The Race To Collapse

As readers of this blog know, I have long regarded the return of economic crisis as an inevitability (because the core energy and no-growth predicament facing the Western world wasn’t solved in 2008-9 but merely kicked further down the road by increasing debt and printing money). It looks like 2012 will be the crunch year, as a series of inter-related crises are rapidly converging: (1) The European sovereign debt crisis; (2) The continuation of the chronic US inability to balance its books, and of instability in the Middle East; (3) The probable onset of serious declines in global oil production, as new oil megaprojects are no longer able to compensate for accelerating decline from existing fields; (4) heightened risks of a war with Iran, as the narrow window opens between the start of US delivery of the next-generation bunker buster MOP (from November 2011) and the culmination of the Iranian nuclear weapons program and its hardening against air strikes (next year or two).

The European debt crisis dominates headlines, with the Anglo-Saxon media crowing about the lazy, shiftless Meds (as opposed to the diligent and careful Germans) and blaming socialism for their problems. This of course has a number of flaws within it. Greeks work the most hours in the EU – 2000 per year, relative to 1300 in Germany. And the only major EU nations without huge debt and fiscal problems are the Scandinavians, who are about as “socialist” as one gets nowadays.

But this is all sidestepping the fact that debt and fiscal crisis afflict the entire Western world, and it is just that – due to the special political weaknesses of the Eurozone – have manifested first and foremost in Greece, Italy, and Spain. However, a look at the actual statistics reveals that even the “serious” countries are in a great deal of trouble. For instance, in 2010 both the US and Britain had bigger primary deficits (cyclically adjusted) than “basketcase” Greece, whereas Italy’s was actually positive! The Meds’ total net government debt is larger, but on the other hand, if even France is beginning to experience perturbations – a country whose fiscal balances are better in every way than Britain’s or America’s – then it surely cannot be long before the crows come home to roost in the Anglo-Saxon world.

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Making the Best of a Bad Situation

So news is in that Britain’s next government is going to be a Tory-Lib Dem coalition, bringing an end to thirteen years of New Labour dominance. At a time of profound economic uncertainty and the imminent return of Great Power politics, it is pollyannish to believe that any British government could resolve Britain’s manifold problems without incurring big social costs. That said, this coalition is likely the UK’s best chance of pulling through in salvageable shape.

Let me recap. First, the UK has a budget deficit of 13% of GDP and a debt to GDP ratio of 80% for 2010. (For comparison, the figures for defaulting Argentina in 2001 were 6.4% and 62%, respectively). According to PricewaterhouseCoopers, “Britain would have to make across-the-board budget cuts of 5% a year to come close to cutting the deficit in half by 2014” – and that assumes an economic upturn that may not materialize due to Britain’s deindustrialization, high energy costs, and the growing crisis in the Eurozone. (If Britain doesn’t make deep cuts soon, a descent into a Greek-style compound debt trap is inevitable). Second, the UK’s abysmal energy policy under New Labour – ignoring the depletion of the North Sea gas fields, declining to invest in new generating capacity, and not concluding long-term gas supply contracts – has made chronic electricity shortages all but inevitable by 2015. Third, separatist undercurrents are ever present. Not very visible now, granted, but that tends to change when a state comes under severe socio-economic pressure. Overall, I would say all this qualifies as a “bad situation” for Britain.

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The Endgame Begins

A year ago I predicted that there will be a “decoupling from the unwinding“, as “emerging markets” by and large ride out the temporary shocks of declining Western demand for their exports (China) and the interruption of Western credit intermediation (Russia) before resuming growth. This is one aspect of the trends leading to the imminent demise of Pax Americana, which will be replaced by “the age of scarcity industrialism” / “a world without the West“. We are now entering this Empire’s endgame.

After briefly stalling in early 2009, China’s economy roared back to life on the back of massive credit loosening to build (or overbuild) infrastructure and industrial capacity. Though not the most efficient use of resources, it did have the advantage of 1) maintaining growth, 2) forestalling the social unrest that would rise up if it wasn’t, and 3) at least Chinese investments went into building up their real economy (amongst other things, it became the world’s largest producer of wind turbines and photovoltaic panels in 2009), instead of the pork and oligarch welfare programs more characteristic of the US “stimulus”. And though Russia’s GDP contracted by 7.9% in 2009 – far higher than expected by most commentators, largely thanks to the dependence its big corporations acquired on continuous flows of intermediated Western credit – it began to slowly recover from mid-2009, industrial output is now rising at a fast clip, and investment banks are predicting growth of 4-6% for 2010. The other two BRIC’s, Brazil and India, didn’t have too many problems at all since they had neither a big credit nor trade dependence on the submerging Western markets.

