of intervention, $350m for every five kopecks, which became a one-way bet for traders. The bank has burned through $40bn of foreign reserves since the start of October.
Crucially, the bank vowed to act with force against “financial stability threats”. It will tighten rouble liquidity used by local speculators for bets on the dollar, evoking punishing memories of the 2008 crisis, when overnight rates briefly punched to 3,000pc and scorched those caught on the wrong side of the trade. “Rouble liquidity is being used for games on the currency markets,” said Elvira Nabiulina, the bank’s governor.
“The rouble is rallying because of a short squeeze but it doesn’t change the big picture,” said Tim Ash, at Standard Bank. “They’ve got their heads in the sand if they think this is driven by speculators. Fundamentals and war risk are behind this.”

One hedge fund manager said traders were wary of a sudden counter-strike by the authorities. “Russia can still put up a good fight. We can argue over whether Russia has enough reserves in the end, but it certainly has enough to destroy your position as a trader on any given day if it wants to. We’re not talking about Nigeria or Ghana here,” he said.

US dollar versus the Russian rouble

Yet Russia remains in the eye of the storm as sanctions bite deeper and the collapse of oil prices change the economic landscape. Mr Ash said Russia was already suffering from the “Dutch Disease” before the invasion of Crimea, addicted to commodity exports that hollowed out the country’s industry and pushed the rouble too high. Non-oil exports have fallen from 21pc to 8pc of GDP since 2000.
Urals crude has fallen from $115 to $83 a barrel since June, prompting speculation by Mr Putin that the move is part of an orchestrated political campaign by Russia's enemies, clearly meaning the US and Saudi Arabia. Otkritie Capital, in Moscow, said the fall in crude is likely to pull down EU gas prices by 22pc next year due to linkage in Gazprom contracts. This will further erode Russia's foreign revenues.
Renaissance Capital said in a report that the marginal cost of new oil projects in Russia is around $90, warning that the country could lose 350,000 barrels a day of output next year if "economic logic" prevails.
The central bank has to pick between two poisons. The slide of the rouble is stoking inflation and asphyxiating companies with dollar debts, yet currency intervention entails monetary tightening and risks a banking crisis. The authorities learned the hard way in 2008 that selling reserves into a recession has ferocious side-effects. “The money base contracts and it crushes the economy,” said Lars Christensen, at Danske Bank. “We think Russia is already in recession, and contraction is going to get worse over coming quarters.”

The central bank expects oil to average $95 next year, an optimistic forecast as China steers its economy away from heavy industry, and renewed supply floods the market from Libya, Iraq and perhaps soon Iran. Deutsche Bank says the “fiscal break-even” price needed to balance the Russian budget and pay for the country’s growing military machine is around $100.
Mrs Nabiulina said foreign reserves will drop to $422bn by December, $35bn lower than previous estimates. This is still ample but not as large as it seems. Russian banks, companies and state entities have $731bn of external debt, mostly in dollars. They must roll over $162bn in the next few months, yet global capital markets remain almost entirely shut.
Oil giant Rosneft has requested $49bn in state aid, while VTB bank has reportedly sought $4.8bn. The bank’s president Andrei Kostin said it was thinking of switching VTB’s listing from London to “Chinese bourses” to make it easier to raise capital.
Lubomir Mitov, from the Institute for International Finance, said it would be “very dangerous” if reserves fell below $330bn. Foreigners have pulled back almost entirely and the financing gap has reached 3pc of GDP each year. A further fall in oil prices would push Russia into a current account deficit. “Russia is already in a perfect storm,” he said.
Circumstances are very different from 1998, when the crash in oil prices pushed Russia into default on its external debts. Yet the trauma of that episode is still fresh in people’s minds, and the illusion of high reserves can evaporate fast. “If they lose another 100bn in three months they’ve got a problem. People would start to panic, it could turn vicious very fast,” said Mr Ash.

