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Ten months ago I bet a symbolic $10 on a Republican win. According to elections models and the bookies, it’s more likely than not that I’ve lost it.

Not that I’m saddened by this development of course. (That said, if the economy slumps sharply in Q3, then a Romney win becomes entirely possible).

(Republished from AKarlin.com by permission of author or representative)
 
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It’s been a great year! To recap, in rough chronological order, 2011 saw: The most popular post (with 562 comments and counting; granted, most of them consisting of Indians and Pakistanis flaming each other); Visualizing the Kremlin Clans (joint project with Kevin Rothrock of A Good Treaty); my National Comparisons between life in Russia, Britain, and the US; my interview with (now defunct) La Russophobe; interviews with Craig Willy and Mark Chapman; lots of non-Russia related stuff concerning the Arctic, futurism, Esperanto, and the Chinese language; possibly the most comprehensive analyses of the degree of election fraud in the Duma elections in English; TV appearances on RT and Al Jazeera; and what I hope will remain productive relationships with Al Jazeera and Inosmi. Needless to say, little if any of this would have been possible without my e-buddies and commentators, so a special shout out to all you guys. In particular, I would like to mention Alex Mercouris, who as far as I can ascertain is the guy who contributed the 20,000th comment here. I should send him a special T-shirt or something.

In previous years, my tradition was to review the previous year before launching into new predictions. I find this boring and will now forego the exercise, though in passing I will note that many of the defining traits in 2010 – the secular rise of China and of “The Rest” more generally; political dysfunction in the US; growing fissures in Europe, in contrast to Eurasian (re)integration; the rising prominence of the Arctic – have remained dominant into this year. The major new development that neither I nor practically anyone else foresaw was the so-called “Arab Spring”, as part of a pattern of increasing political stress in many other states: Occupy Wall Street and its local branches in the West; the Meetings for Fair Elections in Russia; Wukan in China and anti-corruption protests in India. I don’t disagree with TIME’s decision to nominate The Protester as its person of the year. However, as I will argue below, the nature of protest and instability is radically different in all these regions. I will finish up by reviewing the accuracy of my 2011 predictions from last year.

tsar-putin 1. There is little doubt that Putin will comfortably win the Presidential elections in the first round. The last December VCIOM poll implies he will get about 60%. So assuming there is no major movement in political tectonics in the last three months – and there’s no evidence for thinking that may be the case, as there are tentative signs that Putin’s popularity has began to recover in the last few weeks from its post-elections nadir. Due to the energized political situation, turnout will probably be higher than than in the 2008 elections – which will benefit Putin because of his greater support among passive voters. I do think efforts will be made to crack down on fraud so as to avoid a PR and legitimacy crisis, so that its extent will fall from perhaps 5%-7% in the 2011 Duma elections to maybe 2%-3% (fraud in places like the ethnic republics are more endemic than in, say, Moscow, and will be difficult to expunge); this will counterbalance the advantage Putin will get from a higher turnout. So that’s my prediction for March: Putin wins in the first round with 60%, followed by perennially second-place Zyuganov at 15%-20%, Zhirinovsky with 10%, and Sergey Mironov, Mikhail Prokhorov and Grigory Yavlinsky with a combined 10% or so. If Prokhorov and Yavlinsky aren’t registered to participate, then Putin’s first round victory will probably be more like 65%.

2. I will also go ahead and say that I do not expect the Meetings For Fair Elections to make headway. Despite the much bigger publicity surrounding the second protest at Prospekt Sakharova, attendance there was only marginally higher than at Bolotnaya (for calculations see here). So the revolutionary momentum was barely maintained in Moscow, but flopped everywhere else in the country – as the Medvedev administration responded with what is, in retrospect, a well balanced set of concessions and subtle ridicule. Navalny, the key person holding together the disparate ideological currents swirling about in these Meetings, is not gaining ground; his potential voters are at most 1% of the Russian electorate. And there is no other person in the “non-systemic opposition” with anywhere near his political appeal. There will be further Meetings, the biggest of which – with perhaps as many as 150,000 people – will be the one immediately after Putin’s first round victory; there will be the usual (implausibly large) claims of 15-20% fraud from the usual suspects in the liberal opposition and Western media. But if the authorities do their homework – i.e. refrain from violence against peaceful protesters, and successfully reduce fraud levels (e.g. with the help of web cameras) – the movement should die away. As I pointed out in my article BRIC’s of Stability, the economic situation in Russia – featuring 4.8% GDP growth in Q3 2011 – is at the moment simply not conductive to an Occupy Wall Street movement, let alone the more violent and desperate revolts wracking parts of the Arab world.

3. Many commentators are beginning to voice the unspeakable: The possible (or inevitable) disintegration of the Eurozone. I disagree. I am almost certain that the Euro will survive as a currency this year and for that matter to 2020 too. But many other things will change. The crisis afflicting Europe is far more cultural-political than it is economic; in aggregate terms, the US, Britain and Japan are ALL fiscally worse off than the Eurozone. The main problem afflicting the latter is that it suffers from a geographic and cultural rift between the North and South that is politically unbridgeable.

The costs of debt service for Greece, Portugal, Italy, and Spain are all quickly becoming unsustainable. They cannot devalue, like they would have done before the Euro; nor is Germany prepared to countenance massive fiscal transfers. The result is the prospect of austerity and recession as far as the eye can see (note that all these countries also have rapidly aging populations that will exert increasing pressure on their finances into the indefinite future). Meanwhile, “core Europe” – above all, Germany – benefits as its superior competitiveness allows it to dominate European markets for manufactured goods and the coffers of its shaky banking system are replenished by Southern payments on their sovereign debt.

The only way to resolve this contradiction is through a full-fledged fiscal union, with big longterm transfers from the North to the South. However, the best the Eurocrats have been able to come up with is a stricter version of Maastricht mandating limited budget deficits and debt reduction that, in practice, translates into unenforceable demands for permanent austerity. This is not a sustainable arrangement. In Greece, the Far Left is leading the socialists in the run-up to the April elections; should they win, it is hard to see the country continuing on its present course. On the other side of the spectrum, the Fidesz Party under Viktor Orbán in Hungary appears to be mimicking United Russia in building a “managed democracy” that will ensure its dominance for at least the next decade; in the wake of its public divorce with the ECB and the IMF, it is hard to imagine how it will be able to maintain deep integration with Europe for much longer. (In general, I think the events in Hungary are very interesting and probably a harbinger of what is to come in many more European countries in the 2010′s; I am planning to make a post on this soon).

Maybe not in 2012, but in the longer term it is becoming likely that the future Europe will be multi-tier (not multi-speed). The common economic space will probably continue growing, eventually merging with the Eurasian Union now coalescing in the east. However, many countries will drop out of the Eurozone and/or deeper integration for the foreseeable future – the UK is obvious (or at least England, should Scotland separate in the next few years); so too will Italy (again, if it remains united), Greece, the Iberian peninsula, and Hungary. The “core”, that is German industrial muscle married to Benelux and France (with its far healthier demography), may in the long-term start acquiring a truly federal character with a Euro and a single fiscal policy. But specifically for 2012, I expect Greece to drop out of the Eurozone (either voluntarily, or kicked out if it starts printing Euros independently, as the former Soviet republics did with rubles as Moscow’s central control dissipated). The other PIGS may straggle through the year, but they too will follow Greece eventually.

I expect a deep recession at the European level, possibly touching on depression (more than 10% GDP decline) in some countries.

4. How will Russia’s economy fare? A lot will depend on European and global events, but arguably it is better placed than it was in 2008. That said, this time I am far more cautious about my own predictions; back then, I swallowed the rhetoric about it being an “island of stability” and got burned for it (in terms of pride, not money, thankfully). So feel free to adjust this to the downside.

  • The major cause of the steep Russian recession of 2008-2009 wasn’t so much the oil price collapse but the sharp withdrawal of cheap Western credit from the Russian market. Russian banks and industrial groups had gotten used to taking out short-term loans to rollover their debts and were paralyzed by their sudden withdrawal. These practices have declined since. Now, short-term debts held by those institutions have halved relative to their peak levels in 2008; and Russia is now a net capital exporter.
  • I assume this makes Russia far less dependent on global financial flows. Though some analysts use the loaded term “capital flight” to describe Russia’s capital export, I don’t think it’s fair because the vast bulk of this “flight” actually consists of Russian daughters of Western banking groups recapitalizing their mothers in Western Europe, and Russians banks and industrial groups buying up assets and infrastructure in East-Central Europe.
  • The 2008 crisis was a global financial crisis; at least *for now*, it looks like a European sovereign debt crisis (though I don’t deny that it may well translate into a global financial crisis further down the line). There are few safe harbors. Russia may not be one of them but it’s difficult to say what is nowadays. US Treasuries, despite the huge fiscal problems there? Gold?
  • Political risks? The Presidential elections are in March, so if a second crisis does come to Russia, it will be too late to really affect the political situation.
  • Despite the “imminent” euro-apocalypse, I notice that the oil price has barely budged. This is almost certainly because of severe upwards pressure on the oil price from depletion (i.e. “peak oil”) and long-term commodity investors. I think these factors will prevent oil prices from ever plumbing the depths they briefly reached in early 2009. So despite the increases in social and military spending, I don’t see Russia’s budget going massively into the red.
  • What is a problem (as the last crisis showed) is that the collapse in imports following a ruble depreciation can, despite its directly positive effect on GDP, be overwhelmed by knock-on effects on the retail sector. On the other hand, it’s still worth noting that the dollar-ruble ratio is now 32, a far cry from what it reached at the peak of the Russia bubble in 2008 when it was at 23. Will the drop now be anywhere near as steep? Probably not, as there’s less room for it fall.
  • A great deal depends on what happens on China. I happen to think that its debt problems are overstated and that it still has the fiscal firepower to power through a second global crisis, which should also help keep Russia and the other commodity BRIC’s like Brazil afloat. But if this impression is wrong, then the consequences will be more serious.

So I think that, despite my bad call last time, Russia’s position really is quite a lot more stable this time round. If the Eurozone starts fraying at the margins and falls into deep recession, as I expect, then Russia will probably go down with them, but this time any collapse is unlikely to be as deep or prolonged as in 2008-2009.

new-eurasia 5. Largely unnoticed, as of the beginning of this year, Russia, Belarus, and Kazakhstan became a common economic space with free movement of capital, goods, and labor. Putin has also made Eurasian (re)integration one of the cornerstones of his Presidential campaign. I expect 2012 will be the year in which Ukraine joins the Eurasian common economic space. EU membership is beginning to lose its shine; despite that, Yanukovych was still rebuffed this December on the Association Agreement due to his government’s prosecution of Yulia Tymoshenko. Ukraine can only afford to pay Russia’s steep prices for gas for one year at most without IMF help, and I doubt it will be forthcoming. Russia itself is willing to sit back and play hardball. It is in this atmosphere that Ukraine will hold its parliamentary elections in October. If the Party of Regions does well, by fair means or foul, it is not impossible to imagine a scenario in which accusations of vote rigging and protests force Yanukovych to turn to Eurasia (as did Lukashenko after the 2010 elections).

6. Russia’s demography. I expect births to remain steady or fall slightly (regardless of the secular trend towards an increasing TFR, the aging of the big 1980′s female cohort is finally starting to make itself felt). Deaths will continue to fall quite rapidly, as excise taxes on vodka – the main contributor to Russia’s high mortality rates – are slated to rise sharply after the Presidential elections.

7. Obama will probably lose to the Republican candidate, who will probably be Mitt Romney. (Much as I would prefer Ron Paul over Obama, and Obama over Romney). I have an entire post and real money devoted to this, read here.

The US may well slip back towards recession if Europe tips over in a big way. I stand by my assertion that its fiscal condition is in no way sustainable, but given that the bond vigilantes are preoccupied with Europe it should be able to ride out 2012.

8. There is a 50% (!) chance of a US military confrontation with Iran. If it’s going to be any year, 2012 will be it. And I don’t say this because of the recent headlines about Iranian war games, the downing of the US drone, or the bizarre bomb plot against the Saudi ambassador in the US, but because of structural factors that I have been harping on about for several years (read the “Geopolitical Shocks” section of my Decade Forecast for more details); factors that will make 2012 a “window of opportunity” that will only be fleetingly open.

  • Despite the rhetoric, the US does not want to get involved in a showdown with Iran due to the huge disruption to oil shipping routes that will result from even an unsuccessful attempt to block of the Strait of Hormuz. BUT…
  • While a nuclear Iran is distasteful to the US, it is still preferable to oil prices spiking up into the high triple digits. But for Israel it is a more existential issue. Netanyahu, in particular, is a hardliner on this issue.
  • The US has withdrawn its troops from Iraq. In 2010, there were rumors that the US had made it clear to Israel that if it flew planes over Iraq to bomb Iran they would be fired upon. This threat (if it existed) is no longer actual.
  • The US finished the development of a next-generation bunker-busting MOP last year and started taking delivery in November 2011. But the Iranians are simultaneously in a race to harden and deepen their nuclear facilities, but this program will not culminate until next year or so. If there is a time to strike in order to maximize the chances of crippling Iran’s nuclear program, it is now. It is in 2012.
  • Additionally, if Europe goes really haywire, oil prices may start dropping as demand is destroyed. In this case, there will be an extra cushion for containing fallout from any Iranian attempt to block off the Strait of Hormuz.
  • Critically, the US does not have to want this fight. Israel can easily force its hand by striking first. The US will be forced into following up.

The chances of an Azeri-Armenian war rise to 15% from last year’s 10%. If there is any good time for Azerbaijan to strike, it will be in the chaotic aftermath following a US strike on Iran (though the same constraints will apply as before: Aliyev’s fears of Russian retaliation).

world-crude-oil-prodcution-and-fitted-growth-oil-drum

[Source: The Oil Drum].

9. Though I usually predict oil price trends (with great and sustained accuracy, I might add), I will not bother doing so this year. With the global situation as unstable as it is it would be a fool’s errand. Things to consider: (1) Whither Europe? (demand destruction); (2) What effect on China and the US?; (3) the genesis of sustained oil production decline (oil megaprojects are projected to sharply fall off from this year into the indefinite future); (4) The Iranian wildcard: If played, all bets are off. But I will more or less confidently predict that global oil production in 2012 will be a definite decrease on this year.

If investing, I would go into US Treasuries (short-term) and gold to hedge against the catastrophic developments; yuan exposure (longterm secular rise) and and US CDS (potential for astounding returns once SHTF). Property is looking good in Minsk, Bulgaria, and Murmansk. Any exposure to Arctic shipping or oil & gas is great; as the sea ice melts at truly prodigious rates, the returns will be amazing. I do think the Euro will survive and eventually strengthen as the weaker countries go out, but not to the extent that I would put money on it. Otherwise, I highly agree with Eric Kraus’ investment advice.

10. China will not see a hard landing. It has its debt problems, but its momentum is unparalleled. Economists have predicted about ten of its past zero collapses.

11. Solar irradiation was still near its cyclical minimum this year, but it can only rise in the next few years; together with the ever-increasing CO2 load, it will likely make for a very warm 2012. So, more broken records in 2012. Record low sea ice extent and volume. And perhaps 100 vessels will sail the Northern Sea Route this year.

12. Tunisia is the only country of the “Arab Spring” that I expect to form a more or less moderate and secular government. According to polls, 75% of Egyptians support death for apostasy and adultery; this is not an environment in which Western liberal ideas can realistically flourish. Ergo for Libya. I can’t say I have any clue as to how Syria will turn out. Things seem strange there: Russia and Israel are ostensibly unlikely, but actually logical, allies of Assad, while the US, France, the UK, and the Gulf monarchies are trying their best to topple him. These wars are waged in the shadows.

I've got some ways to go before I reach Navalny's demagogic stature.

I’ve got some ways to go before I reach Navalny’s demagogic stature.

13. As mentioned in the intro, 2011 has been a year of protest. As I argued in BRIC’s of Stability, in countries like China, Russia, or Brazil they will remain relatively small and ineffectual. Despite greater scales and tensions, likewise in Europe (though Greece may be an exception); these are old societies, and besides they are relatively rich. They won’t have street revolutions. I do not think Occupy Wall Street has good prospects in the US. By acting outside the mainstream (as part of a “non-systemic opposition”, to borrow from Russian political parlance) it remains irrelevant – the weed smoking and poor sartorial choices of its members works against its attaining respectability – and municipalities across the US are moving to break up their camps with only a few squeaks of protest. (This despite the arrests of 36 journalists, a number that had it been associated with Russia would have cries of Stalinism splashed across Western op-ed pages). I say this as someone who is broadly sympathetic with OWS aims and has attended associated events in Berkeley.

The nature of protest in the Arab world is fundamentally different, harkening back to earlier and more dramatic times: Bread riots, not hipsters with iPhones; against cynical and corrupt dictators, not cynical and corrupt pseudo-democrats; featuring fundamental debates about reconciling democracy, liberalism and religion, as opposed to weird slogans like “Occupy first. Demands come later.” Meh.

14. The world will, of course, end on December 21, 2012.

What about the 2011 Predictions?

1) My economic predictions were basically correct: “Today I’d repeat this, but add that the risks have heightened… The obvious loci of the next big crisis are the so-called “PIGS” (Portugal, Italy, Greece, Spain), and Ireland, Belgium and Hungary.”

2) Neither the Iranian war (chance: 40%) or an Azeri-Armenian war (chance: 10%) took place. If they don’t happen in 2012, their chances of happening will begin to rapidly decline.

3) Luzhkov still hasn’t been been hit with corruption charges, but merely called forth as a witness. Wrong.

Prediction of 3.5%-5.5% growth for Russia was exactly correct (estimates now converging to 4.0%-4.5%).

With headlines this December cropping up such as “End is nigh for Russia’s ‘reset’ with US“, my old intuition that US – Russia imperial rivalry couldn’t be set aside with a mere red plastic button may have been prescient: “In foreign policy, expect relations with the US to deteriorate.”

4) Pretty much correct about the US and the UK, though I didn’t predict anything drastic or unconventional for them.

5) “Oil prices should stay at around $80-120 in 2010 and production will remain roughly stable as increased demand (from China mostly) collides with geological depletion.” Totally correct, as usual.

6) China will grow about 9.4% this year, well in line with: “China will continue growing at 8-10% per year. Their housing bubble is a non-issue; with 50% of their population still rural, it isn’t even a proper bubble, since eventually all those new, deserted apartment blocs will be occupied anyway.”

7) 2011 was the warmest La Nina year on record, so in a sense thermometers did break records this year.

“Speaking of the Arctic, as its longterm ice volume continues to plummet and sea ice extent retreats, we can expect more circumpolar shipping. I wouldn’t be surprised to see up to 10 non-stop voyages along the Northern Sea Route from Europe to China, following just one by MV Nordic Barents in 2010.” If anything, I low-balled it. 34 ships made the passage this year! Sea ice cover was the second lowest on record, and sea ice volume was the lowest. So in the broad sense, absolutely correct.

“Likewise, expect the Arctic to become a major locus of investment.” This year, plans were announced to double the capacity of the Port of Murmansk by 2015.

8) Wrong on the Wikileaks prediction. The insurance file was released by The Guardian’s carelessness (whose journalists, David Leigh and Luke Harding, then proceeded to mendaciously lie about it), not by Assange. And the extradition proceedings are taking far longer than expected, though my suspicions that his case is politically motivated is reinforced by US prosecutors’ apparent pressure on Bradley Manning to implicate Assange in the theft of the State Department cables.

9) On Peter’s enthusiastic reminder, I did get my Russia Presidential predictions for 2012 wrong. Or 75% wrong, to be precise, and 20% right (those were the odds that I gave for Putin’s return back in May). I did however cover it separately on a different post, here. That said, I do not think the logic I used was fundamentally flawed; many other Kremlinologists ended up in the same boat (and most didn’t hedge like I did).

