Unsettling precedents for today’s world

Events evoke not the 1930s but the period before the first world war

Martin Wolf

Trump Kaiser
© James Ferguson

History does not repeat itself, but it often rhymes. This remark is often incorrectly attributed to Mark Twain. But it is a good one.

History is the most powerful guide to the present, because it speaks to what is permanent in our humanity, especially the forces that drive us towards conflict. Since the biggest current geopolitical event, by far, is the burgeoning friction between the US and China, it is illuminating to look back to similar events in the past. In a thought-provoking book, Destined for War, Harvard’s Graham Allison started with the account of the Peloponnesian war by Thucydides, the great Athenian historian of the 5th century BC.

However, I will focus on the three eras of conflict of the past 120 years. From them much is to be learnt.

The most recent conflict was the cold war (1948-1989) between a liberal democratic west, led by the US, and the communist Soviet Union, a transformed version of the pre-first world war Russian empire. This was a great power conflict between the chief victors of the second world war. But it was also an ideological conflict over the nature of modernity.

The west ultimately won. It did so because the scale of western economies and the speed of western technological advances vastly outmatched those of the Soviet Union. The subjects of the Soviet empire also became disenchanted with their corrupt and despotic rulers and the Soviet leadership itself concluded its system had failed. Despite moments of danger, notably the Cuban missile crisis of 1962, the cold war also ended peacefully.

Going further back, we reach the interwar years. This was an interregnum in which the attempt to restore the pre-first world war order failed, the US withdrew from Europe and a huge financial and economic crisis, emanating originally from the US, ravaged the world economy.

It was a time of civil strife, populism, nationalism, communism, fascism and national socialism.

The 1930s are an abiding lesson in the possibility of democratic collapse once elites fail. They are also a lesson of what happens when great countries fall into the hands of power-hungry lunatics.

2 charts showing that the period before the first world war saw the rise of the US and Germany. Share of global GDP (%) and  the share of global manufacturing output (%)

Going further back still, we reach the decisive period 1870-1914. As Paul Kennedy noted in his classic book, The Rise and the Fall of the Great Powers, in 1880, the UK generated 23 per cent of global manufacturing output. By 1913, this had fallen to 14 per cent.

Over the same period, Germany’s share rose from 9 per cent to 15 per cent. This shift in the European balance led to a catastrophic Thucydidean war between the UK, an anxious status quo power, especially once the Germans started building a modern fleet, and Germany, a resentful rising one.

Meanwhile, US industrial output went from 15 to 32 per cent of the world’s, while China fell into irrelevance. Thereupon, US action (in the 20th century’s big conflicts) and inaction (in the interwar years) determined the outcomes.

Today’s era is a mixture of all three of these.

It is marked by a conflict of political systems and ideology between two superpowers, as in the cold war, by a post-financial crisis decline of confidence in democratic politics and market economics as well as by the rise of populism, nationalism and authoritarianism, as in the 1930s, and, most significantly, by a dramatic shift in relative economic power, with the rise of China, as with the US before 1914.

For the first time since then, the US faces a power with an economic potential exceeding its own.

The pre-1914 period ended in a catastrophic war, as did the interwar period, albeit with a relatively successful post-1945 aftermath.

The cold war ended in peaceful triumph.

Now, the world confronts challenges that easily match those of the earlier periods. So what lessons are we to learn from these eras?

2 charts showing that the last 40 years have been notable for the rise of China. Share of GDP (%) and share of global manufacturing output (%)

Perhaps the most obvious one is that quality of leadership matters. President Xi Jinping’s capacities and intentions are clear enough: he is devoted to party dominance over a resurgent China. But the political system of the western world and especially the US and UK, the two powers that dragged the world through the 1930s, is failing.

US President Donald Trump’s erratic leadership recalls that of Germany under Kaiser Wilhelm. Without better leadership, the west and so the wider world are in deep trouble.