What the Fall of the Wall Did Not Change

By George Friedman

Tuesday, November 11, 2014 - 03:00

Twenty-five years ago, a crowd filled with an uneasy mixture of joy and rage tore down the Berlin Wall. There was joy for the end of Germany's partition and the end of tyranny. There was rage against generations of fear. One fear was of communist oppression. The other fear was of the threat of a war, which had loomed over Europe and Germany since 1945. One fear was moral and ideological, while the other was prudential and geopolitical. As in all defining political moments, fear and rage, ideology and geopolitics, blended together in an intoxicating mix.

Marxism's Sway

Twenty-five years later, we take for granted the moral bankruptcy of Soviet Communism, along with its geopolitical weakness. It is difficult for us to remember how seductive Marxism was, and how frightening Soviet power was. For my generation, at the better universities, Marxism was not an exotic form of oriental despotism, but a persuasive explanation of the world and how it worked, as well as a moral imperative that a stunning number of students and faculty were committed to. The vast majority of Marxists in what was called the New Left adopted it as fashion more than passion. A small segment of the New Left, particularly in Europe and supported by Soviet intelligence, took direct action and took risks, killing, wounding, kidnapping and blowing things up in the pursuit of political aims. The latter had courage; the former were shallow and cynical. There is no doubt that the shallow and cynical were more praiseworthy.

Still, ideologically, Marxism in its several varieties had a persuasive power that is difficult for even those of us who lived through it to recall. Its pull had little to do with industrial democracy, although songs from the labor movement were sung regularly. It was far less about the proletariat and more a revolt against what was seen as the shallow one-dimensionality of affluence. It was never clear to me what Marxists had against affluence, as I was relatively poor, but the venom against the previous generation's capitulation to ordinary life was intense.

Marxism had become the ideology of the young, who celebrated its moral superiority. This should not be dismissed. The young have driven European revolutions since 1789, and they have always been driven by a deep sense of moral superiority. The passion of the young Karl Marx, writing amid the risings of 1848, led directly to Lenin and then Stalin. The self-righteous young have consequence, something no one attending a major Euro-American university in the decades before the collapse of the Soviet empire could ignore. Bitterness against those over 30 (then considered old) was a greater driver than class struggle. That the young feel superior to the old is built into the Enlightenment. We believe in progress, and the young have more of a future than the old.

In looking at pictures of the celebrants at the collapse of the Berlin Wall, it was the young who had risen up. I was not in Berlin in those days, but I had been to Berlin before, and Berlin was a dynamo of Marxism. I am morally and statistically certain that many of those celebrating the collapse of the wall were Marxists.

When the wall came down, it for the most part destroyed Marxism. The so-called New Left believed Soviet Communism was a betrayal of communism. Since Marxism argued that history was in some sense deterministic, how Marxism could have failed from a Marxist point of view was never clear to me. But in the end, the Marxism of my generation had more to do with the fact that their parents, shaped in the Great Depression and World War II, were content with a house and a car, a spouse and some savings. The young always have greater aspirations than to simply live, but they grow out of it.

The fate of Marxism in Europe and the United States differed greatly from its fate in the Soviet Union and Eastern Europe. Marxism died in the Soviet Union with Stalin. With Mao, Stalin was the last great Communist. It was not just that he believed, but that he acted on that belief. At the heart of communism was the class struggle, and that didn't end when the Communist Party had won. The Party and the people had to be purged, shaped and forged into something unprecedented. It was to be an agonizing process, and Stalin was prepared to impose the agony.

Stalin is the finest argument there is against sincerity. He sincerely believed not only in the possibility of creating a new society, but in the brutal actions needed to achieve it.

Stalin killed communism. He was right that creating a new society required agony. He didn't realize, or perhaps in the end didn't care, that the agony required made the new society pointless, corrupt before it was born. Nikita Khrushchev tried to build a communist state without Stalinism. But when Leonid Brezhnev, Alexei Kosygin and Nikolai Podgorny overthrew Khrushchev in 1964, it was the revolution of the exhausted. Their lives were built on a single triumph: They had survived Stalin.