(Republished from Sublime Oblivion by permission of author or representative)
 
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And ironically, despite my blog’s focus, to date my US predictions have been more accurate than my Russian ones. Obama to become President? Check. Republicans to win 2010 mid-terms? Check. The emergence of “a new party, a new politics”, with “the feds [facing] challenges from the far-left and the far-right”? Check (Tea Party, Occupy Wall Street). Dammit, even the prediction about falling fertility rates is panning out (to Mark Steyn’s presumed chagrin, it now equals “decadent” France’s) – though that wasn’t a particularly hard one to make, given the recession and looming economic collapse and all. Perhaps I should give up on this Russia-watching thing and just analyze the US? ;)

Anyhow, back to Obama’s impending loss. To be fair, the title is a bit of a misnomer. I’d actually put his odds at 35% (Republicans – 65%). There really isn’t much to explain, is there? The economy sucks and is almost guaranteed to get better than worse. Output remains below peak 2007 levels. The deficit remains stubbornly high and the budget crisis will rear its head again in January 2012. Lord knows what it will become if there is another recession on the scale of the last one. Unemployment remains stuck at over 9%. Obama’s net approval rating is -12%. By the metrics I used to predict McCain’s defeat in 2008, Obama looks like he’s in deep trouble.

For what it’s worth, the InTrade prediction market is coming to the same conclusion. The latest figures created by gamblers who put their money where their mouths are give Obama a 48% chance, but as you can see since the market became high-volume in around April this year he has been trending down. (PS. Note the spike in early May, that was the Osama bin Laden assassination).

obama-bets

Incidentally, it was right around this time that I gambled $10 at Bodog on an Obama loss, immediately after the OBL assassination to take advantage of the cacophony of voices proclaiming Obama’s victory was now sealed. Yes, it would have played a huge rule had it happened a few days before the elections. But in May 2011? A year is an eternity in politics. New issues will cover over any lingering legacy of the OBL assassination. And that is why, with the bookies offering very favorable odds of 17/10 – and at the time, assessing Obama’s chances at only 45% – I made the bet below on Bodog.

obama-will-lose

In retrospect, with Obama’s re-election metrics continuing to decline, this was a very good bet if I say so myself. If things pan out, I will almost make back the $20 I lost betting on Medvedev as Russia’s next President.

Now a few words on the consequences (and refraining from bringing my own ideologies into this). Obama is not going to solve America’s economic problems. Nor is a Republican President. In any possible political configuration arising post-elections, raising taxes is nigh impossible – and that is the only way to alleviate the budget deficit which has been running at banana republic levels of 10% of GDP since 2009. Not cutting spending will lead to default, either outright or as is more likely by inflation (cue Argentina 2002). Both will be deleterious. Cutting spending at a time when the private sector is too over-leveraged to take up the slack will knock the legs out from the economy and likely result in a big collapse in output (cue Latvia 2008).

The fundamental problem is high oil prices, and the fact that any marginal increases in supply of this commodity that underpins all modern economies is being bid away by emerging markets that can make more productive use of them – primarily, China, with its factories and surfeit of cheap, relatively high-skilled labor (what’s the better return for a barrel of oil – the gas tank of an American SUV, or a Guangzhou factory making useful widgets?) – or the oil exporters themselves. To make the best of the current situation, the US needs long-term investments in raising its human capital (which, elite universities aside, is fairly low by developed country standards, as measured by international standardized tests) and raising energy efficiency. But these are only good in the long-term, and even here special interests are doing their best to prevent anything from being accomplished.

That is why the entire debate in the US over austerity vs. stimulus (both are suicide), or “American exceptionalism”, or the Presidential elections (given Obama’s stance on the War on Terror, Wikileaks, interventions, poker, weed, etc., to what extent to they really matter?), are all so tiring and mundane. In the face of uncompromising fiscal and energetic realities, which the US can mitigate to a degree but chooses not to, they are nothing but meaningless distractions.

(Republished from Sublime Oblivion by permission of author or representative)
 
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future-superpowers Most projections of future trends in national power fail to appreciate the importance of three crucial factors: (1) the declining EROEI of energy resources (including, but not limited to, “peak oil”); (2) the importance of human capital to economic growth, especially in developing countries’ attempts to “catch up” to the advanced world; and (3) the impacts of climate change, which are projected to be more and more catastrophic with every passing year. Disregarding these trends produces predictions such as George Friedman’s (STRATFOR) argument that Mexico – a low human capital country experiencing plummeting oil production and growing water stress – will become a superpower by 2100.

Using my current estimates of Comprehensive National Power as a base (an index of power that attempts to express a nation’s economic, military, and cultural power in a single number), I will specially stress the above factors in my analysis of future global power trends. Some results will look plausible and familiar (e.g. China overtaking the US as a superpower by the 2020′s); others will appear utterly bizarre (e.g. Canada becoming a major Great Power in by the end of the century, while India and Brazil plummet back into obscurity). But they are nonetheless all plausible and even likely outcomes, derived from bringing together worlds that all too often are considered independently of each other: the economy; human capital; geopolitics; energetics; and climate change.

There may of course be unexpected discontinuities – popularized as Black Swans by Nassim Taleb – that unravel these projections (the probability of their happening increasing exponentially over time). This will be covered in greater depth below. In the meantime, bear this caveat in mind as you read the rest of the post.

comprehensive-national-power

[Graph shows CNP of the greatest Powers 1980-2100; the "superpower" is always at 100 and all other Great Powers are shown relative to it. Click to enlarge.]

Phase 1: The End of Pax Americana (1980-2025)

The US is the current superpower, but China is rapidly making up ground. Its real GDP is now at $10 trillion, though according to some estimates it has already overtaken the $14.5 trillion American economy.

Some critics claim that nominal GDP is a better measure of power, even using these figures to claim that even at 10% growth it will be decades before China surpasses the US. This is a product of economic illiteracy, because it doesn’t take into account the convergence of Chinese price levels to those of developed countries (its nominal GDP has been expanding at more than 20% in the last 5 years).

There are a number of other factors that are often quoted to predict the doom of China’s rise, such as: (1) Growing regional disparities; (2) Income inequality; (3) Environmental degradation; (4) Bad loans and financial collapse, aka Japan; (5) Aging population; (6) Excessive export dependency; (7) Social unrest; (8) Authoritarian nature of its Marxist-Leninist political model.

Suffice to say that they are either common to most industrializing countries (1-3, 7); will only seriously affect it by the time its already developed (4-5); are overestimated (4, 6); or it is unclear why they should derail its economic ascent for long even if they lead to a democratizing revolution (7-8). I address all these points in detail here.

In any case, most of these are factors have yet to be realized, whereas many of the same trends undermining US power are already in evidence. You can point out the accumulating weight of China’s bad loans, but it is the Western financial system that had to be bailed out in 2008 at social expense; you can argue that the aging of China’s population will bankrupt its (minimal) social net, but it is the US that is facing a budget deficit of >10% of GDP and a national debt soaring into the stratosphere.

China is already the world’s largest manufacturing power. On current trends, it is due to overtake the US economy by the mid-2010′s (followed in nominal terms sometime in the 2020′s, as restrictions on the yuan are lifted and it appreciates). Since China produces its own military hardware, real GDP is what matters; consequently, it will take less relative effort for the PLA to match and overtake the US (especially in the crucial East Asian region and the Indian Ocean). As Paul Kennedy noted in The Rise and Fall of the Great Powers (of which, incidentally, the Chinese are great fans) military and political power follows naturally in the wake of economic power, whereas trying to achieve results from the opposite directions leads to the “imperial overstretch” that contributed to Soviet collapse and is now undermining American power.

Which brings us to the last point. China’s population is four times bigger than America’s, and human capital among the youngest generations is now as good as the US average. This makes its per capita convergence – and consequently, its ascent to economic primacy – almost inevitable.

But rather than assessing the situation dispassionately and preparing for a strategic retreat, the US is digging in all fronts: foreign wars, deficit spending, oil dependence, political gridlock, etc. This increases the probability that US decline will take the form of a sudden collapse, as of Argentina’s in 1999-2002, instead of fading away like the British Empire after 1945.

Phase 2: The Return of the Middle Kingdom (2020-2075)

The cultural decline will be slower. It took Latin more than a millennium after the collapse of the Roman Empire to lose its status as a lingua franca. Needless to say, the US will still retain a great deal of power by virtue of its large population and developed economy, it will remain in second place, almost no matter what, well into the 21st century. Furthermore, it will retain its deep ties – economic, cultural, etc. – with the Anglo-Saxon world (the UK, Canada, Australia, New Zealand) and, to a lesser extent, Europe. Hollywood, Silicon Valley, and the Ivy League will remain staples of global culture and technology.

However, there’s only so much power you can exercise through the English language, Google, or even Chuck Norris. For everything else there’s China – after a two hundred year break (a mere blip in its millennial history), the Middle Kingdom will have returned to its rightful place at the center of the world.

China is now roughly where South Korea was in 1990. A similar growth profile will by 2030 leave its economic power equal to 25 of today’s Koreas. Imagine that!

It’s unclear what political system China will have by then. Democratization on the Taiwanese model is not inevitable. The Chinese Communist Party (CCP) has studied the Soviet collapse in rigorous detail and is determined not to repeat its liberalizing mistakes. What I consider at least equally likely is an emergence of a “consultative Leninism”, in which the current NEPist model is opened up to democratic elements (e.g. competitive local elections; policy-making based on opinion polling) but under the continuing hegemony of the CCP. This could be China’s own, sovereign road to democracy.

Other possibilities are also possible, e.g. a Singaporean authoritarianism, or “managed democracy” in the style of Putin’s Russia. But short of a reversion to Maoism – which is exceedingly unlikely, given that China now has a commercial class that would strongly oppose it – it’s unclear how the widespread mantra that political change must be accompanied by a cessation of economic growth can be justified.

China’s rise will be accompanied by the flock of BRIC’s trailing in its wake: Brazil, Russia, and India. The first two will enjoy a massive resource windfall from selling their plentiful energy, mineral, and water (in the form of food) reserves to a world made increasingly ravenous by depletion elsewhere and the effects of an increasingly destructive and chaotic climate. Russia will remain a first-class Great Power, and India will join its ranks; Brazil will be the most prominent of the second-class powers, which will also include France, Canada, Germany, Japan, the UK, Turkey, and Korea.

As with China, there are many reasons cited to explain for why Russia will fail to achieve its promise, such as (1) demographic decline; (2) corruption; (3) resource-based economy; (4) crumbling infrastructure; (5) authoritarianism. All these factors are either exaggerated (1-5), typical of most middle-income countries (2, 4), or it is unclear why they are necessarily negatives at all (3, 5). But it also has great strengths. Russia combines the BRIC’s fiscal sturdiness and economic dynamism (both lacking in the West) with a GDP per capita that is almost twice that of the next richest BRIC, Brazil. Its human capital is on a par with the developed world’s, allowing for an easy convergence. Crucially, Russia is perfectly positioned for the coming age of “scarcity industrialism”, in which food, energy, and energy prices soar and global warming opens up vast regions of the country, including the Arctic, to shipping, energy production, agriculture, and habitation. Even at current growth rates of 4% per year, Russia should converge to European income levels by 2020-25 and spend the next few decades comfortably, its energy riches shielded by its nuclear umbrella.

Obviously Russia lacks the population mass, at least at this stage, to become a true superpower (even if it absorbs the other post-Soviet nations into a Eurasian union). This is not the case for India, which will overtake China to become the world’s most populous nation by 2025. But within that fast-growing population illiteracy is still rife and 47% of children remain malnourished. Though it suffers from many the usual ailments of low-income countries – creaky infrastructure, caste-based inequalities, sluggish courts and bureaucracy, etc. – it’s India’s low level of human capital that is the primary cause of its falling so far behind China (manufacturing output is an order of magnitude lower, and the poorest Chinese provinces are equal to the Indian average). Nonetheless, India has the coal to power itself, and temperatures will remain within acceptable bounds for producing stagnant grain harvests for at least the next few decades. And quantity counts. That is why India will become a first-rank Great Power, equaling Russia and approaching the US.

With its ample lands and resources (e.g. iron, oil), not to mention its successes with sugar cane-derived ethanol, Brazil is set to enjoy – much like Russia – a comfortable existence as a regional hegemon in a world of high prices for food, energy and minerals. Its military strength is paltry, but irrelevant given its distance from other Great Powers. It is also the least corrupt of the BRIC’s. However, its prospects for true superpowerdom are constrained by relatively low human capital; as its economy wasn’t distorted by a legacy of socialist mismanagement (as with China or Russia), its GDP per capita is already, more or less, “where it should be.” In the background, Canada will be getting very rich off supplying fuels and water to an increasingly parched and energy-starved US. However, for the time being its profile will remain modest.

The European Union is conspicuous by its absence. Europe is no longer united by the memory of war and the Soviet threat, and each country concerned above all for its own national interests. This is not a stable foundation for a union, and as such it will likely retreat into something like a glorified free trade area by the 2020′s. Real power will be concentrated among the big European Powers, which will carve out spheres of influence and compete with each other for neo-colonial influence: e.g. France (Maghreb); Germany (East-Central Europe); Turkey (Balkans, Azerbaijan, Arab world); the Scandinavian bloc; the Visegrad bloc. Arguably there is already evidence of this in the Anglo-French effort to oust Qaddafi. Read more here.

No European Power will have the mass to become a first-rank Great Power, though it may be (marginally) possible for France and definitely possible for coalitions of European Powers. By themselves, all the European nations will be lingering near the bottom of the CNP scale.

There is no point discussing any other country or alliance. NATO is becoming more irrelevant with each passing year. Japan is technologically advanced, but reliant on the US for its security and dependent on the same oceanic supply routes as China; as soon as the latter becomes the new regional hegemon, Japan’s effective sovereignty is history. Indonesia is similar India, but five times smaller. South Africa, Mexico, Australia, Nigeria, Iran, and Saudi Arabia are all some combination of (1) too underpopulated, (2) too underdeveloped, and (3) too vulnerable to climate change.

Phase 3: Towards a Russian Century? (2075-?)

Beyond 2050 we are getting into very foggy territory. Just think of an educated European observing the world one century ago, in 1911 – could he have predicted Germany’s utter collapse and occupation, and the rise of Russia (now known as the USSR) as a superpower along with the (vastly stronger) US superpower? And could that observer in 1951 have predicted that a China only recently consolidated under Communist control, after a century of stagnation, invasions and warlordism, would just fifty years later have overtaken a Russia that had become a basketcase?

Any number of black swans may have intervened by 2050, steering any projections wildly of course. Here are a few examples:

  • China and the US cooperate to build a massive global geoengineering project in the 2040′s that succeeds at checking global warming. This removes the conditions for Russia’s rise to a dominant position.
  • Facing desiccation in the West and flooding in the South, the US annexes Canada. As a result, it becomes the greatest Power in the world.
  • There is a total war between nuclear Powers, perhaps triggered by a Chinese land grab for the Russian Far East. Whoever “wins” (if that’s the right term), well, wins.
  • The development of nuclear fusion, space-based solar power, or some other technology, that reverses the secular trend towards declining EROEI. This massively undercuts the power of major resource exporters, such as Russia, Canada, and Brazil.
  • A transition to sustainable development. With global CO2 emissions setting a new record in 2010 (just one year after the deepest global recession in the past half-century), and setting the 2C warming target practically out of reach, there is little hope of that without geoengineering (after 2C the process is expected to display a runaway dynamic due to positive feedback loops). But miracles happen, sometimes.
  • A technological singularity. Perhaps this catapults the nation where it first appears into a dominant leadership position, much like Britain during the industrial revolution; or maybe it is so transnational and transformative in its scope that it makes the very idea of nations and national power obsolete. By definition, a technological singularity is beyond the “event horizon” of our limited imaginations, so there’s little more I can say on this.

For the purposes of completing the scenario to 2100, I will assume that the above don’t occur. Instead, the dominant forces in previous decades – economic convergence; declining EROEI and minerals accessibility; accelerating climate change – remain constants.

By the second half the century, climate change will start to dominate over everything else. The latest projections tend to lean towards the high end of the IPCC’s 1-6C warming range for the next century (the scariest of them show that by 2300 most of the world outside the Arctic may become downright lethal during summer). Warming of 4C is the point at which agriculture starts to not only experience difficulties but outright collapse throughout most of the equator and mid-latitudes.

http://youtu.be/MePAro1PsiI

[Map of global drought under aggregated runs of IPCC's models. Most of the US, southern Europe, the Middle East, Africa, and Latin America will be in an unprecedented mega-drought. Read more here.]

All the problems currently experienced by China and India with stagnant grain harvests will increase further, requiring very costly counter-measures. Now this is not to say that there will necessarily be mass famine and “dieoff”, as doomers like to predict. It is certainly a possibility, especially under the most severe warming scenarios, but growing food production in Russia, Canada, and even East Africa may make up the difference. In particular, China should be relatively safe, because by then it should be a developed country.

On the other hand, the Chinese state will have its hands full mitigating disaster after climate disaster. The spate of rebuilding after the flooding of New Orleans, which actually boosted US GDP, was one thing; when commercial metropolises like Shanghai are getting flooded and coastal property prices devaluing to nothing, it is economic and financial apocalypse.

What’s possible, then, is the following scenario. By the 2070′s, the Chinese state becomes so preoccupied with maintaining food stability, and the energy and mineral flows that enable industrial society in general, that the surplus resources and administrative capacity to do anything else diminish. This is not a new development in its history. For much of the 19th century, Qing China was the world’s biggest economy by GDP, even though Britain was becoming far more industrialized. This was because China was at its Malthusian limits; the population level was stable, but it was always on the edge of famine, and presided over by a government made weak by lack of taxable surpluses and unable to check the corruption and independence of its own public officials. The state was unable to defend itself, to modernize the country, or to guarantee its independence.

India is in a worse bind, and not just because it will likely remain less developed than China to that time. The Chinese, at least, have the reserve option of migrating some of their surplus population to Tibet (or East Africa, if they conquer it). India doesn’t have that, and faces the unwelcome prospect of a further flood of excess population – this time from a collapsing Pakistan (the Indus to run dry by late century, as Himalayan glaciers melt) and inundating Bangladesh.

A consequence is that states with far smaller populations and economies, but greater surplus resources – will emerge as new Great Powers. Primarily, this means Russia, but Canada would also be in this category, as will Scandinavia, Alaska, and (in one or two more centuries) whoever settles or controls Greenland. By virtue of their control over most of the world’s remaining critical resources – water (not only for food, but electricity); gas; coal; metals; whatever’s left of oil – they will wield unprecedented strategic power over the countries to the south.

Perhaps a colonial relationship will develop, in which the Arctic nations send resources and allow southern workers to farm their lands in exchange for selling off their industrial assets and eventually ceding political sovereignty. In the very long term, this will logically lead to the development of caste-based societies in Russia and Canada, as the sheer magnitude of climate refugees would mean that in any integration policy, it would be the indigenous inhabitants who would have to do most of the integrating (and hence politically impracticable).

By the end of the century – a world of two Arctic superpowers, Russia and Canada?

(Republished from Sublime Oblivion by permission of author or representative)
 
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This is the first post in a series of three, in which I will analyze the major trends that will define the next ten years and their likely impacts on global regions. To put these forecasts into context, I must first describe the narrative through which I view the history of the post-WW2 era (the Oil Age, the Age of Hubris, or as John M. Greer aptly described it, the “age of abundance industrialism” – now on the verge of meeting its Nemesis, the waning of Pax Americana and the demise of global Western hegemony), which is dominated by the concept of “limits to growth” – the 1972 Club of Rome thesis that finite resources and pollution sinks will ensure that business-as-usual economic growth can never continue indefinitely on planet Earth.

A Short History of Abundance Industrialism

Driven by an electro-mechanical revolution powered by a windfall of cheap oil, the world registered its highest GDP growth rates in the 1950-1973 period. The era was defined by self-confidence and a secular “myth of progress”, which reached its apogee with the 1969 moon landings. But the next decade saw the arrival of major discontinuities. American oil production peaked in 1970, and went into decline. Saudi Arabia settled into its role as the world swing producer, enabling it to inflict a severe “oil shock” on Western economies in 1973 to punish them for their support for Israel, to be followed by another in 1979 coinciding with the Islamic Revolution in Iran. The decade also saw milestones such as the publication of Limits to Growth, the ending of hyperbolic growth of the world system, and a new emphasis on conservation and sustainability (which led to significant improvements in fuel efficiency and pollution control – back then, the fruits were all low-hanging, so impressive results were not hard to achieve). Yet the first tentative steps towards sustainability were not to be followed through, as the newly-elected Reagan took office proclaiming “Morning in America!”, with its implicit promise of a return to a past with no future. It was a false dawn.