In the long-term, I argued that the brunt of the crisis would fall on the “submerging” Anglo-Saxon markets, thanks to their “charades over “quantitative easing” (translation: printing money), transfer of toxic “assets” onto the public account”, and unsustainable fiscal stimuli. Today, the American political system is for all practical purposes broken. Republicans won’t agree to tax increases, Democrats won’t agree to cutting entitlement programs. The legislative process is reverting to that of the 17th century Polish-Lithuanian Commonwealth, when a single veto could (and did) prevent anything being agreed on in their Sejm, or parliament. (Hint: the ultimate consequences weren’t good for Poland).

The inflated hopes and expectations accompanying Obama’s accession to power were indeed, just as I suggested on his election, “greatly constrained by financial and institutional realities”. He is a weakling President, alternating between meaningless populist rhetoric and pandering to the Wall Street oligarchs; scorned by the left as Bush II with gloss, and condemned by the right as a foreign Marxist Islamofascist: his policies and outreaches failing at home and abroad, rejected in his own heartlands, these outcomes are engendered by and in large part made inevitable by his hopelessly pollyannish belief in his own messianic powers of compromise and persuasion.

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Shifting Winds: The End Of Pax Americana

Every once in a while, there occurs a major shift in the international arena. The First World War and its consequences were the seminal change of the last century, collapsing ancient empires and ushering in a new era of ethno-nationalist clashes, political radicalism and emerging powers challenging the established order of Versailles, forces that were fully unleashed in the aftermath of the Great Depression. From the middle of the Second World War, it became clear that the new world order would be defined by a bipolar competition between the USSR and the US. The next major shift occurred with the oil shocks of the 1970’s, when growth throughout the industrialized world, capitalist and socialist alike, declined, and they were beset with increasing social problems, while the beginning of the rise of China and the economic re-emergence of Western Europe and Japan heralded a new, globalizing multipolarity that was confirmed by the end of the Cold War and the collapse of the USSR.

The next two decades saw the triumph of “Western liberal democracy as the final form of government” and the spread of the neoliberal consensus, all underwritten by American military dominance and the new resources unlocked by the opening of formerly autarkic economies. Generally speaking, this was a rather peaceful and prosperous time. Though wars continued and there was the occasional genocide in Rwanda or Darfur, the overall incidence of violence declined sharply in all categories, the sole exception being terrorism. Similarly, the opening up of world trade sharply increased consumer power in the US and Europe as China’s reserve armies of labor set about producing cheap goods, a process lubricated by cheap oil, gargantuan freighters and developments in supply-chain management. And though its flowers still bloom and the politicians smile and exude the air that nothing’s much amiss, the winds of time are shifting, the sun is already setting on this world, and darkness is about to creep in.

Quite literally. The cheap oil that underpins industrial civilization is ending, as the world approaches peak oil production – the point when about half of recoverable reserves have been taken out of the ground. The remaining half lies in remoter places and will be much harder to extract, especially taking into account that the resources for doing so will be significantly more limited due to the collapse of the world credit system, a system that should have died a free-market death in late 2008, but which limps on, zombie-like, sustained by governments whose solvency now hangs by a thread only maintained by investors still naive enough to believe in their credibility.

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Russia Economic Crisis III: On the Importance of Self-Sufficiency in Liquids

In this essay, I analyze three major areas of concern about the current Russian economy – the debt burden, balance of payments and future fiscal sustainability. Although on paper Russia is comfortably solvent, rolling over debt has been problematic for Russia Inc. because of the shutdown of its traditional financing mechanisms, cheap American credit and foreign direct investment, coinciding with an avalanche of collapsing commodities. The underdevelopment of its domestic financial system forced the government to respond in an improvisatory, but swift and effective, way. Although Russia’s capital account will go deep red, the current account should remain in the black, or will at worst take on a pinkish hue; as such, the balance of payments will remain manageable, given the country’s huge foreign currency reserves. The consolidated budget may run a small deficit due to dwindling oil revenues, a smaller tax base and increased spending, but it will be easily financed out of the state’s rainy day funds. Growth in GDP will be small or stagnant, but the social impact will be mitigated by an expanding safety net. After the crisis, Russia will emerge with a stronger, more self-sufficient domestic financial system – and just in time to enjoy a new oil bonanza.