Their goal was to continue surviving. Brezhnev destroyed communism by trying to hold absolute power and do as little with it as possible. He sank into corruption and weakness, as did his regime. The empire didn't revolt. It simply took advantage of the fact that the Soviet Union was too corrupt and self-indulgent to hold onto them. It was less a revolution than the fact that the jailhouse door had been left unlocked.

Marxism's Failure

Marxism destroyed itself because it took power, and putting Marxism on display in power ultimately cost it its credibility. Had it never been in power, more than the tiny handful who are still Marxists might take it seriously.

Marxism was repudiated as an ideology, even as it had repudiated ideology in general. It was the culmination of the Enlightenment, not only because Marxism had the most extreme notion of equality imaginable but also because it was ruthlessly consistent. It had views not only on politics and economics, but also on art, the proper raising of children, proper methods of plowing and the role of sports in society. It had views on everything, and with the power of the state at its disposal, nothing was outside its purview. In the end, Marxism discredited the Enlightenment. It was the reductio ad absurdum of systematic reason. Marxism shattered the Enlightenment into an infinite number of prisms, each free to live the one life Marxism could not tolerate: a life of contradictions. We are heir to the incoherence it left.

But the truth was that Marxism not only failed to create the society it wished, it also did not effectively motivate the New Left. Marxism never succeeded in escaping the primordial reality of the human condition. I don't mean this as not escaping self-interest or corruption. What it failed to do was escape the reality of community as the foundation of human existence, more important than the individual, and certainly more important than class.

From the beginning to the end, the Soviet Union was an empire. It had a center in Moscow and an apparatus that controlled other, lesser vassal states. It could claim that the Soviet Man was being created, but the truth was that the Russian was a Russian, the Kazakh a Kazakh, and the Armenian an Armenian. Stalin never crushed this reality as much as he tried. And when he died, and as the Soviet state grew weaker and more corrupt, these national differences became even more important.

But even more than this, the Soviet Union acted in the world as an empire. On taking power, Lenin made a deal with Germany, exchanging land for peace. Indeed, Lenin came to power essentially as a German operative, delivered to St. Petersburg in a sealed train and funded to overthrow the government and make peace with Germany on Berlin's terms. Lenin made this deal in order to take power. When Germany was defeated, he regained the lost lands and the rest of the empire in a civil war that reclaimed Peter the Great's empire for himself. When we look back, the class struggle was merely the preface. The reality was what Marx called Oriental Despotism, coupled with a capitulation to geopolitical reality.

Stalin later spent the 1930s preparing for war with Germany, purging the military, starving peasants in order to buy steel factories, and building weapons. That he miscalculated the beginning does not change the end. Stalin waged a ruthless war for the motherland and pushed the Soviet empire west to the center of Germany and into the Carpathians. The Soviet Union anchored itself in the center of Europe waging a war with the United States for the former European empires cast free by the collapse of European power. It is one of the great ironies of history that the greatest imperial conflict was waged by the two great anti-imperial powers, the United States and the Soviet Union.

We all now know that the Soviet Union was doomed. It was not nearly so clear to the United States as it fought to a stalemate in Korea and lost in Vietnam. It was not clear during the Cuban Missile Crisis or during the Berlin blockade. Above all, it was not clear in 1980, when the United States had lost in Vietnam and was reeling economically. Iran had expelled American power, and the Soviets had invaded Afghanistan. Tito was dead in Yugoslavia, and the Soviets were fishing in muddy waters. Greek society was torn apart, and the Soviets were funding all sides of an incipient civil war in Turkey. The American strategy of containment was solid in Europe and had added China to the frontier, but it appeared to be rupturing on a line from Yugoslavia to Afghanistan.