Thus began the “age of diminished expectations”. In the US, physical production by volume and real working class wages stalled in the 1970′s, and have since been on a plateau (slightly tilted up according to official statistics, slightly tilted down according to unofficial ones). The age of Mammon saw rising inequality, both within and between nations (the sole major exception being China whose ascent to world power began in the late 1970′s). As the American industrial base entered its long atrophy, its economy shifted towards construction, services, and finance, – symbolized by metastasizing suburbia – and made possible by new drilling by the oil majors in remoter areas like Alaska, the Mexican Gulf, and the North Sea, a political-security rapprochement with Saudi Arabia, the IT revolution, and the rise of multinational corporations exploiting globalizing markets and cybernetic technology in a flattening world. Sustainability went out the window; quite literally, as Carter’s solar panels were removed from the White House roof in 1986. Finally, the US harnessed its new role as the focal point of the emerging global neoliberal system to open up their economies to the world, unleashing China’s “surplus armies of labor” and the former USSR’s energy resources in the service of Pax Americana.

overshoot

[Source: Tracking the ecological overshoot of the human economy, PNAS.]

This new era of international neoliberalism and developed country post-industrialism coincided with the genesis of humanity’s ecological overshoot of the carrying capacity of the Earth. Though the first global pollution alarm in the form of the “ozone hole” led to an impressive response involving a global agreement on the withdrawal of CFC production, the reaction to the growing specter of runaway climate change caused by man-made CO2 emissions – which is ultimately a far more serious issue – has been muted right up until 2009′s Copenhagen fiasco and today. Instead, the party continued in full blast throughout the 1990′s, for the US was too busy basking in the glow of the ostensible end-of-history triumph of “Western liberal democracy as the final form of human government”.

These hubristic visions of imminent utopia, of global drive-in democracy, collided with hard reality in the first decade of what was supposed to be a “new American century”. The United States is in a state of severe economic disequilibrium and has been in rapid decline relative to its competitors – a condition reminiscent of the USSR in the 1980′s. The probable decline and fall of the global order of which it is the locus will constitute the defining trend of the next decade.

Shifting Winds: The End of Pax Americana

What is Pax Americana? It is the liberal, internationalist, post-Cold War order, which has extended its reach throughout the whole world barring a few socialist holdovers like Cuba and North Korea. Globalization, rule of law, human rights, liberal democracy, free markets, economic growth – these are its self-defined values, which it considers to be the apex of humanity’s socio-political evolution. Its critics, from Western leftists to Third World nationalists, decry it as an exploitative, ruinous, imperialist, hypocritical, end-of-history theology, with voluminous references to the inconsistent ways in which these values are practiced by their own sponsors, or wielded as weapons against its ideological and geopolitical competitors.

But these arguments will soon become academic. As demonstrated by Robert Ayres, there is a glaring hole at the center of modern macroeconomic theory – accounts of growth neglect the vital role of “useful work” (a function of exergy and technical efficiency), whose contribution far outweighs that of labor and capital combined. Both factors have been flattening in the US in recent years, making further growth unsustainable. Furthermore, studies in systems dynamics indicate that brittle systems, with poor “shock absorbers”, can be subject to so-called “cascade collapse“, in which failures at one node produce a self-amplifying resonance that causes many other nodes to fail. If this is an accurate description of the global System, then a setback in any one sphere – be it economic, financial, geopolitical, etc – could usher in a vicious spiral into anarchic apolarity on the international stage.

Pax Americana and its neoliberal ideological superstructure rests on three pillars: cheap oil, American dollars, and the US Navy. Like the legs of a tripod, they all survive – or fall – together. And today, they are crumbling. Let us examine the forces that will be undermining these pillars in the next decade:

Peak Oil

Contrary to the “doomer” worldview, it is almost certainly possible to sustain an industrial civilization without a drop of oil (though ceteris paribus it will be a materially poorer one, because of oil’s uniquely high EROEI). The problem is that today’s industrial system, especially in the US, is built in such a way – gas-guzzling SUV’s on asphalt roads slithering across endless vistas of soulless suburbia – that cheap oil is indispensable to making the commutes and credit flows, the jet flights and JIT production systems, function. An even bigger problem is that Hubbert’s predictions of a global oil peak are (roughly) on schedule: though delayed by the 1970′s oil shocks, it is likely that either 2008 or 2010 was the all-time peak, and oil production will now decline at an accelerating rate – even without accounting for possible discontinuities like a global credit implosion, a sudden collapse of Ghawar, the spread of revolution to Saudi Arabia, or Iranian mining of the Straits of Hormuz.

oil-production

[Source: World Oil Production Forecast - Update November 2009, Oil Drum. Click to enlarge.]

The US spent prodigious sums to fight a war to open up Iraq’s oil reserves, but today its oil production is no higher than in 2000 (and hopes of massively increasing it are probably unrealistic). Russia has reconsolidated state control over its hydrocarbon deposits, discounting Western recriminations over its “resource nationalism”, and has successfully pushed back against Washington-backed “color revolutions”. Central Asia never proved to be the black gold lode of American geostrategic fantasy, and in any case it has since been closed off again by Russia. Due to their immense capital costs, environmental impact, and low energy-return-on-energy-invested (EROEI), there can be no salvation in tar sands or shale. Nor have there been any efforts at mitigation of the kind recommended in the Hirsch report. Any energy transition will be a very drawn-out process, considering the sheer scale of the infrastructure that will have to be replaced – and using continuously lower-EROEI energy sources!

As such, it can be said with a high degree of certainty that the world will soon experience a severe shortfall in liquid fuels. Because of its high degree of dependence on cheap oil, this will affect the US disproportionately, which will have to make good with demand destruction. The consequences will include major knock-on effects on consumers, who constitute the mainstay of American economic power.

State Insolvency

The geological realities of peak oil (2005-2010), in combination with soaring demand from industrializing Asia, have led to the worst crisis since the Great Depression, with the free-fall only being checked by a dizzying panoply of monetary flooding, fiscal stimulus, and government bailouts. As if this weren’t enough, the US faces rising entitlements costs as the baby boomers start retiring, a bloated military-industrial complex, and increasing commitments to Afghanistan with no timetable in sight (where there are now more US troops than there were at the peak of the Soviet intervention).

us-budget-woes

[The US budget deficit is predicted to permanently remain in the red even under the rosiest assumptions. As of now, it is the more pessimistic scenarios that are being born out - Republican refusals to raise tax rates or cooperate on Medicare; Soviet-like rhetoric about "defense cuts" while real military spending continues rising; etc.]

Now the major reason why the US has been able to afford both guns (the US military) and butter (its double deficits) in the face of deindustrialization was by giving its many foreign investors an atrocious rate of return, which they accepted in return for America’s “alpha” – its reputation as the largest economy, sole superpower, and global financial center, in other words, the “safe haven” par excellence. It also draws immense strength from the US dollar’s role as the global reserve currency, for instance by allowing it to comfortably buy oil at $-denominated prices even when the currency is weak. But with its “imperial overstretch” (see Afghanistan), moribund financial system, and a budget deficit north of 10% of GDP and projected to remain in the red for the foreseeable future – by some measures, US debt and fiscal metrics are worse than those of the PIGS on aggregate – will this American “alpha” survive? Probably not for much longer.

The creeping monetization of US debt will destroy investor confidence that they will ever make a positive return on their US bond investment. The withdrawal of a single major investor, especially if it coincides with a geopolitical shock, could set off a “cascading collapse” as other investors scurry away from US Treasury bonds. This will leave the US incapable of generating the primary surpluses to service its negative net foreign investment position, leading either to a compound debt trap or a classic emerging market-style currency crisis. Ice or fire? Given America’s democratic system and the bipartisan consensus on fiscal profligacy, I would bet on the latter.

Economic Decline

The collapse of what in some respects resembles an informal tributary system, channeling global (i.e. Asian) savings to the American consumer, will sound the death knell for Pax Americana. As Paul Kennedy argued in The Rise and Fall of the Great Powers, military power is ultimately subordinate to the economic base which supports it. The industrial base that won the Second World War and forged the American superpower has been in decline since the 1970′s – though on paper it boasted a high productivity growth rate, it masked a huge decline in the size and complexity of its “industrial ecosystem”. Mundane manufacturing, the automotive industry, and machine building have all experienced rapid decline; the heavily-subsidized aerospace and defense industries constitute the only major exceptions to this trend.

Now as long as globalization, free trade, and stability reigned, this did not portend international decline. Industrial hallowing out simply freed up workers into sectors that were more in demand, like restaurants, construction, services of all kinds, etc; and women gained many more economic opportunities. The US could get its manufactures from abroad, like Spain during its (literal) Golden Age. Furthermore, the transition from manufacturing to consumption and finance is historically not without precedents, being observed in the halcyon days of empires like Holland and Great Britain. After these former empires had established their initial industrial supremacy through mercantile means, they transitioned to free-trade regimes designed to reinforce their economic hegemony – and in so doing “kicked away the ladder” from countries trying to catch up. (The United States itself was one of the world’s most protectionist nations until the Second World War, at the end of which it accounted for half of global industrial output and drastically reduced tariff rates).

However, as pointed out above, the crumbling of two pillars of Pax Americana, cheap oil and the US dollar, makes the survival of today’s comfortable globalization highly unlikely. When the inflows of cheap credit from abroad cease; when oil flows decline due to geological, political, and geopolitical factors – the US will no longer be able to maintain its privileged position as the world’s “market dominant minority“, its overstretched armed forces will no longer have access to the lavish funding of the days of yore, and the neoliberal world order they upheld will come to an end.

Geopolitical Shocks

Facing the twinned specter of peak oil and fiscal insolvency and supported by an atrophied industrial base, Pax Americana could in fairness be described as a “brittle system” under a growing threat of collapse. Though it may yet fade away gradually into the night, to be slowly displaced by the state-centered, neo-Westphalian, mercantile reality of “world without the West“, it is altogether possible that geopolitical shocks will make the transition far more abrupt and chaotic than expected.

Though nothing’s certain, it is possible, likely even, that the biggest shock will emanate from a confrontation between Iran and the US in the Persian Gulf. Since 2005, the hardline IRGC paramilitary / intelligence clan, whose figurehead is Ahmadinejad), has been in the ascendant in Iran. Their power was further reinforced in 2009 when the Supreme Leader Khamenei sided with the IRGC in the aftermath of the abortive “Green Revolution” spearheaded by the waning “moderate” clerical clan (headed by Rafsanjani), in response to Mousavi’s electoral loss. These internal Iranian developments occurred in tandem with the rising tensions with Israel, Saudi Arabia, and the US over Iran’s pursuit of an nuclear bomb, amidst the window of opportunity left open to the Islamic Republic by the US quagmire in Iraq. Iran sees the Bomb as the best guarantor of regime security by allowing it to establish a regional hegemony in the Persian Gulf region.

This is unacceptable to everyone in the region. Israel views an Iranian bomb as an existential threat; Ahmadinejad expresses the opinion of 62% of Iranians when he says the Israel state should be wiped off the map. The Jewish state is now ruled by Benjamin Netanyahu, a man who in 2007 opined: “It’s 1938, and Iran is Germany, and Iran is racing to arm itself with atomic bombs”. Not much room for compromise there. The rulers of Saudi Arabia, beset by Iranian-stoked ferment amongst their Shi’ite population and undermined by the Iran-backed al-Houthi insurrection on their Yemeni border, view the prospect of an Iranian bomb with similar trepidation. Though they will protest in public, they will be quite happy to see an Israeli-American strike on Iran; rumor has it that Saudi officials have given Israel permission to fly over their territory via backdoor diplomatic channels.

The US is hesitant. Striking Iran carries great risks. First, no matter how good and accurate your bombs are – the US has accelerated the development of a bunker-buster capable of penetrating 60m of reinforced concrete – they are only worth their weight if you know precisely where to strike. Iranian nuclear facilities are highly dispersed and concealed, making the extent of US intelligence on them uncertain. Second, Iran can mine the Strait of Hormuz and harass oil tankers with coastal shore batteries, diesel submarines, and merchant raiders. This will put at risk 20% of the global oil supply; even if the blockade proves ineffective, as predicted by most analysts, soaring insurance rates may result in oil prices spiraling into new highs due to unprecedentedly tight supplies. Third, the Islamic Republic has a panoply of retaliatory options at its disposal: a renewed Hezbollah missile barrage against Israel, increased support for Shi’ite insurgencies in the Arabian peninsula, and above all a resurgence of political violence and state instability in Iraq. As mentioned above, hopes have been pinned on Iraq to delay global peak oil by another decade. Yet it has always been a land of unfulfilled potential, its imminent oil production takeoff regularly stymied once per decade – in 1979 with the outbreak of the Iran-Iraq War, in 1991 with the Gulf War, in 2003 with the US invasion. It would not be out of character for its oil production to plummet again in 2012, in the face of renewed internecine warfare, Iranian incursions, and mining of the Strait of Hormuz.

Given all these risks and uncertainties, it is not surprising that the US is pursuing a cautious approach, restraining Israel and pushing for “crippling” sanctions on Iran, targeting its gasoline imports. However, the latter will not achieve much, especially since Russia – which has not received the firm recognition of its sphere of influence over the post-Soviet space that it really wants from Washington – will be able to torpedo any sanctions by allowing Iran to import gasoline through its Central Asian surrogates. Israel may grow impatient and eventually jump the gun without US permission. But Iran will likely consider Israeli and US actions to have been coordinated, and will embark on its “Project Mayhem.” The US may be forced to rush in and respond unprepared to contain the fallout as best it could. Now it is true that alarmist predictions that the US Navy will be crippled by Iranian low-tech swarm attacks are largely unsubstantiated, and there is no question that the US will have no trouble in gaining full air superiority over the obsolete Iranian integrated air defense system. However, defeating Iran’s dispersed retaliatory assets in detail may be a difficult and prolonged undertaking, perhaps even requiring the military occupation of strategic Iranian regions such as Khuzestan and Kish Island.

The US finds itself caught in a Catch-22 situation. Let Iran be, and it develops a nuclear deterrent allowing it to make a bid for regional hegemony – if it is not preempted by an Israeli strike. Attack Iran, and needless to say, anything worse than the most optimistic scenarios (in which the Strait of Hormuz only remains blocked for a few days) will constitute a tremendous physical and psychological shock for Pax Americana, a shock in which all its three pillars come under strain in the form of oil supply disruptions, financial turbulence, and prolonged aeronaval operations.

Endgame

In conclusion, given the inherent fragility of the neoliberal world order and the mounting stresses on it in the years ahead, stresses that could be explosively released in a major geopolitical crisis – possible in Iran, though major clashes in other hotspots like the Caucasus or the East China Sea cannot be dismissed – it is unlikely that Pax Americana will survive the decade.

Yet its collapse will not herald a global collapse and a sudden descent into the Olduvai Gorge, for Pax Americana is ultimately just a subsystem of a larger system – that of global industrialism, the System that encompasses virtually the entire world, with the sole exception of hunter-gatherer remnants in the Amazonian fastnesses and a few mystical recluses. The American empire, much like the Soviet one, will retreat from globalist pretensions, while maintaining a continental hegemony. In the meantime, powered by domestic coal and a new kind of resource tributary system – one based on bilateral deals instead of open markets – China will be well on its world-historical “great reconvergence” with the West, making it the preeminent superpower of the age of scarcity industrialism.

The geopolitics of scarcity industrialism are the topic of the next monograph in this series.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Carrying on from yesterday’s 2010 in Review, I’ll now lay out my predictions for this year and see how well last year’s stacked up to reality.

(1) Last year, I wrote: “World economy continues an anemic recovery, though there are significant risks to the downside.” Today I’d repeat this, but add that the risks have heightened. Many countries in the developed world, from Spain to the US, now run patently unsustainable fiscal policies. I don’t know when the bond vigilantes would strike (and even if I did I’d rather get rich than tell you), but sooner rather than later they will. The obvious loci of the next big crisis are the so-called “PIGS” (Portugal, Italy, Greece, Spain), and Ireland, Belgium and Hungary.

But obvious isn’t preordained. Iberia, at least, is covered by the EU’s €440bn rescue fund, while Italy’s 120%-of-GDP debt is counterbalanced with a 0.9 ratio of receipts to outlays (i.e. for every €1 it spends it collects €0.9 in tax). The UK has the worst budget deficit amongst the big European countries, but it’s insulated by an average debt maturity of 14 years. Japan has the most apocalyptic sovereign debt figure at 220%-of-GDP, but also has immense foreign savings. Finally, though the US appears to be in one of the worst positions all round, with an debt maturity of just 4 years, a 0.6 receipts to outlays ratio and an ideological rift that precludes a political solution, it is still buffered by the $’s status as the global reserve currency.

Which of these dominoes will fall first, and when, must remain a matter of speculation, and may ultimately be contingent on unforeseeable shocks and triggers. For instance, a damning Wikileaks expose of Bank of America? Iran blocking the Strait of Hormuz in response to an Israeli strike (as I speculated here)? It’s all possible.

pollaro-budgets-debt

[Michael Pollaro's collection of budget and debt metrics. Note that on aggregate, the US is in a worse position than the faltering PIGS.]

(2) Possible wars. My analysis remains the same as last year’s, with two changes: (1) The likelihood of a US/Israeli strike against Iran rises from 25% to 40% because the Stuxnet worm can not longer be relied upon to sabotage Iranian nuclear progress, the US development of the MOP, and Obama’s domestic weakness in light of the GOP’s resurgence; (2) The chance of an Azeri-Armenian war over Nagorno-Karabakh has risen from small to 10% in view of heightened rhetoric, skirmishes and exploding Azeri military spending.

(3) My Russia predictions. Back on October 8th, I predicted: “Within the next 3 months Luzhkov is going to get hit with corruption charges and will either go on trial or seek political asylum in the West.” Still more than three weeks to go!

Barring another catastrophic heatwave or natural disaster, Russia’s population should resume growth in 2011 (as in 2009, but probably will just miss out in 2010). The life expectancy should approach (or slightly exceed) 70 years; the total fertility rate will approach (or exceed) 1.6 children per woman; the birth rate will be in the 12.5-13.0 / 1000 and the death rate in the 13.5-14.0 / 1000 range. The justifications for these predictions should be well-known to S/O readers but for refreshers see here and here.

Consensus is that the Russian economy will growth by 3.5-5.5%. This will be lower if there is a second global financial crisis, but the results on growth are almost certain to be far less severe than in 2009 (-7.9% growth) because today’s Russia Inc. is much less dependent on foreign credit inflows. See Russia 2010: Growth but state-led recovery is bad news by Ben Aris.

In foreign policy, expect relations with the US to deteriorate, on account of the rise of hardline Russophobes amongst Republican Representatives. On the other hand, the France-German bloc – increasingly estranged from the Mediterranean South – will be more willing to engage Russia’s non-indebted, growing and expanding (see Kazakhstan & Belarus customs union) markets.

(4) US politics will be mired in domestic issues, with Republicans doing their utmost to hack away at the healthcare legislation, calling for cuts to social (but not security) spending, harassing the EPA, and perhaps even trying to shut down government around March. The joblessness of the recovery and dim economic prospects will dim Obama’s political prospects, but they may be just about rescued if the Republicans overreach themselves.

I think the ConDem coalition in the UK will last the year, albeit with a lot of acrimony and backstabbing. The Lib Dems have lost half their electoral support, the students whom they betrayed, so they’ll want to hang in with the Tories as long as possible.