Another lesson is the overriding importance of avoiding war. Prof Allison describes well how mutual suspicion fuelled the journey to war in 1914. It is even more crucial for the US and China to avoid head-on conflict now. That was the great success of the cold war. But nuclear deterrence may not be enough.

Yet perhaps the most important conclusion is that avoiding yet another catastrophe is insufficient. We cannot afford the old games of great power rivalry, however inevitable they must seem. Our fates are too deeply intertwined for that. A positive-sum vision of relations between the west, China and the rest has to become dominant if we are to manage the economic, security and environmental challenges we face.

Humanity has to do far better than it has done before. Today, that must seem a fantasy, given the quality of western leadership, authoritarianism in China and rising tide of mutual suspicion. But we must try. We have to manage this difficult new era strategically. On our ability to do that all our futures now depend.

Sitting Still Will Be Hard for the Fed

The Federal Reserve is expected to stand pat next year after a tumultuous 2019, but it may not be able to do so

By Justin Lahart

The Federal Reserve is expected to leave rates steady after its two-day policy meeting this week. Photo: leah millis/Reuters

Federal Reserve officials would like to spend the next year not doing much of anything. They probably won’t get their wish.

The Fed starts a two-day policy meeting on Tuesday and at its conclusion the central bank will almost certainly leave rates on hold. An active year, during which it reversed course on its planned rate increases and then conducted three “insurance” rate cuts on worries that trade tensions and global weakness would put the economy at risk of recession, is ending on a muted tone.

With recession fears dialed back, investors’ focus will turn to the Fed’s projections for 2020.

These will likely show that most officials expect their target range for overnight rates will remain at the current 1.5% to 1.75%. That would be happy news for the Fed in an election year where it would prefer not to be seen as helping or hindering any candidate—a concern that is likely heightened given President Trump’s frequent criticism.

But while a projection for no change in rates may be the most balanced forecast, given the combination of potential headwinds and tailwinds the economy faces, it may not count as the most likely outcome. It is all too easy to imagine scenarios in which the Fed ends up having to cut rates and it is possible to imagine ones where it ends up raising them.

Trade worries, for example, for now are muted on the expectation that the U.S. and China will soon strike a “phase-one” deal. But given how often trade tensions have eased only to flare up again over the past two years—particularly last spring, when a U.S./China deal seemed imminent, only to fall apart—it is hard to have much confidence.

The presidential election also poses a risk, especially if the Democrats nominate a candidate who spooks employers and investors into believing corporate tax and regulatory costs are about to head substantially higher.

Conversely, if the economy faces few obstacles and grows steadily, pushing the unemployment rate down past its current 50-year low of 3.5%, the Fed may be hard pressed not to take back at least some of this year’s insurance cuts—particularly if inflation readings or wage growth pick up.

The only reliable prediction one could have made about the Fed in recent years has been that it wound up doing something unexpected.

Bolivia’s Crisis of Legitimacy

By: Allison Fedirka     

After the recent wave of unrest in South America that included Ecuador, Chile, Colombia and Bolivia, some are beginning to wonder what will happen next.

Each country will respond to the turmoil in different ways, but they all have one thing in common: They need to maintain or restore the legitimacy of the government and build public confidence in whatever solution the government comes up with to meet the demands of protesters.

Without this, the unrest is likely to continue and will fade out only as protesters grow fatigued or through a crackdown by security forces.

But the legitimacy of the government is a larger problem for some countries than others.

Bolivia will face the biggest challenge because the power vacuum created by the unrest there has undermined the legitimacy of the current and future governments, leaving the population divided.

Establishing Legitimacy

The question of a government’s legitimacy is a particularly sensitive topic for young democracies in South America.

In the not-too-distant past, several countries in the region were ruled by dictatorships, authoritarian leaders and military regimes.

People in these countries over the age of 50 – some of whom hold positions of power in the government and military – can still recall what life was like under these repressive regimes.

Democracy is a relatively new phenomenon in South America, especially when compared to places like the United States or Western Europe.