In retrospect, we can see that the Soviet Union had long since lost its will to power. It could not have taken risks even if it wanted to. By 1980, it could poke at the United States and its allies, but a full-blooded thrust was something that haunted only American minds. Still, the Soviets played the geopolitical game. Surrounded, they sought openings, and failing to find those, they tried to drive the Americans off-balance throughout the world. They were everywhere. But in the end, their economy was weak, their satrapies were restless and the leaders wanted to enjoy their dachas and their pleasures. It was partly that they had lost all belief, but it was also, in retrospect, that they knew they were weak.

Marx argued that the revolution would come in an advanced industrial country, like Germany.

Instead, it came in a place that violated his theory and where building communism was impossible. It arrived in the vast European Mainland, not on the European Peninsula. It came in an impoverished, landlocked country with terrible transportation and a dispersed population, not on the maritime peninsula, with excellent transportation and a concentrated population. This meant that their thrust in Germany and Eastern Europe left them with a region that now shared Russian poverty, and which had to be occupied and defended. The American solution was simple: to wait. There was really no other solution, as an invasion of the mainland had destroyed Napoleon and Hitler. Geopolitics imposed a strategy of waiting on both sides, and the Soviets had less time than the Americans and their allies.

And so the wall came down. The most fantastic dreams of the Enlightenment were shattered.

The young Marxists of Berlin, confused by a history that could not conform to their contradictory dreams, got jobs at Siemens or Deutsche Bank or perhaps in Brussels. The Americans claimed a victory that is somewhat reasonable, if the strategy of doing nothing is allowed into the rules of geopolitics. And the empire shattered into small pieces that cannot be rebuilt, in spite of a leader who would like to think of himself as Stalin, but is really a better-dressed Brezhnev.

The most important thing that happened on that day, and which must not be forgotten, is that Germany became once more reunited. From 1871 onward, a united Germany has posed a problem for Europe. It is too productive to compete with and too insecure to live with. This is not a matter of ideology; it is a matter of geography and culture. The young men and women at the wall now emphatically support austerity in Europe, not accepting responsibility for the rest of Europe's fecklessness. Why should they?

The fall of the Berlin Wall 25 years ago served as an exclamation point in history ending an ideology and an empire. It did not end history, but rather it renewed the puzzle that has dogged Europe since 1871. What will Germany do next and what will the outside world do with Germany? This once slightly unsettling question has become a moderately unsettling one. In Europe, history sometimes throws a party and then presents an unpleasant surprise. But then, Europe is always a surprise, or at least pretends to be.

viernes, noviembre 14, 2014



Op-Ed Contributor

The Truth About the Wars


NOV. 10, 2014

AS a senior commander in Iraq and Afghanistan, I lost 80 soldiers. Despite their sacrifices, and those of thousands more, all we have to show for it are two failed wars. This fact eats at me every day, and Veterans Day is tougher than most.
As veterans, we tell ourselves it was all worth it. The grim butchery of war hovers out of sight and out of mind, an unwelcome guest at the dignified ceremonies. Instead, we talk of devotion to duty and noble sacrifice. We salute the soldiers at Omaha Beach, the sailors at Leyte Gulf, the airmen in the skies over Berlin and the Marines at the Chosin Reservoir, and we’re not wrong to do so. The military thrives on tales of valor. In our volunteer armed forces, such stirring examples keep bringing young men and women through the recruiters’ door. As we used to say in the First Cavalry Division, they want to “live the legend.” In the military, we love our legends.