(5) Oil prices should stay at around $80-120 in 2010 and production will remain roughly stable as increased demand (from China mostly) collides with geological depletion. If there is a second global economic crisis, I doubt we’ll see prices plummeting to $40 as we did in early 2009, when investors abandoned stocks and commodities for the perceived safety of bonds. But since the next big crisis will probably be a bonds crisis, the most attractive safe havens may well become commodities, and the government bonds of emerging markets (where commodity consumption is rising).

(6) China will continue growing at 8-10% per year. Their housing bubble is a non-issue; with 50% of their population still rural, it isn’t even a proper bubble, since eventually all those new, deserted apartment blocs will be occupied anyway. What is of concern is that China’s coal production – now almost 50% of global production – is close to plateauing. This is of some consequence given that coal is China’s primary energy driver.

(7) Despite NASA reporting that 2010 may be the hottest year on record, the thermometers may break limits again in 2011. That is because, despite the unprecedented temperatures – manifesting in a great Russian heatwave that destroyed 40% of its grain crops and flooding in Pakistan that displaced millions – 2010 actually correlated to the end of a minimum in solar irradiance.

solar-irradiance

Solar irradiance has a forcing effect on global temperatures, independent of the secular rise in atmospheric CO2. Based on the graph above, we can expect another peak in the next few years. Since greenhouse emissions continue unabated and are indeed joined by feedback emissions such as methane from melting Arctic permafrost, we can confidently expect several major climate events this year.

Speaking of the Arctic, as its longterm ice volume continues to plummet and sea ice extent retreats, we can expect more circumpolar shipping. I wouldn’t be surprised to see up to 10 non-stop voyages along the Northern Sea Route from Europe to China, following just one by MV Nordic Barents in 2010. Likewise, expect the Arctic to become a major locus of investment – if not in 2011, then in a few more years – as lucrative companies and ports are privatized in Arctic Russia.

(8) Wikileaks will not be “shut down”, as the Internet is too resilient. If Assange is successfully extradited to the US to face espionage or computer misuse charges – I’d give a 50% chance of that happening – then expect fireworks to go off as the “insurance file” is released.

What about the 2010 Predictions?

Consider this post on 2010 predictions and my prediction of the 2010 Ukrainian elections.

(1) “World economy continues an anemic recovery”: mostly true, though I should have clarified that I was referring to the developed countries. Though some, like Germany, did really well.

(2) “Republicans will carry the mid-term elections in 2010, but there is a strong mood of apathy and a sense that what is really needed is a new party, a new politics“: Bingo! Republicans won – check. Social disillusionment – check Gallup. A new party, a new politics – the Tea Party.

“Rising violence in Iraq… a false quiet in Afghanistan”: Got them wrong way round.

“In the UK, Gordon Brown (New Labour) will almost certainly lose to James Cameron (Conservatives) in the mid-2010 elections”: Totally correct.*

(3) None of the wars I mentioned happened, but I didn’t necessarily expect them to, as all of them were given as probabilities.

(4) “[Russia's demography will] continue improving further in 2010 and that the year will see the first year of positive population growth since 1994 (or 2009)… Birth rate = 12.5-13.0 (reasons), Death rate = 13.5-14.0 (a reason), Net Migration = 1.5-2.0, all / 1000.”: The Great Russian Heatwave of 2010, causing 44,000 excess deaths, threw many of my predictions off kilter. For now I’m basing it all on Jan-Nov 2010 stats, as December isn’t in yet. The birth rate during this period rose from 12.4 / 1000 to 12.6 / 1000, so I got that right. Unfortunately, the death rate rose from 14.1 / 1000 to 14.4 / 1000, due to an extra 28,300 deaths; if we exclude the 44,700 excess deaths accruing to the heatwave, the death rate would have been 14.0 / 1000, and so just within predicted range. A substantial falloff in net immigration, which I didn’t expect – surely more people should have left during the recession? – means that Russia’s population growth will almost certainly dip into negative territory this year.

“Economic growth of around 3-5% of GDP sounds reasonable.”: Most estimates are now converging at around 4%, so completely correct.

“Lots of privatizations and corruption investigations as part of the Surkov clan’s struggle against the siloviki and “their” state companies.”: True for the first part; not so much for the second, as most efforts have instead been diverted to ousting the last 1990′s-vintage regional barons.

“Yushenko will almost certainly (95%+) be kicked out of the Presidency in the coming Ukrainian elections… Ukraine under Yanukovych will join Eurasec or the Russia-Belarus-Kazakhstan customs union, but is yet unlikely to join the CSTO or give Russian 2nd language status.”: Correct; wrong & wrong; right & right. I still expect Ukraine to join a Eurasian common economic space. As George Friedman points out in his “geopolitical journey” (see the part “European Dreams”), the Kiev intelligentsia has little sense of national identity, and dream of a Europe whose foundations are in fact crumbling let alone considering further expansion. By far the most logical alternative for Ukraine, in the long-term, is something resembling what it has been since 1654.

In late January, 2010: “Adding up these figures, Yanukovych gets 50% of the votes, whereas Tymoshenko gets 46%… It is safer to say that Yanukovych will win with a gap wide enough that Tymoshenko will not have grounds to make a legal wrangle out of it – though that is just about possible if she’s very lucky and comes within 1-2% points of Yanukovych. But my prediction is a Yanukovych win by 5-10% points over Tymoshenko”: During the second runoffs on February 7th, Yanukovych got 48.95% and Tymoshenko got 45.47%, making a gap of 3.5%. My first, allegiance-tallying method was virtually perfectly correct (50%-46%); the one that involved factoring in opinion polls led me to miss my mark. But nonetheless, I still ended up predicting the correct result.

(5) “Oil production in 2010 will be around the same as 2009 – increased demand will collide with geological depletion to keep output stable. Oil prices in H1 will remain at 70-90$, and will rise to 90-110$ in H2″: More accurate to say $70-90 for the whole year with dips and rises, but you wouldn’t have lost money taking my advice (and that after making big bank in 2009: “…a rebound in oil prices from around 40-50$ per barrel in the first half, to 60-80$ in the second”).

(6) “No major AGW-related physical events (except for a heatwave or two), given that solar irradiation remains at an unusually long trough – expect the fireworks by 2012-15″: Well, and quite a few floods. But dead on about the “heatwave or two.”

“AGW skepticism will become more popular in the wake of Climategate“: Yes – see the Republican Party.

“China and its proxies will prevent any more significant action being taken at the next UN climate change summit in Mexico, than was “achieved” in Copenhagen”: Correct, though actually it was the entire world (save a few countries like Bolivia), not just China, that colluded in making a worthless agreement.

“By year-end the performance of the world’s top supercomputer will exceed 3 petaflop/s (repeat of 2009 prediction)”: Still not there, as the current top supercomputer, the Chinese Tianhe-1A, achieved a performance level of 2.57 petaflop/s. Next year for sure though.

(7) “China’s growth will slow from around 8% in 2009, to perhaps 5% in 2010… expect China to continue keeping a low profile as the US insists on shooting itself in the foot.” So wrong! Ouch.

* EDIT. A reader wrote in to tell me I meant David Cameron is the leader of the Tories, even though James (the film-maker) might be preferable. LOL. For me to get it wrong not once (when writing) but twice (when reading) there must have been some serious Freudian slippage going on!

(Republished from Sublime Oblivion by permission of author or representative)
 
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Happy new year to all Sublime Oblivion readers! This blog wouldn’t be what it is without you. In fact, I’d have probably abandoned it after a month or two after a couple of posts as I did with my first blog in 2006. So please keep on reading and commenting.

BTW, the image above is of the Xue Long (雪龙) icebreaker in the Arctic. It represents the intersection of several major current trends: The multifaceted rise of China; the growing importance of the Arctic; climate change.

Year in Review: 2010

As usual, I will begin by reviewing the defining trends of this year (Part 1), before making predictions for the next and finishing up by reviewing the accuracy of my 2010 predictions (Part 2). The main global theme of 2010 is the continuing Rise of the Rest – led by but not limited to the BRICs (Brazil, Russia, India, China) – set against the background of the accelerating political, economic and above all institutional and soft power decline of the old Western order.

(1) China keeps getting stronger, on every facet of national power, at an exhilarating rate. A comprehensive overview is well beyond the scope of this post, but a few examples give an idea of the general picture. A country that first displayed its UAV’s in 2006, has now exhibited more than 25 different models. One of them, the WJ600 – boasting a jet engine, multiple missiles and stealth features – might even be more advanced than any US or Israeli model. Just as the year rolled to an end, leaked photos showed that the Chinese now have their own fifth-generation fighter, the Chengdu J-20. Bearing in mind that Russia also revealed its PAK FA this year (after around 25 years of development), I think it’s safe to say that the Chinese have now fully caught up with Russia in non-strategic military technology*.

However, unlike the USSR, China is not a largely one-dimensional military power. What’s far more significant is that in sector after sector it is investing massive resources into R&D and espionage to achieve qualitative near-parity with Western products (e.g. Japanese trains, German machine tools, etc) then seizing their market shares abroad through its lower labor costs. China now produces half the world’s wind turbines and solar panels, a hugely strategic sector given current energy prospects; it has the world’s most powerful supercomputer (and is now second overall to the US in supercomputing); and finally, PISA international standardized tests have confirmed that Chinese youth are now as skilled in reading, math and science as their (far richer) Western and Japanese counterparts.

One can stretch these examples almost indefinitely, but the main point is that “the rise of China” isn’t just 1980′s Japan-style hype; its tenfold larger population makes it the real deal. If you wish, dismiss it by referring to its aging problems (might be an issue by 2030) or its property bubble (when 50% of its population is still rural). But don’t be surprised by not-so-distant headlines such as “China becomes world’s biggest economy by GDP” or “RAND analysts claim PLAN has achieved military superiority in the West Pacific”.

(2) While China is its main champion, many other countries traditionally considered to be economically stagnant, politically unstable and socially backward are emerging as major regional Powers in their own right, and beginning to project global cultural influence. In its adroit PR handling of the flotilla incident, Turkey has staked out its claim to regional prominence by challenging Israel and appealing to global Muslim sentiment. Brazil and Turkey enjoyed blistering growth rates. Russia has resolved its differences with Belarus in recent weeks, and together with Kazakhstan has finalized the timetable for a customs union; with the election of Yanukovych to the Ukrainian Presidency and Ukraine’s (partial) reorientation towards Eurasia, it too may join in the next year or two. Non-Western outlets such as Russia Today and Al Jazeera are now major participants in the global media discourse along with the likes of CNN and the BBC.

(3) The ideological rift between pro-stimulus Democrats and pro-scrouging Republicans – and their mutual capture by special interests (the financial sector, the military-industrial complex, etc) – has become increasingly evident this past year. This now puts the probability of the US ever resolving its budget problems by choice, slim to begin with, at next to zero. At this point, the only realistic chance of returning to fiscal sustainability without unleashing massive social disarray is to increase taxes on the rich, cut security spending, reign in the financial and “homeland security” mafias and rule out future stimuluses (whose effects tend to be crude and non-lasting) in favor of targeted social spending. However, ideological factors preclude this (The Tragedy of Obama: “a corporatist centrist giving endless concessions to Republicans who (successfully) portray him as a radical leftist”).

(4) How not to close awning budget deficits: the UK (I regret to say that I blogged in support of the ConDem coalition). While any idiot can see that the UK is on a fiscally unsustainable path, the ways in which cuts are being made, with a sneering classism that hits the poorest and least-privileged; commercialization of state social functions; and dumping of state assets, is incredibly shorttermist, foments social disarray and undermines longterm prospects. From 2011, the UK will implement the highest university tuition fees in the world. The headlines say it all: “McDonald’s and PepsiCo to help write UK health policy”, “Students could boost marks by showing ‘corporate skills’”, etc.

(5) In Europe, the German corporatist model, the Swedish welfare state, and to a lesser extent French dirigisme, have acquired ideological supremacy over the UK and Irish neoliberal models and the bureaucratized Mediterranean states. In a low-key meeting at Deauville in October, Sarkozy appeared to agree with Merkel’s proposals that would penalize countries that require bailouts by denying them votes in EU councils and placing them under Brussels supervision. Will the Mediterranean accept these Diktats or will it fracture the EU? Is even Germany, with its own high debts and demographic problems, capable of guaranteeing them? In any case, one thing we can say for sure is that this development reinforces the trends towards a multi-speed Europe, with the power of the traditional Franco-German core reinforced further by their (relative) economic resilience.

(6) The posturing by North Korea is, as usual, a show meant to extract concessions. Not worthy of the alarmist headlines.

It appears that the main reason Israel has so far restrained itself from striking Iran – as I still think will happen, eventually – is the remarkable success of the Stuxnet worm at sabotaging its uranium enrichment processes. But in all likelihood – I give it 75% – this strike will come sometime in the next few years.

Afghanistan is as unwinnable as always, but ideological inertia and the “psychology of previous investments” conspire to keep the US there.

(7) If you want the single best example of declining US soft power, consider this: even as prominent US politicians called for the assassination of a controversial foreign journalist for “espionage” or “information terrorism” – and even better, while touting its plans for World Press Freedom Day in May 2011 (presumably Assange isn’t on the invite list) – and Britain imprisoned him on what are almost certainly politically-motivated rape charges from Sweden, the President of Ecuador offered him asylum and the Russians mooted giving him a Nobel Peace Prize. Now I certainly don’t mean this portrayal of Assange’s travails to demonstrate that countries like Russia are altruistic crusaders for transparency and journalistic freedom; to the contrary, its safeguards for leakers are not so much abysmal as non-existent. However, Wikileaks illustrates that when the Western power elite is challenged so openly, forced to go through the political version of the airport body scanners it foists on its own citizenry, all pretensions to lofty ideals such as “rule of law” are tossed out of the window**.

But Wikileaks is more than just a collection of political gossip, or revelations such as that the British train Bangladeshi death squads and US contractors traffic in children for Afghan warlords, or inspiration for national and regional leaker websites such as Indoleaks (Indonesia), Rospil (Russia) or Euroleaks (EU), or even confirmation of “radical” viewpoints such as that the political elites of most European countries take their marching orders from the State Department.

The Wikileaks Saga is a historical crossroads that will determine the future balance between privacy, freedom and security in the West. Down one road, the powers that be will clamp down on journalistic freedoms and the unrestricted Internet, and so confirm the dominance of the one-way “surveillance state”; down the other, the transparency virus unleashed by Wikileaks will destroy the effectiveness of state “authoritarian conspiracies”, leading to citizen empowerment and “universal sousveillance” (two-way surveillance). Since technological development makes increasing surveillance inevitable, and consequently serves to concentrate power in the hands of materially and legally privileged actors such as states and corporations, I think the kind of citizen sousveillance represented by Wikileaks is indispensable for preserving personal freedoms and people power in our cyberpunk future.

(8) In the hottest year on record globally, which saw a devastating heatwave in Russia and unprecedented flooding in Pakistan and Australia, AGW denialism claimed victories in the US Congressional elections and the inconsequential summit in Cancún (without verification or penalties, any targets or commitments aren’t worth the paper they’re on). The climate crisis is now so self-evident and imminently devastating that the only psychological option is to draw in the runaway train curtains and prosecute anyone who peeks out and points out the broken bridge ahead. Geoengineering it will be (attempted).

(9) On Russia, Nikitin has summarized the year with a report card. Swell job. (Apart from the bizarre Khodorkovsky apologetics – talk of teachers’ pets!).

In short. The economy is so-so: though 4% growth is respectable, it should be seen in the context of an 8% GDP decline in 2009. (On the other hand, updated Real GDP per capita calculations by the World Bank and OECD/Eurostat have indicated that Russia’s is around $20,000, higher than the previous estimate of c.$15,000. This makes it similar to Poland, Croatia or Estonia; and in overall size comparable to Germany, and far above France or the UK). Its demographic situation has remained mostly unchanged from 2009, a small rise in births being more than canceled out by a rise in death rates caused by the 44,000 excess deaths due to the heatwave. In the political realm, the biggest developments were: (1) the uneasy survival of the Reset with the US, in which Russia cooperates with the West in return for more technological access; (2) the huge $700bn rearmament program announced for the next decade; and (3) the increasing drive towards recentralization and technocratic management encapsulated by the ouster of Mintimer Shaimiev (Tatarstan) and Yuri Luzhkov (Moscow).

(10) The melting of Arctic sea ice and local warming is creating the foundations for a sustained economic boom. This year the MV Nordic Barents steamed into the record books as the first foreign flagged vessel to sail from Europe to China through the entire Northern Sea Route without stopping at any Russian harbor. With traffic through the North Sea Route expected to increase tenfold over the next decade, ports being expanded, and power and transport infrastructure built up at a furious pace, the Arctic represents the next investment El Dorado after the BRICs. Follow S/O’s sister blog Arctic Progress to stay on top of things at the top of the world!

* Of course, this isn’t to say that all Chinese military tech is now up to Russian standards. E.g. Russia is well ahead in air defense. On the other hand, China’s naval technology is now arguably better. On average, I’d say the qualitative level of conventional arms is now roughly equal.

** Just as they are with the Third World victims of Western imperialism, or its own repressed minorities in urban ghettoes, or Muslims, but when it happens to English-speaking white guys it’s far more serious.

Stay tuned for Part 2 in which I make predictions for 2011 and review those from last year. Meanwhile, please feel free to point out any major events or trends I missed out.

(Republished from Sublime Oblivion by permission of author or representative)
 
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I was recently interviewed on Middle East geopolitics and the Iran Question by Marat Kunaev, a blogger and translator at InoForum. I would like to thank him for the opportunity to express my views on the topic and providing a possible gateway into the geopolitical commentary on Runet. I’m reprinting the interview from here, with a few very minor edits; Marat made a Russian translation here.

What do you think about the situation in the Middle East?

The mainstream media likes to make generalizations about this very diverse region. Most of these are idiotic, simplistic tropes (oil, Islam, terrorists, etc). I don’t think this is productive, so instead I’ll highlight two things that get little traction in the Western mainstream media.

First, water scarcity is the root of many of the region’s problems. The Middle East is the world’s only major region perennially incapable of feeding itself, forcing it to import “virtual water” in the form of food. One of the main causes of the Israeli-Palestinian Conflict is over the unfair distribution of water, which is skewed towards Israel and Israeli settlers in the West Bank. On a bigger scale, water flows are almost as important to the region’s strategic balance as the distribution of oil deposits. Control of the headwaters of the Jordan, Euphrates and Tigris rivers, coupled with the biggest economic base in the region, gives Turkey immense strategic clout. To the contrary, Egypt’s food production deficits make it potentially vulnerable, as seen in the food riots of 2008 when global grain prices spiked. The urban poor who are hardest hit tend to resent their secular authoritarian rulers and support Islamists such as the Muslim Brotherhood. As such, making good with Israel and seeking US protection and subsidies makes perfect sense for the Egyptian political elites: resources can be freed up from military spending towards maintaining domestic stability.

Second, the “Islamic Resurgence” is rather simplistically portrayed as single-minded opposition to the West. The real situation is a lot more complex. The movement takes a variety of guises, from the moderate Islamism of Turkey’s AKP to Al-Qaeda’s franchise-based terrorist cells to the internal clan-based conflicts of Shi’ite Iran’s “Velayat-e faqih” system. It is inaccurate to treat them as a hostile monolith. And many of their grievances do sound genuine to ordinary Muslims. For instance, even Osama bin Laden doesn’t hate the US for its “freedom”, but for its support of Arab elites that he sees as corrupt, anti-democratic and hostile to Islam — e. g., the House of Saud’s acquiescence in stationing US troops in the holy lands of Mecca and Medina to protect the oil exports whose proceeds overwhelmingly benefit influential cliques. But arguing that this interpretation has some validity to it is a sure road to a wrecked career in American mainstream journalism.

Should we wait for radical change in Afghanistan?

No. Even Ronald Reagan and Rambo were pessimistic, back in the 1980’s! :) Americans don’t want to stay in Afghanistan for much longer, and their finances won’t allow them to anyway. In a few years, the Afghan government will have to sink or swim without US ground forces to support it.

However, I doubt the Taleban will seize central control again. Afghanistan has $1 trillion in untapped mineral reserves, and regional giants China, India, Russia and Iran have no interest in fundamentalists blocking access to them — especially in our world of increasingly scarce, harder-to-get resources.