And while government legitimacy is important in all countries, South American nations are more mindful than most that a government’s claim to authority can’t be taken for granted.      

Elected officials are constantly aware that a social movement can thwart their ability to pass laws or stay in power.

Legitimacy becomes a critical question particularly during transitions of power, especially when the transition does not occur through a scheduled, democratic election.      
Political parties and civil society organizations see transparency and free and fair elections as necessary before elected leaders can be given the mandate to govern.

Therefore, many struggle to see as legitimate any government or official who rose to power without going through the electoral process.

Such value is placed in the democratic process that any government or leader who does not win the approval of the people through an election is seen as a threat to democracy itself.

Take Paraguay and Brazil as examples.

In both countries, recent presidents were removed from office through impeachment: Fernando Lugo in Paraguay and Dilma Rousseff in Brazil.

Both Lugo and Rousseff, along with their supporters, referred to their impeachments as coups and criticized the congressional proceedings under which their removal from office was executed.

By questioning the legitimacy of the impeachment proceedings themselves, they were also questioning the legitimacy of the next leaders who would take over as president.

As these cases show, it’s incredibly difficult to justify the removal of an elected government and to build support for a government that takes over from an ousted leader.

Legitimacy is clearly a necessary component for the success of any government, but it’s also critical to the success of any strategy to deal with social unrest.

Trying to bring order by using excessive force or by introducing reforms that offer no real change and don’t have broad support among the public often don’t work in the long run; these strategies resemble the behavior of dictatorial governments. But doing nothing is not an option.

Ecuador, Chile and Colombia have already started to build support for their strategies.

The governments have called on an array of political players, thought leaders and social groups to participate in a national dialogue geared toward finding solutions.

In Ecuador, President Lenin Moreno has met with indigenous leaders to discuss economic reforms.

Chile has started making arrangements for a referendum on constitutional changes (one of the key demands of the protesters) in the first half of next year.

The government also recently proposed a law that would allow the military to be deployed to protect critical infrastructure without declaring a state of emergency.

In Colombia, the government launched a “national dialogue” over critical social and economic issues and introduced economic reforms to decrease living costs.

In all these cases, getting buy-in from civil society has been critical to establishing the legitimacy of the government approach and avoiding backlash and further disarray.

Bolivia’s Power Vacuum

Bolivia, however, faces a bigger challenge than these other examples when it comes to legitimacy.

The protests in Bolivia resulted in the resignation of President Evo Morales, who held office for 13 years, longer than any other post-independence Bolivian leader.

Bolivia’s history is riddled with political and military strongmen, and Morales’ long tenure in office resembled the hold on power of other “caudillos” in Bolivia’s past.

It enabled him to exert undue influence over certain institutions.

In a decision that was widely criticized, the Supreme Court, for example, ruled that Morales could run for another term in 2019 despite a 2016 referendum in which a majority of Bolivians voted against extending term limits.

In Bolivia’s case, restoring the legitimacy of the government goes beyond finding a new president or passing legislation to meet protesters’ demands; it requires the reconstruction and legitimization of all major government institutions.

That’s because Morales’ ouster has left a power vacuum in Bolivia.

Normally, when a leader is removed from office, the post gets filled by the next in line to the presidency.

But in Bolivia, Morales stepped down from office (at the request of the military) rather than being removed by force.

After his departure, many other high-ranking government officials also resigned, including the vice president, the parliamentary leader and the president of the Senate, gutting the government of all the senior officials who would have been next in line for the presidency according to the country’s constitution.

Senate Vice President Jeanine Anez ultimately took over, even though this post is not included in the line of succession stipulated in the constitution, because the remaining lawmakers (most of whom were members of the opposition party to which Anez belongs) agreed that this was the most logical solution.

Morales’ supporters, however, have attacked Anez’s presidency as illegitimate, though their activities have been limited thanks to the strong police and military presence on the streets.