Here’s a legend that’s going around these days. In 2003, the United States invaded Iraq and toppled a dictator. We botched the follow-through, and a vicious insurgency erupted. Four years later, we surged in fresh troops, adopted improved counterinsurgency tactics and won the war. And then dithering American politicians squandered the gains. It’s a compelling story. But it’s just that — a story.
The surge in Iraq did not “win” anything. It bought time. It allowed us to kill some more bad guys and feel better about ourselves. But in the end, shackled to a corrupt, sectarian government in Baghdad and hobbled by our fellow Americans’ unwillingness to commit to a fight lasting decades, the surge just forestalled today’s stalemate. Like a handful of aspirin gobbled by a fevered patient, the surge cooled the symptoms. But the underlying disease didn’t go away. The remnants of Al Qaeda in Iraq and the Sunni insurgents we battled for more than eight years simply re-emerged this year as the Islamic State, also known as ISIS.
The surge legend is soothing, especially for military commanders like me. We can convince ourselves that we did our part, and a few more diplomats or civilian leaders should have done theirs.
Similar myths no doubt comforted Americans who fought under the command of Robert E. Lee in the Civil War or William C. Westmoreland in Vietnam. But as a three-star general who spent four years trying to win this thing — and failing — I now know better.

We did not understand the enemy, a guerrilla network embedded in a quarrelsome, suspicious civilian population. We didn’t understand our own forces, which are built for rapid, decisive conventional operations, not lingering, ill-defined counterinsurgencies. We’re made for Desert Storm, not Vietnam. As a general, I got it wrong. Like my peers, I argued to stay the course, to persist and persist, to “clear/hold/build” even as the “hold” stage stretched for months, and then years, with decades beckoning. We backed ourselves season by season into a long-term counterinsurgency in Iraq, then compounded it by doing likewise in Afghanistan. The American people had never signed up for that.
What went wrong in Iraq and in Afghanistan isn’t the stuff of legend. It won’t bring people into the recruiting office, or make for good speeches on Veterans Day. Reserve those honors for the brave men and women who bear the burdens of combat.
That said, those who served deserve an accounting from the generals. What happened? How? And, especially, why? It has to be a public assessment, nonpartisan and not left to the military. (We tend to grade ourselves on the curve.) Something along the lines of the 9/11 Commission is in order. We owe that to our veterans and our fellow citizens.
Such an accounting couldn’t be more timely. Today we are hearing some, including those in uniform, argue for a robust ground offensive against the Islamic State in Iraq. Air attacks aren’t enough, we’re told. Our Kurdish and Iraqi Army allies are weak and incompetent. Only another surge can win the fight against this dire threat. Really? If insanity is defined as doing the same thing over and over and expecting different results, I think we’re there.
As a veteran, and a general who learned hard lessons in two lost campaigns, I’d like to suggest an alternative. Maybe an incomplete and imperfect effort to contain the Islamic State is as good as it gets. Perhaps the best we can or should do is to keep it busy, “degrade” its forces, harry them or kill them, and seek the long game at the lowest possible cost. It’s not a solution that is likely to spawn a legend. But in the real world, it just may well give us something better than another defeat. 

Heard on the Street

Banking on Investors to Stop ‘Too Big to Fail’

Proposed Rules Would Put More Eyes on Banks’ Activities

By Paul J. Davies

Nov. 10, 2014 1:43 p.m. ET

When nuclear reactors go into meltdown, they are isolated and decommissioned. Regulators want to be able to do the same for global banks.

New proposals from the global Financial Stability Board aim to ensure that taxpayers should never again foot the bill for a big bank collapse. Even in the worst crisis, a bank should be able to prop itself up—at least until it can be safely wound down.

New requirements for so-called total loss-absorption capacity mean that many banks, especially in Europe, will be forced to sell hundreds of billions of euros worth of junior bonds, or new senior bonds that will suffer losses in a crisis. This is debt that can be “bailed-in”, so that taxpayers don’t have to pick up the tab.

The point of this debt is that a bank’s troubles should never threaten its depositors or other lenders who can pull their money out quickly.

That should help prevent bank runs, which can turn crippling but survivable losses into disastrous meltdowns. It should also stop banks and their investors and lenders from believing that only governments can bear the losses from big failures.

Banks are already changing the way they are structured, and how they issue debt, to allow regulators to deal with them more easily in a crisis.