How real is the possibility of US or Israeli strikes on Iran?

It’s one of those things that everyone talks about all the time, but never happens: until a spark sets of the bonfire, the Big Thing happens, and acquires the tinge of inevitability as viewed in the rear-view mirror of our common history. Kind of like World War One…

I wrote about this in my post The US Strategic Dilemma and Persian Deadlock. The key players are the US, Russia and Iran (the “triangle”) and Israel (the “wildcard”). Each have diverging interests that are hard, if not impossible, to reconcile.

The Strait of Hormuz.

The Strait of Hormuz.

Iran wants nuclear weapons to secure its mountain base, acquire the capability to project influence through its proxies (e. g. Hezbollah) with impunity and become the hegemon over the oil riches of the Gulf. Russia wants to keep the US occupied in the Middle East as it rebuilds its Eurasian sphere of influence, but all things considered, it would rather Iran not get the Bomb. The US is firmly against both Iranian hegemony in the Gulf and Russian hegemony in Eurasia: however, the tools at its disposal are insufficient to prevent both (it doesn’t have the hard power to contain Russian influence within its current borders, while a strike against Iran will have severe repercussions — up to and including a blockade of the Strait of Hormuz, through which pass 40% of the world’s oil exports, the commodity underpinning America’s own global hegemony). As such, the US, Russia, and Iran are locked into an uneasy, but potentially sustainable, strategic “triangle”.

However, this “triangle” is broken by the “wildcard”, Israel. While the Israelis couldn’t care less what Russia gets up to, it sees an Iran armed with nuclear weapons as an existential threat: not exclusively in a military sense — Israel has 200 nukes of its own (though Ahmadinejad’s apocalyptic rantings aren’t reassuring) — but in a political and cultural one. If Iran gets the Bomb, a nuclear race will break out in the Middle East. A sense of doubt and uncertainty will seep into Israel. Hezbollah will grow bolder; the possible entrenchment of political Islam in Turkey or Egypt will create a strategic nightmare for Israel. Educated Jews will start leaving the Jewish homeland, undermining the tax base needed for increased military expenditures (e. g. on anti-ballistic missile systems), as well as the Jewish nature of the Israeli state itself. In short, a nuclearized Middle East will make Israel’s foothold in the Levant vulnerable, even untenable.

If Israel feels that the US is wavering in its commitment to prevent the emergence of a nuclear Iran, then it will go it alone — perhaps with the covert agreement of states like Saudi Arabia, which aren’t much interested in seeing a hostile, nuclear-armed Shi’ite state on the other side of the Gulf either. The US will almost certainly be drawn into the fight in the aftermath — e. g. by an Iranian attempt to block the Strait of Hormuz, Iranian missile attacks on US bases in Iraq, or even false flag Israeli attacks on the US.

In my opinion, the dates of likely Israeli action are from early-2011 (when the US acquires its Massive Ordnance Penetrator bomb capable of busting concrete bunkers 60m deep) to end-2012 (the date by which Iran is likely to have developed workable nuclear weapons). Otherwise, the stage is set for the eventual nuclearization of the Middle East.

Should we expect a further strengthening of sanctions against Iran?

President Medvedev said on 23 September, 2009, “sanctions rarely lead to productive results, but in some cases, sanctions are inevitable.” What he means by this Aesopian language is that it is Russia that will be able to decide whether the results of strengthened sanctions are going to be “productive” (however you define that). Russia’s position is crucial because it is the only country with the spare refining capacity and secure trans-Caspian transport routes to successfully break any gasoline sanctions against Iran.

But even Russia’s participation will not dissuade Iran from working on the Bomb. To the contrary, it can even increase Iranian resolve if it creates the conditions for a “siege mentality” within the Islamic Republic. Furthermore, sanctions are in the interests of both the US (it would prefer accommodating with Iran to fighting it, if possible) and even Russia (to appease the US in exchange for concessions on other policy fronts). As such, sanctions are a very convenient pretext for delaying military action. But for understandable reasons, Israel is unlikely to be as patient.

What do you think are the real Russian, Indian and Chinese positions on Iran?

Though Russia might have a few more friends than just her Army and Navy, Iran certainly isn’t one of them. It’s just a lever to be used for extracting concessions from the US. At this time, supporting sanctions is good for Russia because the Americans are compromising on many spheres (e. g. on modernization, START, Georgia). However, a time may come when Russia performs volte face, e. g. if the US shows signs of reaching a reconciliation with Iran in order to refocus its energies on containing Russia, or ceases supporting Russia’s modernization drive.

China and India are both interested in cooperating with Iran to develop its hydrocarbons sector and lock in its oil and LNG exports. Both countries espouse non-Western values of “national sovereignty” and non-interference. Furthermore, India is interested in recruiting Iran as a western counterweight against its rival Pakistan. As a result, neither country has any interest whatsoever in stringently enforcing sanctions against Iran out of pure altruism.

What do you think are the positions of Georgia and Azerbaijan on military action against Iran and its aftermath?

Since Iran is in a “cold war” with Azerbaijan and supports its prime enemy Armenia, the Azeri elites would probably secretly welcome military action against Iran. Furthermore, there are twice as many Azeris in Iran than in Azerbaijan, and though they enjoy equal rights with Persians, it is Islam — or the system of Guardianship of the Islamic Jury — that really keeps Iran united (with help from the security apparatus). If Iran were to suffer military defeat, the regime may be discredited, and a liberal democratic one may even take its place.

map-iran-ethnicities

Map of Iran’s ethnicities.

In that case, centrifugal tendencies may become predominant — as in the last years of the Soviet Union — and maybe even a Greater Azerbaijan will emerge on both sides of the Caspian Sea in alliance with Turkey to the west. On the other hand, Azerbaijan can’t be too openly enthusiastic about undermining Iran because it borders Russia to the north, which is friendlier with Iran. That is why the Azeris categorically refuse to let Israeli planes fly over its airspace in a strike on Iran.

Georgia’s position is much harder to decipher, as it maintains fairly good relations with everyone except Russia — against which it is irrevocable opposed because of its liberation / occupation (cross out as you wish) of S. Ossetia and Abkhazia. Though in previous years they’d have supported Israel, their current interests aren’t clear, since the Israelis stopped delivering arms to Georgia in exchange for Russia not delivering the S-300 air defense system to Iran. I don’t think a strike against Iran by either Israel or the US will cardinally change Georgia’s situation.

What do you think about the situation in the Russian North Caucasus and the Caucasus region in general?

Russia’s North Caucasus remains bloody and unstable, but secure under Russian control. Kadyrov is the Kremlin’s vassal in Chechnya: should he turn renegade, they’ll find another baron to replace him easily enough.

I doubt there’ll be another Georgia-Russia war. Its clear that the Ossetians and Abkhazians prefer implicit Russian control to explicit Georgian rule, and Saakashvili has no chance of changing this reality by military force. On the other hand, he remains genuinely popular amongst Georgians and secure in his rule. The cold war between Russia and Georgia will continue, but it’s unlikely to turn hot again; not unless Saakashvili is a total loon and tries to replay 08/08/08.

Another war between Armenia and Azerbaijan is also unlikely. Though Azeri military spending, bolstered by its oil wealth, now exceeds the entire Armenian state budget, the latter has had fifteen years to reinforce its positions in Nagorno-Karabakh. (Furthermore, direct Azeri attacks on Armenia proper will probably provoke a Russian military response through the mutual defense provisions of the Collective Security Treaty Organization). Aliyev is a rational, calculating leader and would much rather enjoy Azerbaijan’s oil bounty than run the risk of military defeat and popular uprisings against his regime.

How would you interpret the recent Brazil-Turkey-Iran deal in the context of multipolarity?

It’s an ideological statement: the voices of formerly peripheral countries rejecting the Western consensus on nuclear rights and proposing an alternative project amongst members of the “Rest”. As such, it is a very strong endorsement of the multi-polar ideal. But in real life, the actors playing the key roles are the countries with both interests in the issue and power projection capabilities in the region: Israel, the US, Iran, and Russia. West or Rest, it doesn’t matter: only power and the will to power.

I’d like to thank Marat Kunaev for this interview. I tried to make my answers as thought-provoking as his questions, and though I might have failed in that endevour, I hope the gap is not unbridgeable.

Interviewed by Marat Kunaev.

(Republished from Sublime Oblivion by permission of author or representative)
 
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The standard view of the American economy is one of exponential growth: even if interrupted by a recession once a decade and a Depression once every two generations (the 1890′s, the 1930′s, the 2010′s?), the engines of industry would always come back roaring again. Output per American could always be expected to increase as it has from 1790 until the present day. There has never been a decade, even during America’s two Depressions, when US GDP was lower at the end than at the beginning.

However, another point of view on the US economy can be developed by drawing on observations of factors such as median income, energy consumption and inequality. Broadly speaking, this picture is one relative stagnation from 1890-1940, and again from 1973-today, punctuated by the truly remarkable “miracle economy” of the post-war boom. Furthermore, the US is now about to transition to a new phase: economic stagnation and anarchic stasis, to be followed by oligarchic Caesarism. This first post will be, for now, just a series of observations that I believe to be inextricably linked, but lack the theoretical foundations to put on a sound footing. Feel free to skip it, as it might be hard to follow and I’m mostly writing it to get greater understanding for myself. More polished version(s) to follow.

1. Median incomes (the ones that matter to ordinary Americans) tell a radically different story from the GDP figures. As shown below, they remained at a virtual plateau from 1914 to 1940. During the WW2 mobilization, spare capacity filled up, as factories began to produce the tanks, ships, planes, jeeps and misc. that played a crucial role in the Allied victory. After the war, what might have been a new plateau from the 1940-50 base accelerated, literally driven by the automative revolution; it is during this time that the US became a suburban, oil-based civilization.

ave-us-income-saez

However, the oil shocks of the 1970′s threw a jackhammer into that arrangement. Since then, the only discernible rise took place in the 1990′s: a period that saw the opening up of the Chinese “reserve army of labor” and the Soviet resource base to global markets. These began creating powerful deflationary effects in the US. But things went into reverse altogether during the past “lost decade“.

The median household income in 2008 was $50,303. The median household income in 1999, expressed in 2008 dollars, was $52,748.

You’ve got to figure 2009 will see another decline in income, in which case Americans will end the decade significantly less well off than when they started it. We’re not just treading water. We’re going backwards. …

Still, the 2000s have been especially barren. Median income rose only in three years—2005, 2006 and 2007, and even at the cyclical peak in 2007 it was below the levels of 1999 and 2000.

2. More on the energy developments during the period. During 1950-70, the US enjoyed very rapid growth both in absolute energy consumption and the energy efficiency of its techno-industrial base. Therefore, the quantity of “useful work” available for exploitation by American labor and capital increased very rapidly.

But this growth moderated since the 1970′s. Given the continuing reduction in the EROEI of oil, the peaking of the net energy flowing into the US economy from coal in 1998, and the turn to costly shale gas to maintain natural gas production volumes observed within the last decade, this trend must have only strengthened in the 2000′s. Graphs are taken from Economic Growth and Cheap Oil (Robert Ayres).

us-exergy-services-supply

The growth in the”technical efficiency” with which exergy is converted to “useful work” by the American economy has been flattening since the 1980′s (probably due to diminishing returns to investments into more efficiency: see Tainter, etc). Though Obama’s drive to increase energy efficiency is laudable, it will be hard to achieve big results given that most of the low-hanging fruit have already been picked.

technical-efficiency-us-exergy-services

If further improvements in technical efficiency are low, then the US will be going into a permanent hyper depression in the years ahead according to Ayres’ calculations. As of today, the observed results match the Low forecast.

ayres-us-gdp-forecasts

There’s little reason for hope. The potential for squeezing more “useful work” – the single biggest factor in GDP growth – out of the current US energy base are very limited. Coal, oil and natural gas are roads to nowhere. While nuclear and renewables are far more sustainable in the long-term (for maintaining an industrial base), they need 1) several decades to be build up and 2) given the same investments in K and L generate less useful work than today’s hydrocarbons because of their low EROEI’s.

3. Another interesting thing is that the period of stagnant US median incomes is linked with rising inequality. (This explains the continued moderate growth in consumption and GDP – its just that since 1973 a very large portion of it has been accruing to the guys at the top of the pecking order).

Now in stagnant systems – e.g. overpopulated agrarian societies – this is explained (Turchin) by the fact that land, food and credit prices have a tendency to go up, benefiting the elites (landowners, financiers, etc) relative to the rest of the population. While similar processes apply to industrial societies (see Marx), its effects can be combated by the powerful redistribution mechanisms available to the modern state (that were lacking in the agrarian states of yore). Hence, despite the fact that since the 1980′s Western Europe has been on much the same vastly lower growth trajectory, inequality in states such as France and Germany has remained low.

On the other hand, the US – having progressively deregulated the financial sector and knocked down marginal tax rates – has experienced a massive increase in inequality that may now be approaching the levels of the Gilded Age.

marginal-tax-rates

4. Fertility rates are linked to economic conditions. One of the many explanations for the post-war baby boom in the US is that soldiers were returning home, social conservatism, etc. But none of them are very convincing as comprehensive explanations.

us-fertility-rate

Instead, one may interpret the above graph as follows:

  • 1900-1940: stagnant median incomes; TFR approaches replacement level rates as the US ceases being an agrarian society.
  • 1940-1970: the baby boom as US middle class living standards expand rapidly. Populations tend to expand rapidly when their resource base expands. Interesting why TFR expansion started dropping in early 1960′s, though: perhaps looking at cohort TFR’s (which adjust for average age of childbearing) would yield a better fit with the economic stats?
  • 1970-2010: roughly replacement level TFR’s, stable median incomes.
  • 2010+: if median incomes begin to fall in the future, due to energy constraints and/or fiscal collapse, we might well see the TFR drop to something like 1.5.
  • A comparison: Russia completed its post-agrarian fertility transition by the mid-1960′s; after that, the TFR remained stable at around 1.9-2.1 until 1990 (as we know this was a time of zastoi / stagnation, esp. in the later part of this period). But in the 1990′s Russia’s TFR fell off a cliff, along with real living standards (not only did average incomes fall, soaring inequality made most people’s income fall even faster). The nadir was reached in 1999 (TFR=1.16) and has since risen up to 2009 (TFR=1.56).
  • Of course, non-material factors also play a big role: e.g., why is German TFR so much lower than France’s? etc…

5. Preliminary speculations. The reason I’m very skeptical on the Keynesian / Krugman vs. Austrian / Tea Party “debate” is that both positions, though ostensibly opposite, are based on the same presumption: that further economic growth is still possible, if only their policy prescriptions were to be followed. (In a recent Oil Drum posting Gregor MacDonald laid out my thoughts very well in Hollow Men of Economics.

So, Krugman draws many simplistic graphs showing how growth was bigger during the (Keynesian) 1950′s-1960′s than during the (monetarist) 1980′s-2000′s, ergo, the government should throw more and more money at the economy, the deficits and debts be damned. Then there his ridiculous “invisible” bond vigilantes argument: if the US can sell debt so cheaply, why should we worry about exploding budget deficits? Only a few things wrong with this theory…

  1. It’s a complete strawman! By the time the bond vigilantes take off their invisibility cloak, the costs of servicing debt – much of it now in short-term bonds which have to be frequently rolled over – will begin to spike, leading to an irreversible death spiral.
  2. Makes the questionable assumption that the US will grow at 2-3% in the future, whereas 1) the necessity of deleveraging, 2) the exergy situation and 3) the fragile geopolitical situation makes this highly unlikely.

Of course, the Austrians / WSJ are no less insane. If only the rich could get more tax breaks, if only banksters and oil corporations could be coddled even more than they are already, everything would be fine and dandy and we’ll be growing our way into a Randian paradise of abundance.

Both sides UTTERLY fail to consider the vital factor of useful work to economic growth. Useful work is a function of exergy & technical efficiency. Exergy is likely to peak and go into decline within the decade, given the trends in the energy base; technical efficiency appears to have a trend of flattening out. If investors were to suspect there are no prospects for future growth, the credit system – the economic equivalent of fertilizer in agriculture – as it exists today would collapse (why give out loans if there’s little prospects they will be repaid?), and the consequent drop off in investment will lead to depreciation overtaking and the capital stock beginning to contract. Finally, while the labor force will continue to expand, its quality will not because American IQ has been flat since around the 1980′s because of the cessation of the Flynn effect. (The *only* positive, productivity enhancing trend at work is the continued informatization of the economy, which may gain a boost with the appearance of ubiquitous, specialized and highly effective AI’s by the 2020′s.)

This is not an attractive view to take, because it basically means that whatever the government does or doesn’t do, GDP decline is inevitable. But the alternatives aren’t rosy either:

  • If Krugman “wins” the debate: the economy sputters along for a few years, never getting onto a sustainable growth trajectory. Awning budget deficits and ballooning of the public debt (which is now at 140% of GDP if you also count local/municipal debt and Freddie Mac/Freddie Mae liabilities). The result: an Argentina 2000/Latvia 2009-style collapse, probably sometime around 2012-15 (might be triggered by a “geopolitical shock”). End-result: some kind of American Caesarism.
  • If Austrians “win” the debate: the decline is grinding and gradual, rather than sudden and catastrophic.

Instead, it would perhaps be a better idea to craft policies in such a way as to minimize the harm done for (as I suggested in my abortive “Collapse Party” project) and at the same time make the foundations of the American state stronger.

  • Reintroduce the high marginal tax rates of the 1950′s-60′s to reduce inequality and shift the burden to those able to shoulder it. Might prevent the soaring inequality / corruption / resentment that leads to crony Caesarist outcomes. Problem: ACHTUNG SOCIALISM!
  • Allow the financial system to contract / collapse as needed. Today, it is a rotting dead weight on the US – both economically (there’s no need for such a huge financial sector in the first place) and morally (they are a class apart from normal Americans). Problem: institutional capture means same banksters wield immense influence over both parties of power.
  • Reduce military expenditures. There’s a lot that can be cut. First, the metastasized “war on terror” apparatus. Second, the expeditionary/naval component can be cut. There’s no long-term hope of containing China, but the Western US itself is secure. The Pacific Fleet can be reduced. Get out of Afghanistan. On the other hand, maintaining dominance in the Atlantic (core US interest) and the Middle East (oil) is useful. Third, saved money can be used to 1) continue research into next-generation military technologies, 2) reducing deficit. It’s not really a choice, actually. Military contraction is inevitable in the next decade: the only question is whether it will be uncontrolled (as during 1990′s Russia, when c.70% of Soviet military assets depreciated into junk) or controlled (with the result that core strengths will be preserved). Problem: suggesting reductions in military spending is unpatriotic & goes against the powerful defense & MIC lobby.
  • Obamacare is imperfect, but one of the administration’s best achievements. Leave as is.
  • Use savings from cutting off subsidies to the MIC & financial mafias – and the bigger tax intakes – to launch a coordinated restructuring of the US energy base. To accelerate the transition to sustainability, start planning and building lots of new nuclear power plants, and renewables. Start phasing out coal. First, makes a positive contribution to helping the world avoid catastrophic climate change. Second, this transition is in any case inevitable once the EROEI of hydrocarbons dips to lower levels – but by then, switching will harder because there’ll be many other challenges on the plate (e.g. mitigating the increasing effects of global warming; coping with the dearth of capital). So make a head start now. Problem: requires the kind of forward thinking that institutions are chronically incapable of.
  • How do solve all these problems? Obama needs to take a gamble, revolutionize his leadership, launch an all out political assault against the enemies of progress. Problem: not going to happen.

And that’s the story of it.

If I had to bet on it, I’d say US GDP per capita will be 5-25% lower in 2020 than it is now – even though we’re in recession. (Unlike with the 1930′s Depression, there’s no abundant, very high-EROEI energy subsidy on the horizon waiting to propel the US to another level). Inequality will be no lower than today, because of the power of today’s stakeholders in the system, hence – coupled with lower output and the waning of the credit system – median incomes will be a lot lower; hence, many more people in outright destitution. The center of gravity (economy, population) shifting back to the north and east (above all the Great Lakes region) from the south and west. The Presidency will have transitioned to some kind of Caesarism, served by a clique of politically-connected oligarchs. Any imperialist adventures now confined to the Western hemisphere. The citizenry too atomized, apathetic and preoccupied with quotidian concerns to do much about it.