The power vacuum will make it extremely difficult to legitimize whoever comes to power next in Bolivia.

Anez’s caretaker government has tried to impose a smooth transition.

She has cleared the military of leaders who pushed for Morales’ resignation and worked with other members of the government to arrange elections for early 2020.

Efforts are also underway to sign unity pacts with protesters in the hopes of reducing street violence and the number of security forces needed to keep the peace.

At the same time, however, she has already taken measures to realign Bolivia’s foreign policy toward the U.S. and its regional allies.

Moreover, there are several key questions about the upcoming election that remain unanswered. First, who will be eligible to run for president?

Some Morales supporters still want to see him or his close allies like Vice President Garcia Linera run for office.

Some have also questioned the electoral court authorities who were removed when Anez took power and were replaced with people who were more in line with the opposition.

Voter turnout and public safety will also be a concern given the continued clashes between Morales’ supporters and opponents and the heavy presence of police and military forces.

Elections are necessary to establish the legitimacy of the next Bolivian leader, but whoever comes out on top will still need to work hard to maintain the legitimacy of their administration throughout their tenure.

Legitimacy is a critical question for all South American governments, particularly during times of major unrest.

It is built largely by getting civil society groups on board with government policies and reforms.

But the power vacuum left by Morales’ resignation poses a particularly difficult challenge for Bolivia’s next government.

Lessons learned from Bolivia’s experience may serve as a blueprint for other countries such as Venezuela, Cuba and Nicaragua that could face a similar fate in the future.

Mating strategies

A new theory argues same-sex sexual behaviour is an evolutionary norm

Unless it is essential to know a partner’s sex, why bother?

WHEN IT COMES to sexual behaviour, the animal kingdom is a broad church. Its members indulge in a wide variety of activities, including with creatures of the same sex. Flying foxes gather in all-male clusters to lick each other’s erect penises. Male Humboldt squid have been found with sperm-containing sacs implanted in and around their sexual organs in similar quantities to female squid.

Female snow macaques often pair off to form temporary sexual relationships that includes mounting and pelvic thrusting. Same-sex sexual behaviour has been recorded in some 1,500 animal species.

The mainstream explanations in evolutionary biology for these behaviours are many and varied. Yet they all contain a common assumption: that sexual behaviours involving members of the same sex are a paradox that does indeed need explaining. Reproduction requires mating with a creature of the opposite sex, so why does same-sex mating happen at all?

A paper just published in Nature Ecology and Evolution offers a different approach. Instead of regarding same-sex behaviour as an evolutionary oddity emerging from a normal baseline of different-sex behaviour, the authors suggest that it has been a norm since the first animals came into being.

The common ancestor of all animals alive today, humans included, did not, they posit, have the biological equipment needed to discern the sex of others of its species. Rather, it would have exhibited indiscriminate sexual behaviour—and this would have been good enough to transmit its genes to the next generation.

The group of young researchers from institutions across America who wrote the paper, led by Julia Monk, a graduate student at Yale, argue that conventional models of sexual behaviour’s evolution take two things for granted that they should not. The first is that the cost of same-sex behaviour is high because energy and time spent engaged in it do not contribute to reproductive success.

If that were true it would indeed mean that maintenance of same-sex behaviour over the generations requires some exotic explanation whereby such activity confers benefits that outweigh the disadvantage.

The second assumption is that same-sex activity evolved separately in every species that exhibits it, from an ancestral population that engaged exclusively in different-sex behaviour.

Do you come here often?

Ms Monk and her co-authors question the first assumption by pointing out that many animals seem to mate at a frequency far higher than looks necessary merely to reproduce—meaning that the proportional costs of any instance of sexual activity which does not produce offspring must be low. If this is true, it reverses the burden of proof.

The cost of the sensory and neurological mechanisms needed to identify another’s sex, and thus permit sex-discriminating mating behaviour, is high. Sometimes, that will be a price worth paying, especially if a long-term relationship is involved in reproduction, as it is in most birds and some mammals. But it is the evolution of sex-discrimination for which special-case exemptions must be sought, not the evolution of same-sex behaviour.