UBS is creating a holding company that is legally separate from depositors in its operating bank. From there it can issue senior unsecured bonds that regulators can write down in value or convert into equity if needed.

The change is costing hundreds of millions of Swiss francs to execute, according to senior executives, but should lead to a lower core equity requirement.

Similarly, Barclays has begun issuing new senior bonds out of its holding company for the first time. Others, such as BNP Paribas or Deutsche Bank , may have to create a holding company or issue more expensive junior bonds.

HSBC faces a thornier issue: It is a collection of mostly deposit-funded subsidiaries, spread across continents. And among European banks it faces the highest requirement for issuance of new debt, at more than €90 billion ($112.1 billion), according to Morgan Stanley .
Some in the industry see the proposals as overkill. The new requirements will amount to as much as 25% of a bank’s risk-weighted assets, or a minimum of 6% of its total assets. The U.K.’s worst bank failure, Royal Bank of Scotland , needed government money equivalent to just 2.25% of its total assets.

The proposed rules will shift the pain of banking collapses from taxpayers to savers and investors. But, while markets are far from perfect, it is better that thousands of owners of equities and bonds are watching a bank’s risk-taking and performance than a handful of regulators alone.

This is the ultimate hope: All investors will be on the hook for losses ahead of taxpayers and so should become more interested and attentive stewards of banks’ activities.

Germany’s Secret Credit Addiction

Adair Turner

NOV 10, 2014

  .Credit card
LONDON – With recent data showing that German exports fell 5.8% from July to August, and that industrial production shrank by 4%, it has become clear that the country’s unsustainable credit-fueled expansion is ending. But frugal Germans typically do not see it that way. After all, German household and company debt has fallen as a share of GDP for 15 years, and public debt, too, is now on a downward path. “What credit-fueled expansion?” they might ask.
The answer lies in the reality of our interconnected global economy, which for decades has depended on unsustainable credit growth and now faces a severe debt overhang. Before the 2008 financial crisis hit, the ratio of private credit to GDP grew rapidly in many advanced economies – including the United States, the United Kingdom, and Spain. Those countries also ran current-account deficits, providing the demand that allowed China and Germany to enjoy export-led expansion.
Credit-driven growth enabled some countries to pay down public debt. The ratio of Irish and Spanish public debt to GDP, to cite two examples, fell significantly. But the overall advanced-economy debt/GDP ratio, including public and private debt, grew from 208% in 2001 to 236% by 2008. And total global debt rose from 162% of world GDP to 175%.
Credit growth fueled asset-price increases and further credit growth, in a self-reinforcing cycle that persisted until the bubble burst and confidence collapsed. Faced with falling asset prices, households and companies then attempted to deleverage. The ratio of household debt to GDP in the US has indeed fallen – by 15% since 2009. But the debt did not go away; it simply moved from the private sector to the public sector.
Private deleveraging depressed the economy as households cut consumption and businesses cut investment. Tax revenues fell and social expenditures rose. Fiscal deficits therefore soared. As a result, for every percentage reduction in private debt, the ratio of public debt to GDP rose by a greater amount.
This was a repeat of Japan’s experience over the last 25 years. After the country’s 1980s credit boom went bust, large fiscal deficits were essential to prevent a severe depression. But the inevitable consequence was that, while Japanese companies slowly deleveraged, public debt rose to 245% of GDP.
Leverage shifted not only from private to public sectors, but also among countries. From 2002 to 2008, China’s total debt/GDP ratio was relatively stable and below 150%. It is now around 250%. This was the deliberately chosen policy response to deleveraging in advanced economies.
Fearing that post-crisis recession in advanced economies would produce a socially dangerous decline in Chinese employment, the government instructed its banks to open the credit floodgates, triggering an infrastructure and housing-construction boom. Commodity and capital goods producers – such as Germany – benefited from credit-driven demand.
Household and company debt grew rapidly in many other emerging markets as well. Overall emerging-market debt has grown from 114% to 151% of GDP, and total global leverage is 37% higher than it was in 2008. As the recent 16th Geneva Report on the Global Economy puts it, Deleveraging? What deleveraging?”
Today’s total debt level seems both unsustainable and impossible to reduce without depressing the economy. Eurozone rules demand fiscal consolidation, but the result is slow growth, which makes deleveraging even more difficult. Likewise, Japan raised its consumption tax in April to cut the fiscal deficit, but the increase has tipped the economy into recession.
China now faces the dilemma that arises in the late stage of any credit boom. Faced with falling property prices and credit growth, should it accept a hard landing as inevitable, or keep the boom going, which would undoubtedly lead to bigger problems later? Whatever its choice, growth will slow significantly, and inflation already is well below the central bank’s 4% target.
Slower growth in major markets in turn depresses Germany, until recently, the eurozone economy’s only strong motor. And simultaneous slowdowns in Japan, China, and the eurozone threaten to slow the US and UK recoveries. With global growth anemic and inflationary expectations falling, further growth in debt looks unsustainable. And yet total global leverage continues to rise.
This poses two questions to which orthodox economics and conventional policy have provided an inadequate response. First, how can we ensure that economies grow without rapid private credit growth, which leads to crisis and a debt overhang? Second – and the crucial issue today – how can we escape the debt trap in which past credit growth has left us?