I appreciate your thoughts and criticisms of this post, but do note that it is not meant to be final or “serious”; more like a strange mix of relatively obscure economic concepts, lazy extrapolations and personal impressions. As I said at the beginning, I hope to refine and connect these ideas into a more rigorous and logical framework in the future.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Though there are plenty of caveats and exceptions, it is safe to generalize that predictions of what the “next war” was going to be like before 1914 were completely inaccurate. The Great War would not be the quick, clean affair typical of the wars of German unification in the 1860′s-70′s or the sensationalist literature of the antebellum period. The generals were as wrong as the general public and war nerds. France had an irrationally fervent belief in the power of the offensive and dreamed of the Russians steam-rolling over Berlin before winter, while the Germans gambled their victory on the success of the Schlieffen plan. When the war finally came, the linear tactics of previous wars floundered in the machine guns, artillery, mud, and barbed wire of trench warfare. The belligerent societies were placed under so much strain by this first industrial total war that by its end, four great monarchies would vanish off the face of Europe.

Nonetheless, there were three theorists – a Communist, a Warsaw banker, and a Russian conservative minister – who did predict the future with a remarkable, even eerie, prescience. They were Friedrich Engels, Ivan Bloch, and Pyotr Durnovo.

Friedrich Engels

Way back in 1887, Friedrich Engels, the famous Communist theorist, wrote this remarkably accurate prediction of the next war.

world war of never before seen intensity, if the system of mutual outbidding in armament, carried to the extreme, finally bears its natural fruits… eight to ten million soldiers will slaughter each other and strip Europe bare as no swarm of locusts has ever done before. The devastations of the Third Years War condensed into three or four years and spread all over the continent: famine, epidemics, general barbarization of armies and masses, provoked by sheer desperation; utter chaos in our trade, industry and commerce, ending in general bankruptcy; collapse of the old states and their traditional wisdom in such a way that the crowns will roll in the gutter by the dozens and there will be nobody to pick them up; absolute impossibility to foresee how all this will end and who will be victors in that struggle; only one result was absolutely certain: general exhaustion and the creation of circumstances for the final victory of the working class.

Engels was completely right on the “total war” aspect. The number of military deaths in the war, 9.7mn, was within his predicted range. And indeed by 1918 there was a severe epidemic, the Spanish flu, and a year later the crowns of Russia, Germany, Austria-Hungary, and Turkey were all rolling in the gutter. The working class only got their “final victory” in Russia (though they came close in Hungary, Slovakia, and Bavaria).

Ivan Bloch

Ivan Bloch was a Warsaw banker, railway planner, and campaigner against Russian anti-Semitism. In 1899, he wrote a book Is War Now Impossible?, in which he argued that its costs would be such that the inevitable result would be a struggle of attrition and eventual bankruptcy and famine. His hope was that by getting people to comprehend the vast costs and uncertainties of future war, he could forestall it. Though he was unsuccessful in that goal, he did at least get the muted privilege of being almost 100% right about its nature. For instance, see this direct extract from his book.

At first there will be increased slaughter – increased slaughter on so terrible a scale as to render it impossible to get troops to push the battle to a decisive issue. They will try to, thinking that they are fighting under the old conditions, and they will learn such a lession that they will abandon the attempt forever. Then, instead of war fought out to the bitter end in a series of decisive battles, we shall have as a substitute a long period of continually increasing strain upon the resources of the combatants. The war, instead of being a hand-to-hand contest, in which the combatants measure their physical and moral superiority, will become a kind of stalemate, in which neither army being willing to get at the other, both armies will be maintained in opposition to each other, threatening the other, but never being able to deliver a final and decisive attack… That is the future of war – not fighting, but famine, not the slaying of men, but the bankruptcy of nations and the breakup of the whole social organization… Everybody will be entrenched in the next war. It will be a great war of entrenchments. The spade will be as indispensable to the soldier as his rifle… All wars will of necessity partake of the character of siege operations… soldiers may fight as they please; the ultimate decision is in the hand of famine… Unless you have a supreme navy, it is not worthwhile having one at all, and a navy that is not supreme is only a hostage in the hands of the Power whose fleet is supreme.

This is, of course, a pretty accurate prevision of WW1. It was a stalemate of artillery and entrenchments. The German home front collapsed in late 1918 in large part as a result of dearth resulting from being cut off from global food imports and the requisitioning of the chemical fertilizer industries for munitions production. And the Kaiserliche Marine was indeed bottled up in port for most of the war. To further demonstrate Bloch’s predictive genius, I will quote from Niall Ferguson’s summary of his book in The Pity of War.

In Is War Now Impossible? (1899), the abridged and somewhat mistitled English version of his massive six-volume study, the Warsaw financier Ivan Stanislavovich Bloch argued that, for three reasons, a major European war would be unprecedented in its scale and destructiveness. Firstly, military technology had transformed the nature of warfare in a war that ruled out swift victory for an attacker. “The day of the bayonet [was] over“; cavalry charges were too obsolete. Thanks to the increased rapidity and accuracy of rifle fire, the introduction of smokeless powder, the increased penetration of bullets and the greater range and power of the breech-loading cannon, traditional set-piece would not occur. Instead of hand-to-hand combat, men in the open would “simply fall and die without either seeing or hearing anything“. For this reason, “the next war… [would] be a great war of entrenchments“. According to Bloch’s meticulous calculations, a hundred men in a trench would be able to kill an attacking force up to four times as numerous, as the latter attempted to cross a 300-yard wide “fire zone“. Secondly, the increase in the size of European armies meant that any war would involve as many as ten million men, with fighting “spread over an enormous front”. Thus, although there would be very high rates of mortality (especially among officers), “the next war [would] be a long war“. Thirdly, and consequently, economic factors would be “the dominant and decisive elements in the matter”. War would mean:

entire dislocation of all industry and severing of all the sources of supply… the future of war [is] not fighting, but famine, not the slaying of men, but the bankruptcy of nations and the break-up of the whole social organization.

The disruption of trade would badly affect food supply in those countries reliant on imported grain and other foodstuffs. The machinery of distribution would also be disrupted. There would be colossal financial burdens, labour shortages and, finally, social instability.

He pretty much nails it! Now yes, Bloch wasn’t 100% spot on. He was slightly wrong about alliances. His was wrong in his conjecture that “the city dweller is by no means as capable of lying out at nights in damp and exposed conditions as the peasant”, which coupled with her agricultural self-sufficiency, would give Russia the advantage in a war with “more highly organized” Germany. And most of all, he was wrong in predicting that social instability and revolution would doom all the belligerent states – after all, the key war objective would only be to remain the last man standing.

Pyotr Durnovo

While reading Secular Cycles by Turchin & Nefedov, I came across a reference to a truly, remarkably prophetic document called the Durnovo Memorandum. It was penned by Pyotr Durnovo, a member of the State Council and former Minister of the Interior in Witte’s cabinet, and presented to the Tsar in February 1914. A conservative Russian nationalist, he emphasized that it was not in Russia’s interest to fight a costly and uncertain war with fellow monarchy Germany, a war he saw as only serving to further Albion’s aims. His fears were all astoundingly prescient and eventually, tragically realized. More than anything, this discovery spurred me to write this post.

After digging around I found that Douglas Muir had already written about it in History: The Durnovo Memorandum at A Fistful of Euros. It is an excellent summary and analysis, and I recommend you go over and read it in its entirety. In this section, I will liberally quote and paraphrase Doug’s post.

Under what conditions will this clash occur and what will be its probable consequences? The fundamental groupings in a future war are self-evident: Russia, France, and England, on the one side, with Germany, Austria, and Turkey, on the other.

Italy, if she has any conception of her real interests, will not join the German side. … [Romania] will remain neutral until the scales of fortune favor one or another side. Then, animated by normal political self-interest, she will attach herself to the victors, to be rewarded at the expense of either Russia or Austria. Of the other Balkan States, Serbia and Montenegro will unquestionably join the side opposing Austria, while Bulgaria and Albania (if by that time they have not yet formed at least the embryo of a State) will take their stand against the Serbian side. Greece will in all probability remain neutral…

Both America and Japan–the former fundamentally, and the latter by virtue of her present political orientation–are hostile to Germany, and there is no reason to expect them to act on the German side. … Indeed, it is possible that America or Japan may join the anti-German side…

Right off the bat, in February 1914, Durnovo correctly sketches out the WW1 alliance system, despite that “Italy was still officially allied with Germany and Austria, Ottoman Turkey was firmly neutral, and Romania was ruled by a Hohenzollern”.

Are we prepared for so stubborn a war as the future war of the European nations will undoubtedly become? This question we must answer, without evasion, in the negative… [T]here are substantial shortcomings in the organization of our defenses.

In this regard we must note, first of all, the insufficiency of our war supplies… the supply schedules are still far from being executed, owing to the low productivity of our factories. This insufficiency of munitions is the more significant since, in the embryonic condition of our industries, we shall, during the war, have no opportunity to make up the revealed shortage by our own efforts, and the closing of the Baltic as well as the Black Sea will prevent the importation from abroad of the defense materials which we lack.

Another circumstance unfavorable to our defense is its far too great dependence, generally speaking, upon foreign industry, a fact which, in connection with the above noted interruption of more or less convenient communications with abroad, will create a series of obstacles difficult to overcome. The quantity of our heavy artillery, the importance of which was demonstrated in the Japanese War, is far too inadequate, and there are few machine guns

The network of strategic railways is inadequate. The railways possess a rolling stock sufficient, perhaps, for normal traffic, but not commensurate with the colossal demands which will be made upon them in the event of a European war. Lastly, it should not be forgotten that the impending war will be fought among the most civilized and technically most advanced nations. Every previous war has invariably been followed by something new in the realm of military technique, but the technical backwardness of our industries does not create favorable conditions for our adoption of the new inventions. …

[A] war will necessitate expenditures which are beyond Russia’s limited financial means. We shall have to obtain credit from allied and neutral countries, but this will not be granted gratuitously. As to what will happen if the war should end disastrously for us, I do not wish to discuss now. The financial and economic consequences of defeat can be neither calculated nor foreseen, and will undoubtedly spell the total ruin of our entire national economy.

“Bang, bang, bang: too few heavy guns, not enough munitions production, inadequate rail network and rolling stock, too much reliance on imports, financial weakness. Durnovo doesn’t identify every problem Russia would have, but he’s hit about half of the top ten.” In particular, I was impressed with his negative assessment of Russia’s railways (which would break down later in the war resulting in food riots in the cities) and his gloomy perspective on the productivity and innovation potential of Russia’s military industrial complex. Obviously, he leaves out a set of other crucial factors – the administrative and political failings of the Russian state itself (the corruption and incompetence of many Russian ministers like Sukhomlinov, the personal foibles of the Tsar and the malignant influence of court lackeys, etc). Whether this omission was due to political considerations or Durnovo’s own blind-sidedness as a conservative stalwart is open to interpretation.

If the war ends in victory, the putting down of the Socialist movement will not offer any insurmountable obstacles. There will be agrarian troubles, as a result of agitation for compensating the soldiers with additional land allotments; there will be labor troubles during the transition from the probably increased wages of war time to normal schedules; and this, it is to be hoped, will be all, so long as the wave of the German social revolution has not reached us. But in the event of defeat, the possibility of which in a struggle with a foe like Germany cannot be overlooked, social revolution in its most extreme form is inevitable.

As has already been said, the trouble will start with the blaming of the Government for all disasters. In the legislative institutions a bitter campaign against the Government will begin, followed by revolutionary agitations throughout the country, with Socialist slogans, capable of arousing and rallying the masses, beginning with the division of the land and succeeded by a division of all valuables and property. The defeated army, having lost its most dependable men, and carried away by the tide of primitive peasant desire for land, will find itself too demoralized to serve as a bulwark of law and order. The legislative institutions and the intellectual opposition parties, lacking real authority in the eyes of the people, will be powerless to stem the popular tide, aroused by themselves, and Russia will be flung into hopeless anarchy, the issue of which cannot be foreseen. …

No matter how strange it may appear at first sight, considering the extraordinary poise of the German character, Germany, likewise, is destined to suffer, in case of defeat, no lesser social upheavals. The effect of a disastrous war upon the population will be too severe not to bring to the surface destructive tendencies, now deeply hidden. … there will be a revival of the hitherto concealed separatist tendencies in southern Germany, and the hidden antagonism of Bavaria to domination by Prussia will emerge in all its intensity.

Things went, as they say, to the letter. Not only does Durnovo seriously entertain the prospect of Russia’s defeat, but he spells out its consequences with an almost eerie accuracy. The Empire was indeed wracked by social revolution, as the railway system and food supply system began to disintegrate by late 1916 and popular resentment against the government was inflamed by court scandals. The soldiers in St.-Petersburg in February 1917, many of them recently drafted peasants who did not want to fight for a regime under which they were non-propertied and disenfranchised, would join the workers demonstrating for bread instead of dispersing them. Within another year, Russia was wracked by total anarchy. Likewise, following its defeat, Germany experienced political fissures between the far right and the far left, and even saw the emergence of the short-lived Bavarian Soviet Republic. If one were very generous, Durnovo’s mention of “destructive tendencies” could even be said to have hinted at the coming of Nazism.

“Durnovo glosses over a lot, and gets some details wrong. His contempt for intellectuals and the Duma is very clear in the last part of the memo, and it leads him down a couple of dead ends. But he’s so right about so many things that picking out his errors is really quibbling. In the last hundred years of European history, I’m not aware of any document that makes so many predictions, of such importance, so correctly. And I’m astonished that it doesn’t get more attention from western historians.”

The German General Staff

This is not to say that all European armies were infatuated with the offensive and the bayonet. In particular, certain thinkers from the elite German General Staff stand out for their prescience. They feared that rapid Franco-Russian military modernization meant Germany had to plan for a two-front war of attrition instead of a rapid, one-front campaign of annihilation. Thus Moltke the Elder foresaw that the convergence of social and technological trends would make the Prussian tradition of ‘total force applied in limited ways for limited objectives’ obsolete, or in his last Reichstag speech of 1890, that the “age of cabinet war” would have to give way to “people’s war”.

His disciple Colmar von der Goltz had expounded on these views in his influential book Das Volk in Waffen back in 1883, which advocated the mobilization of all human and material resources under firm military rule for the duration of the war. (Although, unlike Bloch or Engels he did not cover the impact on the civilian role in much detail, e.g. how to feed the population or maintain industrial production – on which total war would make unprecedented demands – under harsh conditions of blockade). Köpke , the Quartermaster of the General Staff, wrote in 1895: “Even with the most offensive spirit…nothing more can be achieved than a tedious and bloody crawling forward step by step here and there by way of an ordinary attack in siege style – in order to slowly win some advantages”.

Yet for all the brilliant foresight of a few members of the German General Staff, as a body it institutionalized the military philosophy of the past. The best proof is its fixation on the Schlieffen Plan, described by B.H. Liddell Hart as a “conception of Napoleonic boldness”, which aimed to knock out France early in the war so that Germany would not have to confront the geo-strategic horror of waging a two-front war against the Entente Cordiale. But while it may have worked a decade or two before WW1, by 1914 it suffered from a host of unwarranted assumptions that made its success highly uncertain – e.g., a lack of effective Belgian resistance, a slow Russian mobilization, the ineffectiveness of the British Expeditionary Force, and underestimation of French logistical capacities and overestimation of their own. So even an institution as brilliant as the German General Staff was trapped between the Scylla of past experience and the Charybdis of new technologies; they were just somewhat more aware of this trap than the other European armies.

What’s the point of this post? It is really a confluence of several interests – the history of World War One, history in general, and futurism. It might not challenge any existing “narrative”, but I do think it adds a bit of richness to the subject, and reinforces the theme that sometimes the “conventional wisdom” (among both masses and elites) can be very, very wrong, and only recognized as so by a few pundits coming from surprisingly varied, even opposed, ideological positions.

(Republished from Sublime Oblivion by permission of author or representative)
 
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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.

If you think things look bad now, with the budget deficit at 10% of GDP for 2009 and a similar figure projected for 2010, don’t look at what awaits us in a few more years. The fiscal pressure is only going to increase as the baby boomers start retiring, and as long as the US remains a populist democracy the public will not allow it to cut entitlements (at least until China and the world’s oil exporters force it on them). For instance, the Congressional Budget Office believes that the US will never again run a balanced budget, and you can guess its consequences for American global power. Furthermore, this doesn’t take into account that 1) the vast majority of prior budget forecasts have been optimistic and 2) this assumes that none of the potential breaking-points that could doom Pax Americana (which I’ve identified as imperial overstretch, geopolitical shocks, and oil-credit perturbations caused by peak oil) come to pass.

As shown above, the US has had an almost continous budget deficit since the start of its “age of diminished expectations” in the 1970′s, funded by investors willing to buy up its Treasuries, accepting low returns in exchange for America’s perceived status as a “safe haven” (so-called “American alpha”). Yet with the American empire crumbling at the margins and their own most optimistic forecasts predicting a structural deficit into the foreseeable future, will investors continue buying up Treasuries – or will they turn to more promising emerging markets? Could it even be possible that the US is already in its imperial endgame, as argued by John Michael Greer?

A different reality pertains within the Washington DC beltway. Where states that fail to balance their budgets get their bond ratings cut and, in some cases, are having trouble finding buyers for their debt at less than usurious interest rates, the federal government seems to be able to defy the normal behavior of bond markets with impunity. Despite soaring deficits, not to mention a growing disinclination on the part of foreign governments to keep on financing the same, every new issuance of US treasury bills somehow finds buyers in such abundance that interest rates stay remarkably low. A few weeks ago, Tom Whipple of ASPO became the latest in a tolerably large number of perceptive observers who have pointed out that this makes sense only if the US government is surreptitiously buying its own debt.

The process works something like this. The Federal Reserve, which is not actually a government agency but a consortium of large banks working under a Federal charter, has the statutory right to mint money in the US. These days, that can be done by a few keystrokes on a computer, and another few keystrokes can transfer that money to any bank in the nation. Some of those banks use the money to buy up US treasury bills, probably by way of subsidiaries chartered in the Cayman Islands and the like, and these same off-book subsidiaries then stash the T-bills and keep them off the books. The money thus laundered finally arrives at the US treasury, where it gets spent.

It may be a bit more complex than that. Those huge sums of money voted by Congress to bail out the financial system may well have been diverted into this process – that would certainly explain why the Department of the Treasury and the Federal Reserve Bank of New York have stonewalled every attempt to trace exactly where all that money went. Friendly foreign governments may also have a hand in the process. One way or another, though, those of my readers who remember the financial engineering that got Enron its fifteen minutes of fame may find all this uncomfortably familiar – and it is. The world’s largest economy has become, in effect, the United States of Enron.

And it’s not only tree-hugging Druids that are raising the alarm. Niall Ferguson, court historian for Pax Americana, is also tolling the bell for its imminent demise on the pages of the Financial Times (A Greek crisis is coming to America).

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect. …

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941. …

The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). [AK: Yes, Britain is screwed. So is Japan]. Then came Ireland, Spain and Greece (9 per cent). [AK: The PIIGS (Portugal, Italy, Ireland, Greece, Spain are screwed too, especially Greece and Spain at this point]. And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $15,000bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months. [AK: This refers to the dreaded "debt compound trap", in which the real costs of servicing debt spiral out of control and the only way out is restructuring (partial / negotiated default) or "monetization" of the debt (inflation). PS. The "debt trap" is essentially what brought down the regime of Louis XVI in 1789].

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. [AK: Ha!] But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.

Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”

The US is a weakened skier and is now hurtling towards a rock-strewn double black for which it is not prepared in any way, shape, or form. But at least for now, its position looks stable – after all, it grew at an annualized 5.7% in Q4, 2009 (half due to inventories buildup). The same cannot be said of Greece and the Eurozone, which seem to be approaching a major crisis in mid-2010.