The second assumption is even easier to challenge. Typically, evolutionary biologists assume that traits shared widely across a related group are likely to have evolved in an ancestral population, not repeatedly and separately in each lineage.

Ms Monk and her colleagues argue that cognitive biases in the subject’s practitioners have pushed them to look for fantastic explanations for the evolution of same-sex behaviours in a range of animals, rather than considering the perhaps more reasonable explanation for its persistence, that it is a low-cost ancestral trait that has little evolutionary reason to disappear.

Although the idea that same-sex behaviour has always been a norm is scientifically intriguing, the paper’s authors are also making a broader point about human beings’ pursuit of knowledge. Ms Monk says that the paper’s authors met through a Twitter account which promotes the work of LGBT scientists.

This was a serendipitous encounter which gave them space to explore an idea that might have been dismissed at first sight in a more conventional setting. The group includes people with a range of sexual orientations, so naturally they had an incentive to ask whether mainstream evolutionary biology’s view of sexual orientation is correct.

Their hypothesis still needs testing. That will mean zoologists gathering more observational data on sexual behaviour of animals in the wild—and doing so with an open mind. The authors themselves are also mulling approaches involving computer modelling, which might show that a group of organisms behaving according to their theory is capable of reaching the distribution of sexual behaviours seen in the wild today.

If their hypothesis is confirmed, it raises the question of which other facets of scientific knowledge might be being obscured because the backgrounds of practitioners in those fields do not lead them to ask unconventional questions.

Ms Monk’s and her colleagues’ theory may yet turn notions of the evolution of animal sexual behaviour on their head. With a broader array of minds focused on other problems, other fields might follow, too.

Doug Casey on the Destruction of the Dollar

by Doug Casey

"Inflation" occurs when the creation of currency outruns the creation of real wealth it can bid for… It isn’t caused by price increases; rather, it causes price increases.

Inflation is not caused by the butcher, the baker, or the auto maker, although they usually get blamed.

On the contrary, by producing real wealth, they fight the effects of inflation.

Inflation is the work of government alone, since government alone controls the creation of currency.

In a true free-market society, the only way a person or organization can legitimately obtain wealth is through production.

"Making money" is no different from "creating wealth," and money is nothing but a certificate of production.

In our world, however, the government can create currency at trivial cost, and spend it at full value in the marketplace.

If taxation is the expropriation of wealth by force, then inflation is its expropriation by fraud.

To inflate, a government needs complete control of a country’s legal money.

This has the widest possible implications, since money is much more than just a medium of exchange. Money is the means by which all other material goods are valued.

It represents, in an objective way, the hours of one’s life spent in acquiring it.

And if enough money allows one to live life as one wishes, it represents freedom as well.

It represents all the good things one hopes to have, do, and provide for others.

Money is life concentrated.

As the state becomes more powerful and is expected to provide more resources to selected groups, its demand for funds escalates.

Government naturally prefers to avoid imposing more taxes as people become less able (or willing) to pay them.

It runs greater budget deficits, choosing to borrow what it needs.

As the market becomes less able (or willing) to lend it money, it turns to inflation, selling ever greater amounts of its debt to its central bank, which pays for the debt by printing more money.

As the supply of currency rises, it loses value relative to other things, and prices rise.

The process is vastly more destructive than taxation, which merely dissipates wealth.

Inflation undermines and destroys the basis for valuing all goods relative to others and the basis for allocating resources intelligently.

It creates the business cycle and causes the resulting misallocations and distortions in the economy.

We know the old saw "The rich get richer, and the poor get poorer."

No one ever said life had to be fair, but usually there is no a priori reason why the rich must get richer.

In a free-market society the sayings "Shirtsleeves to shirtsleeves in three generations" and "A fool and his money are soon parted" might be better descriptions of reality.