David Stockman to Bill Gross: Take the Gold Watch Now, Please
By John Morgan

Monday, 10 Nov 2014 06:00 AM

Bill Gross should stick to the shuffleboard courts because his call for bigger deficits is illogical, according to David Stockman, the still-outspoken U.S. budget chief during the Reagan White House years.

Writing on his Contra Corner blog, Stockman said Gross, perhaps the nation's most prominent bond guru during his years at the helm of Pimco, has apparently "lost it" since taking up residence at Janus Capital.

That's because Gross, in his November investment letter at Janus, called for more money printing and more spending from the debt-ridden federal government to boost the economy.

Those are fighting words for Stockman, a reliable foe of the Federal Reserve's ultra-loose monetary policies and the Beltway wastrels of Washington, D.C.

"Let's see. In the case of the US, real economic growth has been faltering since the year 2000. During the last 14 years real GDP growth has averaged 1.8 percent per annum — the lowest rate of growth for an equivalent period in modern times," Stockman wrote.

"In fact, it is barely half the average growth rate during the second half of the 20th century. Not only is there no correlation between fiscal deficits and economic growth over those 50 years, but the real evidence is more nearly the opposite."

Stockman noted that during the "golden era of sound money and fiscal rectitude" from 1953 to 1963, GDP averaged 4 percent, deficits were tiny in comparison with today and the government actually recorded some surplus years.
In those days when the inflation rate was only 1.2 percent annually, no one called it deflation or worried about making sure the dollar's purchasing power kept shrinking with hidden inflation, according to Stockman's view.

"Instead, they called it sound money, and such price stability was especially welcomed by bond managers of the day. The latter made their living by investing capital, not front-running the central banks of the world as do speculators like the bond king. Accordingly, bond managers during the golden era would have been utterly mystified by the babble that Gross unloaded in his call for more deficit spending."

In his Janus commentary, Gross bemoans the stagnant world economy and concludes: "The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side — from the dreaded government side — where deficits are anathema and balanced budgets are increasingly in vogue."

But that's balderdash, according to Stockman.

The rising interest rate environment that accompanies inflation may be profitable for the fixed-income industry and the likes of Gross and his Washington D.C. compatriots, but in Stockman's view it is terrible for average Americans.
"First, they crushed savers with 70 months of zero interest rates. Now they propose to drive returns from savings even deeper into negative territory by pounding their pans for more inflation," he wrote.

"Finally comes the utterly unsupportable claim that growth and full time jobs have faltered because Washington has not manufactured enough 'aggregate demand' by burying future taxpayers even deeper in debt."