Afflicted with a dysfunctional political system and chronically unable to balance its budget (sound familiar?), yet without the manifold benefits of “American alpha”, Greece is facing a looming default propelled by a 13%-of-GDP budget deficit (even granting full benefit of the doubt to Greece’s dodgy statistics service), public debt at 113% of GDP (well above the 60% limit imposed by Maastricht), and draconian austerity plans that are politically unrealizable.

If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral. …

Remember, Athens holds the whip hand over Brussels, not the other way round. Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of manifest destiny that has driven EU integration for half a century. …

No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be “days away”. While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece’s debt, drawing out the agony. What Greece needs – unless it leaves EMU – is a permanent subsidy from the North. Spain and Portugal will need help too.

The danger point for Greece will come when the Pfennig drops in Berlin that EMU divergence between North and South has widened to such a point that the system will break up unless: either Germany tolerates inflation of 4pc or 5pc to prevent Club Med tipping into debt deflation; or it pays welfare transfers to the South (not loans) equal to East German subsidies after reunification.

Before we blame Greece for making a hash of the euro, let us not forget how we got here. EMU lured Club Med into a trap. Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in a destructive property and wage boom. The ECB was complicit. It breached its inflation and M3 money target repeatedly in order to nurse Germany through slump. ECB rates were 2pc until December 2005. This was poison for overheating Southern states.

And according to Stratfor:

The crisis is rooted in Europe’s greatest success: the Maastricht Treaty and the monetary union the treaty spawned epitomized by the euro. Everyone participating in the euro won by merging their currencies. Germany received full, direct and currency-risk-free access to the markets of all its euro partners. In the years since, Germany’s brutal efficiency has permitted its exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Conversely, the eurozone’s smaller and/or poorer members gained access to Germany’s low interest rates and high credit rating. And the last bit is what spawned the current problem.

Greece now has the following choices:

1) Balance the budget. To do this Greece would have to cut its government spending by as much as half, resulting in sky-rocketing unemployment (20%+) and severe social unrest. Greeks are volatile, not like disciplined Germans or apathetic Latvians.

2) Leave the EMU. And print a New Drachma to inflate away its debt into oblivion, as was once typical for the Med nations. But then it would lose its geopolitical anchor in Europe and lose access to any further foreign investor money. According to Willem Buiter, this isn’t too likely.

Would a eurozone national government faced either with the looming threat of default or with the reality of a default be incentivised to leave the eurozone? Consider the example of a hypothetical country called Hellas. It could not redenominate its existing stock of euro-denominated obligations in its new currency, let’s call it the New Drachma. That itself would constitute a further act of default. If the New Drachma depreciated sharply against the euro, in both nominal and real terms, following the exit of Hellas from the eurozone, the real value of the government debt-to-GDP ratio would rise. In addition, any new funding through the issuance of New Drachma-denominated sovereign bonds would be subject to an exchange rate risk premium, and these bonds would have to be sold in markets that are less deep and liquid that the market for euro-denominated Hellas debt used to be. So the sovereign eurozone quitter and all who sail in her would be clobbered as regards borrowing costs both on the outstanding stock and on the new flows.

A sharp depreciation of the nominal exchange rate of the New Drachma vis-a-vis the euro would for a short period improve the competitive position of the nation because, with domestic costs and prices sticky in nominal New Drachma terms, a nominal depreciation is also a real depreciation. Nominal rigidities are, however, less important for eurozone economies than for the UK, and much less important than in the US. Real rigidities are what characterises mythical Hellas, as it does real-world Greece, Italy, Spain, Portugal and Ireland. The real benefits from a nominal exchange rate depreciation would be eroded after a year – within two years at most – before you could say cyclical recovery. The New Drachma would be a little currency in a big global financial market system – not an instrument to be used to gain competitive advantage or to respond efficiently to asymmetric shocks, but a source of extraneous noise, excess volatility and persistent misalignments, rather like sterling.

A eurozone member state faced with the prospect of sovereign default, or just having suffered the indignity of sovereign default, would be immensely relieved to be a member of the eurozone. The last thing it would want to do is give up the financial shelter provided by membership in the eurozone to try and emulate Iceland, New Zealand or the UK.

3) Old-school default. And be shunned by the rest of Europe. Though threatening to blow up the bomb is to Greece’s advantage, since this will shift the burden to…

Europe – or precisely, Germany – having to make their choice.

1) Let them burn. Germany is getting impatient of being used as Europe’s cash cow for the past 60 years, and may simply tell Greece to deal with it herself. This will likely lead to spiraling debt service costs, fiscal-social-political breakdown, and heightened borrowing costs for the other PIIGS, maybe even a “cascading collapse” of Europe’s entire southern periphery (in the most extreme case, even Belgium and France would be threatened). This would finish off the EU as a meaningful institution, and with it will go the main vehice through which Germany and France wield power at a global level.

2) Berlin bails out Greece. Involves a different set of problems. A straight-out bailout will invite moral hazard and political dissatisfaction amongst the German electorate, who have had their wages constrained for years while the PIIGS wallowed in their bubbles. But all in all, preferable to the above scenario, or the prospect of a spreading crisis of confidence also forcing Germany to bail out Italy, Spain, or even France, all of whom have far bigger borrowing needs (and for which even Germany doesn’t have the resources). Therefore, Germany will probably lead an EU bailout of Greece (even though there is no formal mechanism for doing so) – but in exchange, it will want major political concessions.

But the days of no-strings-attached financial assistance from Germany are over. If Germany is going to do this, there will no longer be anything “implied” or “assumed” about German control of the European Central Bank and the eurozone. The control will become reality, and that control will have consequences. For all intents and purposes, Germany will run the fiscal policies of peripheral member states that have proved they are not up to the task of doing so on their own. To accept anything less intrusive would end with Germany becoming responsible for bailing out everyone.

Granted, at the moment the EU is stalling, not making any commitments; not surprising, given the cluttered and unwieldy talking shop that it is. But as Greece’s bond auctions (almost certainly) fail over the next few months to meet its soaring debt financing commitments, and as it falls into its debt compound trap, the fiscally secure nations – that is, primarily Germany – will realize the dangers of allowing the contagion to spread. And Germany in particular will see a chance to regain the sphere of influence over Mitteleuropa denied it since the Second World War.

Either way, in 2010 the EU institutions are going to be sidelined in favor of more workable, bilateral relations – especially between the Franco-German core and the weakening peripheries. The way will be opened for the return of Great Power politics to the European continent.

Looking further ahead, within a year the US will again enter a state of crisis. Based on Obama’s low popularity at the end of his first year (is he going to set a time record for failed Presidency?) and his loss of Massachusetts (!) to the Republicans, the political gridlock will only harden. As I forecast last September, “the feds will face challenges from the far-left (new Huey Long’s, anarchism, etc) and the far-right (demands for more state rights, anti-tax movements, “American reactionary patriots”, etc)” – though right now, the far-right movements appear to be the more powerful emerging faction (see the grassroots appeal of the reactionary, back-to-the-18th-century Tea Partiers, who in an electoral contest would now garner 17% of the vote – is the US finally going to see a powerful 3rd party?). PS. American corporations can now legally buy themselves political parties.

Second, in addition to the political problem, there will be a renewed economic and credit problem as the Second Wave of the Housing Crisis engulfs the nation because of rising defaults from adjustable-rate mortgages, many of which will be coming due by 2011.

And this brings us to a third problem, a renewed banking crisis. But this time, instead of withdrawing from emerging markets to the “safe haven” of the US, the banks will instead invest more into promising emerging markets (e.g. the BRIC’s) and commodity speculation (see peak oil), while divulging their US holdings and triggering capital flight. This will compount the political and economic problems, as America’s “rootless cosmopolitans” / financial and their political flunkies come under fire from both the far-left and right-wing producerist reactionaries.

Then there’s the fourth problem – peak oil. World oil production capacity may have peaked in 2010, and projections indicate that 2012 will see an accelerating downslide. This time there will be a both severe credit contraction, far exceeding the one in 2008-2009 (because this time capital will be fleeing the US) and soaring oil prices. The American consumer will live through a far more severe retrenchment than in 2007-2009, starting in 2011. The entailing fall in consumption will further reinforce the banking crisis, the wider economic crisis, and the political crisis. By this point, the “Tea Party”-Republican candidate may be well ahead of Obama, who by this point is utterly discredited.

Now what should Obama do? Note that by this time the Iran crisis will be coming to a head. Sanctions will have failed (China and Russia will see no reason to cooperate seriously). Israel will be getting extremely restless, since it treats the Iranian nuclear bomb as an existential threat. And Obama may well come to view a decisive resolution of the Iran issue as the only road still left open to him to claw back domestic and international legitimacy. However, Iran likely has the capability to block the Strait of Hormuz to oil tankers for several weeks using mines and anti-ship missiles. 20% of the world’s oil shipments pass through those narrow Straits. Needless to say, in a world entering the downslope of Hubbert’s peak, any disruption to global oil supplies will have tremendous, chaotic repercussions – economic, financial, political, and geopolitical – that we have no way of predicting in advance.

In conclusion, Pax Americana is going to face a series of severe crises in the next three to five years (and not only its lynchpin, the US). The European crisis, linked to the Med credit bubbles, is leading to the slow unraveling of the EU’s legitimacy in favor of its core states, France and especially Germany. It will come to a head in the next few months. Japan is facing an irredeemable fiscal and debt crisis, which will explode in the next few years: eventually, it will likely bandwagon with China (leveraging its technological base to gain favorable access to China’s markets and labor force) and ditch its post-1990 turn towards neoliberalism, which was never suited for the Japanese mentality anyway, in favor of Asian socialism.

Finally, the US itself will face a panoply of challenges – fiscal profligacy (stemming from its belief that it can have both guns & butter on a shrinking industrial base), imperial overstretch (Afghanistan, Iraq), political dysfunction, a new housing, credit, and economic crisis, soaring energy prices (disastrous for suburbia), and geopolitical challenges (Iran, China, Russia). It can deal with any one of them, but I can see no way how it would be able to deal with all of them coming within a few years of each other. The consequences?

Namely, there will be a partial collapse of legitimacy in the government; the feds will face challenges from the far-left (new Huey Long’s, anarchism, etc) and the far-right (demands for more state rights, anti-tax movements, “American reactionary patriots”, etc); fertility will collapse from the current replacement-level rates to around 1.3-1.7, as welfare shrinks and the utility of having children for the very poor, currently the most fecund social group, drops; crime will increase, etc. Yet within a decade a new social order will gradually emerge, probably fiscally and socially conservative and more authoritarian than the current one, and with it a new equilibrium will slowly, painfully come into being.

However, the US will almost certainly remain a Great Power. I certainly do not see it collapsing into separate states or regions, as dreamt of by the likes of Igor Panarin or Gerald Celente. In some ways, by casting aside its global imperial shell, it will actually become stronger – it will no longer be weighed down by the burden of global empire, and can focus on other activities the more effectively, such as reconstructing its industrial base and reinforcing its neo-colonial sphere around North America, the Carribbean, and perhaps Central America / Venezuela. Whatever form America’s new political economy takes (something resembling Putinism?, or maybe Chavismo?), it will likely be far better suited for the coming age of scarcity industrialism (characterized by economic statism, Realpolitik, and mercantile trade relations), than the crumbling colossus that is today’s Pax Americana.

(Republished from Sublime Oblivion by permission of author or representative)
 
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I would like to wish all Sublime Oblivion readers a very happy and successful New Year. One of my major motivations for writing is getting comments and feedback, so please continue – the more you inflate my ego, the more time I will feel compelled to spend on the blog. ;)

Year in Review: 2009

All in all, 2009 was rather less interesting that 2008, which saw three thresholds of portentous significance – the final peaking of global oil production, the discovery of the magnitude of the Arctic methane meltdown, and the collapse (and partial recovery, abetted by prodigious state credit infusions) of the global financial system. Simultaneously, Russia, China, and other rising powers have begun presenting a rising challenge to Western hegemony on an ever broader front. The key trends of 2009, whether leaders and pundits recognized it or not, were about managing the consequences and realities of 2008.

From the American viewpoint, 2009 was the year of Obama. He realized that the “cowboy diplomacy” pursued by Bush alienated key allies on perceived vital issues (Afghanistan, stimulus spending, etc), and sought to reinvigorate relations with its traditional allies and reach out to its enemies. Though publics tended to be enthusiastic, governments were not as moved; the European states continue stalling on commitments to Afghanistan, whereas Russia, China, and the Muslim world have decidedly spurned him on the basis that actions speak louder than words. They have a point. Obama has essentially continued post-2006 Bush policies based on a “realist” appraisal of American interests – prodigal military spending, “occupation” of the Middle East (as perceived by Muslims), support for Israel, resistance against Russian neo-imperial ambitions for the former Soviet space, engaging with China without reference to human rights, supporting sanctions against Iran while leaving “all options on the table”, etc. This creates a certain impression of schizophrenia to the administration’s actions – popular abroad but spurned by friend and foe; repudiating the Bush legacy but continuing it in practice; talking of reforming healthcare and closing Guantanamo, but stymied by discredited Republicans at home. It’s all a muddle.

So is the bind that the US is stuck in regarding Iran. Officially it supports gasoline sanctions, but they are unlikely to have much effect if Russia circumvents them (which it is likely to do given its continued geopolitical jockeying with the US) – and even if Russia acquiesces to the sanctions, enforcing the sanctions will be difficult. Israel is a loose cannon. It cannot allow the possibility of a radical Islamic regime acquiring a nuclear capability, and will do everything – including striking its nuclear installations – to prevent it. As a consequence, the US will be drawn in because of their fears that in the aftermath, the Iranian military will mine the Strait of Hormuz and interdict the Gulf oil shipping which carries 20% of world oil production. This may usher in a general Middle East war whose geopolitical, economic, and financial ramifications may veer wildly out of control, possibly culminating in the fall of Pax Americana itself. In both the US and Iran, domestic forces are driving the two countries to a confrontation. This is a geopolitical predicament that is becoming increasingly clear, with the US issuing greater threats and Iran intensifying its nuclear brinkmanship in the last few months of 2009.

Even as the US was focused on the Middle East, the Kremlin has been using the resultant “window of opportunity” to continue reasserting its influence over the former Soviet space – expanding the scope of the CSTO military alliance, strengthening ties with Ukraine’s Russia-friendly political forces, pressuring Uzbekistan with a new military base in Kyrgyzstan, and making a customs union with Belarus and Kazakhstan. Though its economic crisis was deep, it did not have major negative internal effects either humanitarian or political, which put Russia in a yet stronger position relative to its Near Abroad. With the Kremlin’s simultaneous strengthening of internal control (e.g. over the oligarchs), Russia continued to return to its past-and-future as a Eurasian empire.

Driven by desperate credit infusions and fiscal spending, the US and Europe began to experience an anemic recovery in mid-2009, – but one that cannot be sustained, especially since the resource fueling it (yes, oil) has peaked, and will decline at an accelerating pace after 2010. The price of recovery is massive new debt, transferred from private to sovereign hands, and a widening of the same imbalances that caused the crisis in the first place. Yet a far worse example of eating the seed corn is the debacle of the Copenhagen summit, where the nations of the world failed to agree on emissions cuts to check runaway global warming. We need to limit the temperature rise to no more than 2C, because after that there are numerous tipping points that will make an accelerating Klimakatastrophe inevitable; this implies that at the minimum, global emissions should peak by 2015, and decline by 80% by 2050 over 1990 levels. The commitments made at Copenhagen are feeble, more so even than Kyoto – largely thanks to Chinese sabotage. (Well, at least we didn’t die of swine flu). In related news, the increasing habitability of Greenland has driven it to make further strides towards declaring formal independence from Denmark.

Riding roughshod over Ireland and the Czech Republic, the EU finally passed the Lisbon Treaty, which gives the large, pro-strong-Europe countries like Germany, France, and Italy far more voting power relative to Euroskeptic nations. Should the Franco-German bloc wish, it now has many of the tools to dominate Europe and present an economic and cultural challenge to US hegemony; whether they will manage to do so is very much open to question, given the rising pressures on European unity presented by trends such as: 1) the rising power of France relative to Germany and 2) the deep-grained economic predicaments of the Mediterranean Rim.D

The skylines lit up at dead of night, the air-conditioning systems cooling empty hotels in the desert, and artificial light in the middle of the day all have something both demented and admirable about them: the mindless luxury of a rich civilization, and yet of a civilization perhaps as scared to see the lights go out as was the hunter in his primitive night. – Baudrillard

There is perhaps no better metaphor for the spectacle of Dubai going bankrupt just as it completed the greatest monument to petro-fueled Gulf vanity, the 818-meter tall Burj Dubai.

Though the Gulf states have increased moves to band together in a customs union, and are slowly but surely transferring their alliance to China – the country likely destined to be the last hegemonic power of the industrial age.

Edit 1/5/09 – There is a better metaphor (or personification?), and best of all it was probably unwitting. From Facebook: Vilhelm Konnander has just (LOL) read today’s “The National” about Burj Dubai: “The tallest tower in the world, its feet anchored in the UAE and its crown floating in the clouds, was inaugurated in an eruption of fireworks last night.”

2010 Predictions

1) World economy continues an anemic recovery, though there are significant risks to the downside.

2) Obama’s honeymoon period is over, his approval ratings are on the downslide, and his major domestic and foreign policy initiatives have almost all failed. Republicans will carry the mid-term elections in 2010, but there is a strong mood of apathy and a sense that what is really needed is a new party, a new politics – though this will only start playing a great role in the post-Obama, or post-2012, era. Rising violence in Iraq (perhaps abetted by Iran, to demonstrate to the US the dangers of attacking it); a false quiet in Afghanistan, as the Taleban limit activity to conserve their strength while the US presence in Afghanistan is strong (they know the Americans will retreat the bulk of their forces soon enough anyway).

In the UK, Gordon Brown (New Labour) will almost certainly lose to James Cameron (Conservatives) in the mid-2010 elections.

3) Possible wars. Foremost looms the shadow of Iran and the bomb, of course. I doubt the US will attack in 2010, unless Israel forces its hand. It will first exhaust its options with sanctions, etc, which will almost certainly be ineffective. The Iranian IRGC-linked hardliners in power (figurehead – Ahmadinejad), under pressure from the Rafsanjani / Mousavi clerical clan, will not yield, and will remain defiant internationally to justify increasing their hold on internal power. There will be tension, but no war – especially since the US still needs to develop its Massive Ordnance Penetrator, the next-generation bunker-buster, to have a high level of confidence that a bombing raid on Iranian nuclear installations have truly done their job. (True, postponing the strike to 2011 or 2012 makes the world economy more vulnerable to disruption because oil prices will be higher then and oil supplies tighter, but then again I highly doubt the administration takes “peak oil” into consideration in its strategic planning). Likelihood: 25%; Severity: 6.

What is much more likely to happen is a new war between Israel and Hezbollah. Since 2006, Israel may have infiltrated Hezbollah, aided by internal splits within the organization, and has taken stock of lessons learned during the unsuccessful last war; it may now want to send a signal to Iran and preemptively incapacitate one of its most effective means for retaliating against Israel into the bargain. Israeli special forces are more than capable of producing a false flag, even if Hezbollah refrains from doing it for them. Furthermore, Hezbollah is causing Saudi Arabia trouble by sending fighters and weapons to the Shia insurgency in Yemen fighting the Saudis; SA would appreciate an Israeli crippling attack on Hezbollah, and may give concessions to Israel, such as allowing it to use its airspace in a strike against Iran (the US has said it will shoot down Israeli planes flying to Iran over Iraq). This further increases the incentives for Israel to pummel Hezbollah, this time round with a real, large-scale ground invasion. Likelihood: 50%; Severity: 3.

A new Russia-Georgia war remains a serious possibility, if Saakashvili uses his rapidly rebuilding military forces to make another megalomaniac lunge at reclaiming South Ossetia, or if Russia orchestrates a false flag to give itself the justification to roll in the tanks to Tbilisi and set up a puppet regime. In the latter case, the “new cold war” atmosphere of August 2008 will begin to appear to be distinctly jovial. Likelihood: 10%; Severity: 4.