We do not live in a free-market society, however.

The rich and the poor do have a tendency to draw apart as a society becomes more bureaucratic, but not because of any cosmic law.

It’s a consequence of any highly politicized system.

Government, to paraphrase Willie Sutton, is where the money is.

The bigger government becomes, the more effort the rich, and those who want to get that way, will put into making the government do things their way.

Only the rich can afford the legal counsel it takes to weave and dodge through the laws that restrict the masses.

The rich can afford the accountants to chart a path through loopholes in the tax laws.

The rich have the credit to borrow and thereby profit from inflation.

The rich can pay to influence how the government distorts the economy, so that the distortions are profitable to them.

The point is not that rich people are bad guys (the political hacks who cater to them are a different question). It is just that in a heavily regulated, highly taxed, and inflationary society, there’s a strong tendency for the rich to get richer at the expense of the poor, who are hurt by the same actions of the government.

Always, and without exception, the most socialistic, or centrally planned, economies have the most unequal distribution of wealth. In those societies the unprincipled become rich, and the rich stay that way, through political power.

In free societies, the rich can get richer only by providing goods and services others want at a price they can afford.

As inflation gets worse, there will be a growing public outcry for government to do something, anything, about it.

People will join political action committees, lobbying groups, and political parties in hopes of gaining leverage to impose their will on the country at large, ostensibly for its own good.

Possible government "solutions" will include wage and price controls, credit controls, restrictions on changing jobs, controls on withdrawing money from bank accounts, import and export restrictions, restrictions on the use of cash to prevent tax evasion, nationalization, even martial law—almost anything is possible.

None of these "solutions" addresses the root cause—state intervention in the economy. Each will just make things worse rather than better.

What these solutions all share is their political nature; in order to work they require that some people be forced to obey the orders of others.

Whether you or I or a taxi driver on the street thinks a particular solution is good or not is irrelevant.

All of the problems that are just beginning to crash down around society’s head (e.g., a bankrupt Social Security system, federally protected banks that are bankrupt, a monetary system gone haywire) used to be solutions, and they must have seemed "good" at the time, otherwise they’d never have been adopted.

The real problem is not what is done but rather how it is done: that is, through the political process or through the free market. The difference is that between coercion and voluntarism.

It’s also the difference between getting excited, frustrated, and beating your head against a wall and taking positive action to improve your own standard of living, to live life the way you like it, and, by your own example, to influence society in the direction that you’d like to see it take—but without asking the government to hold a gun to anyone’s head.

Political action can change things.

Russians in the ’20s, Germans in the ’30s, Chinese in the ’40s, Cubans in the ’50s, Congolese in the ’60s, South Vietnamese and Cambodians in the ’70s, then Rhodesians, Bosnians, Rwandans, and Venezuelans today are among those who certainly discovered it can. It’s just that the changes usually aren’t very constructive.

That’s the nature of government; it doesn’t create wealth, it only allocates what others have created.

More typically, it either dissipates wealth or misallocates it, because it acts in ways that are politically productive (i.e., that gratify and enhance the power of politicians) rather than economically productive (i.e., that allow individuals to satisfy their desires in the ways they prefer).

It’s irresponsible to base your own life on what hundreds of millions of other people and their rulers may or may not do.

The essence of being a free person is to be causative over your own actions and destiny, not to be the effect of others.

You can’t control what others will do, but you can control yourself.

If you’re counting on other people, or political solutions of some type, most likely it will make you unwary and complacent, secure in the hope that "they" know what they’re doing and you needn’t get yourself all flustered with worries about the collapse of the economy.

Editor’s Note: Whether it’s groceries, medical care, tuition, or rent, it seems the cost of everything is rising.

It’s an established trend in motion that is accelerating, and now approaching a breaking point.

At the same time, the world is facing a severe crisis on multiple fronts.

Gold is just about the only place to be. Gold tends to do well during periods of turmoil—for both wealth preservation and speculative gains.