The fast shrinkage of Russia’s foreign currency reserves, plummeting oil prices and the weakening ruble means that Russophobes1 of all stripes are having a field day. They prophecy the collapse of the currency, soaring inflation, and the disintegration of the ‘Putin system’ as populist unrest undermines it from below and silovik clans fighting over dwindling oil rents rend it apart from above. Relying as they do on unsubstantiated claims fitted to support a flawed narrative of Russia as a virulent kleptocracy governed by economic illiterates, their predictions are once again doomed to come to naught – much like prior auguries of fascist takeover or ethnic disintegration2 after the 1998 crisis. This article will reveal why.

In the new millennium, loose US monetary policy and perverse regulations channeled cheap credit into a massive housing bubble. This explains why the US ‘enjoyed’ a consumer boom, even though the Bush II period was historically unique in that median household incomes never exceeded the peak level attained prior to the last recession3 (the dotcom bust after 2000). The borrowing binge spread to Russia in 2005 and intensified up to 2007. Even as the government shed off its debt with the help of soaring oil revenues and squirreled away 600bn $ in foreign currency reserves, its private banks and national champions gorged themselves at Greenspan’s trough to finance domestic and foreign expansion. But all unsustainable things come to a point where they can not longer be sustained, and by 2007 that junkiest junk, the subprime loan market, began to come apart at its seams.

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Russia Economy Crisis II: Anatomy of the Crisis

As promised in the last post, here is a follow-up about Part II of the 17th World Bank Russia report, the reading of which cannot be stressed as too important in the current climate. Like in the last post, I summarize the main reports, using a lot of unattributed straight-out quoting of salient phrases and sentences of the report, interspersed with my own commentary (which I sometimes make explicit by adding NOTE). After this, I plan on writing one more post about the economic crisis in Russia to clarify and further expound on my views, hopefully in a more coherent and readable format that these first two Russia Economy Crisis posts.

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Russia Economy Crisis I: How Red will Russia Get?

Recently the World Bank’s November issue of the biannual Russian Economic Report came out. At the time I was busy with other things, amongst others planning the move from Blogger to self-hosted WordPress; as such, I did not give it the comprehensive treatment that it deserved at the time. Of course, reading about these things today is much more important than at any time since 1998 (or 1987, or even 1929)…and if I devoted an entire post to the last November issue, surely this new compendium of graphs galore and pecuniary palaver deserves some special attention?

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Victimized Venezuela II: Beware of Schadenfreude

Much like Putin’s Russia, Venezuela has been unfairly victimized by Washington’s foreign policy elite and savaged by the Western MSM, which have caricatured Chávez as a run of the mill Latin American populist strongman. In a previous post on this matter, I drew attention to the work of Mark Weisbrot at the CEPR, who has demolished these crude myths (The Venezuelan Economy in the Chávez Years). Under the Bolivarian regime poverty plummeted, access to high-quality healthcare, education and affordable food widened and the GDP skyrocketed by 94% from Q2 2003 to 2008.

Unable to criticize Venezuela on humanitarian grounds, the only option left open to the neoliberal ideologues was to claim that the Venezuelan economic miracle was nothing more than an ‘oil boom headed for collapse’. Unfortunately for them, the Venezuelan state kept a balanced budget, reduced its foreign debt from 47.7% of GDP in 2003 to 24.3% in 2007 and total interest on all public debt amounted to just 2.1% of GDP in 2006 – overall, a fiscal policy far more responsible than Washington’s itself. For 2008, the government assumed an oil price of 35$ per barrel; it is true that in practice the state spends beyond budgeted expenditures when oil revenue far exceeds the budgeted for price, so a fall in oil prices would trim government spending and growth. However, a budgetary crisis or economic downturn are very unlikely, since the government has more than 50bn $ of international reserves it can draw upon in a crisis.

That was the theory when Weisbrot published the paper in February 2008…but how does it stack up in the face of 50$ per barrel today?

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