Finally, we should note that a) Azerbaijan and Armenia have a bitter rivalry, cultural and geographic over the Armenian-populated and -occupied Azeri enclave of Nagorno-Karabakh, b) though it lost a war to Armenia in the early 1990′s, Azerbaijan has been implementing a rapid military modernization since 2006 with the help of oil pipeline transit revenue from the BTC, and its military budget alone is now equivalent to Armenia’s entire state budget, c) Armenia and Turkey are slowly moving towards a reconciliation under Russian brokerage, which threatens Azerbaijan’s strategic position, and d) Armenian-Azeri talks over Nagorno-Karabakh have recently collapsed. The obstacle to war is that Turkey and the US, though friendly with Azerbaijan, are very unlikely to give it direct support; but Armenia is in the CSTO military alliance with Russia. An Azeri attack will almost certainly lead to a decisive Russian response, furthermore there is a large Russian military base in Gyumri, Armenia. Unlike Saakashvili, Aliyev is a rational leader, and for now Russian and Turkey have a mutual interest in keeping things contained. That said, the possibility of a new war cannot be fully discounted – especially if it is simultaneous with the chaos unleashed by a US-Israeli war with Iran and its proxies.

Expect instability, but not collapse, in Pakistan, Egypt, Mexico, some or all of the Baltic states. Despite the occasional rhetoric, there is very little chance of a new Korean war, a Venezuela-Colombia war, or an Israel-Syria war.

4) Given that Russia’s demography has continued improving even in 2009, a year of deep economic contraction and scare stories (false) of an abortion apocalypse, it is almost certain that it will continue improving further in 2010 and that the year will see the first year of positive population growth since 1994 (or 2009). Birth rate = 12.5-13.0 (reasons), Death rate = 13.5-14.0 (a reason), Net Migration = 1.5-2.0, all / 1000. Economic growth of around 3-5% of GDP sounds reasonable. Lots of privatizations and corruption investigations as part of the Surkov clan’s struggle against the siliviki and “their” state companies. Ukraine under Yanukovych will join Eurasec or the Russia-Belarus-Kazakhstan customs union, but is yet unlikely to join the CSTO or give Russian 2nd language status.

5) Oil production in 2010 will be around the same as 2009 – increased demand will collide with geological depletion to keep output stable. Oil prices in H1 will remain at 70-90$, and will rise to 90-110$ in H2 on the basis that background geological depletion will be cancelled out by OPEC going back on its 2009 production cuts to fuel the ongoing global recovery. Of course, if there are serious confrontations with Iran, the oil price will veer right off the historical charts.

6) No major AGW-related physical events (except for a heatwave or two), given that solar irradiation remains at an unusually long trough – expect the fireworks by 2012-15. AGW skepticism will become more popular in the wake of Climategate. China and its proxies will prevent any more significant action being taken at the next UN climate change summit in Mexico, than was “achieved” in Copenhagen. By year-end the performance of the world’s top supercomputer will exceed 3 petaflops (repeat of 2009 prediction).

7) China’s growth will slow from around 8% in 2009, to perhaps 5% in 2010 as it cuts back on the loose credit in recognition of the problems this is going to create further down the line (this is already happening). Otherwise, expect China to continue keeping a low profile as the US insists on shooting itself in the foot.

What about the 2009 Predictions?

How did my previous set of 2009 predictions go?

1) Correct about the American H2 2009 stimulus-boosted recovery, though too pessimistic about its strength. That said, doesn’t change the fact it’s unsustainable, even in the medium-term.

2) Correct about the end of deflation, resumption of credit flows, and rebounding commodities.

3) I was completely, 100%, totally right on my oil price predictions.

However, an incipient global recovery in the second half will result in a rebound in oil prices from around 40-50$ per barrel in the first half, to 60-80$ in the second.

Not so much on food, admittedly.

4) Right on Germany’s and Japan’s steep GDP declines, not so much on China’s anemic growth – massive credit expansion and fiscal stimulus in the People’s Republic has resulted in the building of ever more unneeded capacity, resulting in a growth rate of around 8% instead of the predicted 2%. Correct on rising protectionism, and the economic collapses in the Baltics and Ukraine.

5) The “flight to safety” ended, and as predicted the US $ weakened relative to the Euro (1 Euro = 1.41$ on Jan 1st 2009, = 1.46$ on Jan 1st 2010, now with an upward rather than a downward trend). The pattern for the yen has been similar. The latest CBO figures suggest that the US budget deficit will be 9.9% of GDP for 2009, within my predicted band of 8-13%.

6) Very wrong on Russia’s GDP growth – instead of 1%, it will decline by around 7-9%. I misunderestimated the depth of its consumers’ and companies’ reliance on credit, and the extent of its credit crunch. Nonetheless, the core of what I predicted, such as the declining influence of the oligarchs and the lack of any significant fall in real wellbeing, has been correct. There have been no serious political challenges to Putvedev, as Russia’s ruling tandem retain extremely high approval ratings. And as predicted, the RTS has recovered to above 1000 (to around 1500 in fact).

7) Wrong that Yushenko and Saakashvili would not survive 2009 as political leaders. Well, Yushenko will almost certainly (95%+) be kicked out of the Presidency in the coming Ukrainian elections, probably in favor of Yanukovych. Saakashvili, with his deepening megalomania, has managed to hang on, despite spirited defiance from the opposition and an attempted military coup. If he survived 2009, most likely he will survive for a few years more.

8) My optimistic forecasts on Russia’s demography, which bucked the conventional “wisdom”, have been fully validated, and in the case of the death rate even substantially superseded.

In Russia, the birth rate will be between 11.5 and 12.5 / 1000, the death rate at 14.5 and 15.5 / 1000 and net migration will fall substantially to 0.5 / 1000. For comparison, the figures for the first ten months of 2008 were 12.1, 14.8 and 1.7 respectively.

According to Rosstat figures for Jan-Nov 2009, the birth rate was 12.4, the death rate was 14.1, and the net migration rate actually rose to 1.8 / 1000 during Jan-Oct.

9) No major new wars.

10) Slightly wrong on supercomputer performance, totally correct on oil production fall. Contrary to prediction, no major AGW physical “event”.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Smil, Vaclav – Global Catastrophes and Trends (2008)
Category: futurism, climate change, geopolitics, catastrophes; Rating: 5/5
Summary: Google Books

Vaclav Smil, an energy theorist and language connoisseur, brings his talents to bear on this idiosyncratic, incisive and balanced book on the global future. From the outset, he outlines his skepticism in universal theories of history and attempts at quantifying current trends to make point forecasts (e.g. predictions that nuclear power would make energy too cheap to meter in the halcyon days of the industry). Instead, he emphasizes the role played by the sheer complexity of human systems and their discontinuities – for instance, who could have imagined that a generation after the death of Mao, China would be the workshop of the world helping underwrite US military dominance?

Having established “How (Not) to Look Ahead”, Smil introduces his method – analyzing key variables categorized by a) unpredictable events – “catastrophes”, b) powerful trends (the effects of globalization, global demography, the energy transition), and c) the shifting balance of power between the Great Power (the marginalization of Japan, an unstable Islam, Russia’s partial resurgence, the uncertain rise of China and an increasingly faltering United States). It is one a method I highly favor and I agree with most of the arguments he makes in his book, albeit there are a few major exceptions.

Fatal Discontinuities

First, he classifies the catastrophes or “fatal discontinuities” into: 1) known catastrophic risks (asteroid strikes, earthquakes, super-eruptions), 2) plausible catastrophic risks (nuclear war, pandemic) and 3) speculative risks (“grey goo” or takeover by machines). [There is another classification of existential risks by Nick Bostrom].

The likelihood of world-changing natural disasters occurring is vanishingly small. Though floods and earthquakes killing up to 100,000′s of people happen about once or twice per decade, their global effects are very limited. An asteroid capable of terminating industrial civilization will need to have a diameter of about 2km+ (by darkening the sky with micro-particles and destroying the ozone layer), but the chances of such asteroids striking the Earth decrease exponentially with greater size. In any case the majority of large Near-Earth Objects have already been identified and identified as safe. Predicting super-eruptions is much harder, though again based on the geological record the chances of an unprecedented catastrophe are minimal – which would have to be on the scale of the Toba, Sumatra event 72,000 years ago, which ejected 2,000km3 of ejecta and reduced the world human population to 10,000. An example of a modern threat is a super-eruption of Yellowstone, which is about due though we’d have to be extremely unlucky to have it blow up during our lifetimes. Another possibility are submarine landslides forming tsunamis, such as at La Palma, the Canary Islands, where a 500km3 slide would create a mega-tsunami with repeated walls of water up to 25m striking Florida.

The second category includes pandemics and mega-wars. During the last generation, the onslaught against disease stalled and went into partial reverse, with a growing list of contagious diseases (the most significant of which is HIV / AIDS), failures in eradication (e.g. polio) and antibiotic resistance (multi-drug resistant TB – which now finished off many AIDS sufferers). There also remains the specter of an influenza pandemi c, which will be deeply disruptive and potentially highly virulent. Though a repeat of 1957 or 1968, or the current swine flu for that matter, aren’t going to have much effect, the consequences of the return of a Spanish Flu-like pandemic (1918) will be devastating. Arising out of the natural disease reservoir of South China, the flu can spread more rapidly (air transport, globalization, greater urban populations) and a mortality profile hard on the younger cohorts (15-30 years) will have devastating effects on aging European societies. Globalization will shut down as countries close borders, with highly disruptive effects on national economies. However, we are much better prepared for handling a pandemic today than in 1918 due to better nutrition and technological advances such as mechanical respirators, antibiotics for treating secondary infections, antivirals, and math models for optimizing quarantines and vaccinations.

Just as another pandemic is almost certain to happen, so there will continue to be violent conflict, terrorism, genocides, perhaps even another large-scale democide or mega-war with tens to hundreds of millions of casualties – despite that the incidence of violent conflict fell by 40% since the early 1990′s and the agreed reductions in the US and Russian nuclear arsenals. Some may be transformational and fundamentally change the course of world history (Smil identifies the Taiping Rebellion, the American Civil War, WW1 and WW2 as transformational). The risk remains of an accidental nuclear war between the US and Russia killings hundreds of millions, or the rise of an revisionist, expansionist power unleashing WW3. The potential deaths accruing to war are several OM’s (orders of magnitude) higher than for all natural catastrophes.

Smil points out that terrorism is 1) nothing new, having gone through four “waves” – a) Russia’s narodnaya volya assassinations, b) decolonization, c) PLO, IRA, Basque ETA, and Western left-wing groups favoring bombings and aircraft hijackings, and d) modern Islamic terrorism beginning with the Iranian Revolution / Hezbollah, later extending to the Palestinian intifada and al-Qaeda, at the symbolic start of a new century (1400) by the Islamic calendar, 2) has rarely been effective with a few exceptions like 9/11 (and even there its value lay mostly in symbolism – [the spirit of terrorism], disproportionate public fear and official overreaction), for the chances of dying from terrorism are extremely low. Since producing mass casualties is extremely difficult, terrorists have to settle for “mass disruption” instead of “mass destruction”.

His final category of fatal discontinuity are “imaginable surprises”, such as annihilation of the Earth by exotic particle experiments, unforeseen climatic shifts (e.g. a drastic cooling), grey goo eating the biosphere within a few days, etc. He correctly doesn’t put much stock into these sci-fi scenarios.

Unfolding Trends

Smil makes some general observations about trend analysis. First, they tend to follow a pattern of incremental engineering process (cheaper, more efficient) and gradual diffusion, yet are sometimes marked by profound discontinuities, e.g. fertility transitions, the continuing failure to control nuclear fusion. Surprises can occur because a) long-term trends aren’t recognized in time, such as the Soviet Union’s post-1965 stagnation, b) can’t predict which trends will become embedded in society, and which ones will veer off course, c) their unknowable effects on human society (e.g. will the oil peak be moderated by a smooth transition to gas or renewables, or does it herald the end of industrial civilization?). With that said, Smil now focuses on three things: 1) the coming energy transition, 2) Great Power dynamics and 3) the future of globalization.

Smil now moves into his forte – global energy systems. The first point he makes is that the basis of today’s industrial system was formed a long time ago and that improvements since then paled in significance. “The most important concatenation of these fundamental advances took place between 1867 and 1914″, when engineers realized electricity generation, steam and water turbines, internal combustion engines, inexpensive steel, aluminium, explosives, synthetic fertilizers, electronic components, thus laying the “technical foundations of the twentieth century” [much like men like Marx, Bismarck and Garibaldi laid its ideological foundations]. A second Golden Age occurred in the 1930′s and 1940′s, which saw “the introduction of gas turbines, nuclear fission, electronic computing, semiconductors, key plastics, insecticides and herbicides”.

This technological base requires huge, uninterrupted supplies of energy for its existence. The sources of energy remain constant for long periods due to the difficulty of substitution, which involves discarding old infrastructures and building anew. As a share of world total primary energy supply (TPES), coal went from 95% in 1900 (excluding phytomass), to just 28% in 2005, while crude oil rose from 4% in 1900 to 27% in 1950 and 46% in 1975, but dropped to 36% by 2005. Natural gas expanded significantly since the mid-century, reaching 24% of global TPES by 2005. All together, fossil fuels supplied 88% of global TPES in 2005, compared to 93% in 1975. Despite all the talk about environmentalism and energy security, there has been no walk; ours is still a predominantly fossil-fuel based civilization.

In the future, Smil foresees that a) there will be no oil peak, b) coal is unlimited except by concerns over climate change and c) gas will rise in importance because of its relatively low carbon per unit of energy ratio and advances in LNG technology.

Though I am in qualified agreement with b) and c), Smil ridiculing of the oil peakists in a) is singularly unconvincing. He claims the Hubbert model is “simplistic” in that it is “based on rigidly predetermined reserves” and ignores “innovative advances or price shifts”. The first point is flat out wrong. It applies to Hubbert’s first model, but in his later work he devised a method that did away with the need for guesstimates of URR (ultimately recoverable reserves) – and which gives pretty much the same results, indicating that the effects of technology and higher prices are limited. Taking the case of the US, despite the discovery of oil off Alaska and the Gulf, despite there having been more exploration in the country than in the rest of the world combined, despite the periods of high prices during 1973-1986 and 2002-2008, despite its light regulatory environment and access to cheap credit – American oil production has declined relentlessly since the early 1970′s. Quite simply, the evidence indicates that the power of depletion will eventually defeat ever greater and smarter extraction attempts. Read one of these overviews from 2007 or 2009 for a more indepth explanation of peak oil.

However, I agree with Smil that the transition to other non-fossil fuel sources will be a drawn out process, considering that most of the “prime movers” in our society are oil-based (the steam turbines that generate 70% of global electricity output, the gasoline-fueled internal combustion engine, the diesel engine, the gas turbine, and the induction electric motor). [I would note that these difficulties are going to be aggravated by peak oil].

Addition difficulties include a) the scale of the shift, b) lower energy density of replacement fuels, c) substantially lower power density of renewable energy extraction, d) intermittence of renewable flows and e) uneven distribution of renewable resource extraction.

1) Global civilization uses fossil energy at a rate of 12 TW, a twenty-fold increase from the late 1890′s (total world TPES is around 13 TW). Only solar power has a significantly larger than current TPES is solar flux at 122 PW, which is 4 OM greater; otherwise, wind (<10 TW), ocean waves (<5 TW), and today energy / geothermal (<1 TW). Though Earth’s net primary productivity (NPP) / terrestrial photosynthesis yields solid fuels (biomass) at the range of 55-60 TW, exploiting it will further degrade vital ecosystemic services, and besides humanity already appropriates 30-40% of global NPP as food, feed, fiber and fuel (with wood and crop residue accounting for 10% of current TPES).

2) Coal and oil are far more energy-dense than wood and in general biomass cultivation will take up 4-5 OM more space than conventional oil / gas infrastructure. “In order to energize the existing residential, industrial and transportation infrastructures inherited from the fossil-fueled era, a solar-based society would have to concentrate diffuse flows to bridge power density gaps of 2-3 OM”. As an example, even using Brazilian ethanol from sugar cane to replace all current gasoline, diesel and kerosene used in transport would require the subjugation of 1/3 of the world’s cultivated lands – or all agricultural land in the tropics. Corn ethanol has half the power density of sugar cane ethanol. Large-scale adoption will have catastrophic impacts on food self-sufficiency.

[source]

3) Renewables don’t satisfy base load power requirements of an industrial society. Load factors are 75%+ for coal-powered power stations or 90%+ for nuclear power stations, whereas wind power is just 20-25%.

4) Renewable flows are also unevenly distributed, just like 60%+ of easy hydrocarbons are locked up in the Persian Gulf Zagros Basin. Jakarta has as little sun as Edmonton (shared with equatorial zone). Many areas are either too still or too windy, i.e. will be heavily damaged by hurricanes.

5) Costs won’t necessarily decline. To the contrary, protovoltaic silicon prices have more doubled; prices of steel, aluminium, plastics, etc, for wind turbines also drastically increased due to the underlying rise in oil prices.

Smil reiterates some pretty standard arguments on nuclear and hydrogen. The nuclear industry expanded quickly until the 1970′s, but stalled at that point because it previously hadn’t included costs like state-subsidized nuclear R&D, decommissioning costs and waste disposal (and later negative PR like Chernobyl). Hydrogen is not a realistic option barring the mass spread of cheap solar power. Concludes that this energy transition will be fundamentally different from previous one, which was driven by declining resource availability (deforestation), higher quality of fossil fuels (energy density, easier storage, more flexibility) and lower cost of coal and hydrocarbons. According to Smil, none of these factors apply to the fossil economy – though he expresses some concern over its contribution to climate change.

Having outlined his idea of the main trend of the next fifty years, Smil turns to a standard analysis of the shifting balance of international power between the US, China, Japan, Russia, Islam, and Europe. He cautions against subscribing to the conventional wisdom, pointing out that a) the Soviet collapse and Japan’s post-1980′s stagnation were largely unforeseen, b) the tendency of the US to surprise, going from decline / deindustrialization in the 1980′s to a vigorous “new economy” in the 1990′s before becoming fiscally and militarily overstretched in the 2000′s.

Geopolitical Trends

Smil does not believe Europe holds out much promise, unlike some delusional commentators. It is in long-term, centennial economic decline relative to the rest of the world and its economies are mired in inefficiency, unemployment and bureaucracy, and are less technologically dynamic than Japan or the US. Both Britain and Spain face separatist challenges and are economic basketcases. France is over-regulated dirigisme and has problems with integrating its 10% Muslim population (remember the burning banlieues?), but is at least demographically healthy – unlike Italy and Germany, which are rapidly aging and about to depopulate rapidly with very negative economic effects (they might be in a fertility trap, in which ever smaller generations need to pay higher tax burdens which limits their reproductive freedom). In particular, Italy is sinking back into corruption and Mafia influence, its artisanal manufacturing is being destroyed by Chinese competition and there remain huge gaps between the Nord and Mezzogiorno. He reiterates Mark Steyn’s Eurabia theory arguments (crudely summarized as lots of under-reported young, fertility, fanatical Muslims simmering in ghettoes), which has a number of holes in it. Finally, the EU structure itself is disconnected from national electorates and reality in general, and has no inspiring sense of mission; further expansion will just weaken it further. [Agreed with most things - I believe the EU by 2020 will be a much less significant institution and European nations will be tottering, preoccupied with trying to solve their own internal problems].

After a period of euphoric hubris in the 1980′s, when it seemed Japan would be number one, the country crashed into a long, ongoing period of stagnation marked by crippling deflation, the fall of the Nikkei from a peak at 39,000 in December 1989 to below 10,000, and the appearance of the NEET generation (not in employment, education or training). Though it remains rich, well-off and technologically advanced, there is a moral anomie as long-term jobs vanished and fertility plunged to around 1.2 children per woman. Smil is pessimistic on Japan due to a) its ingrained conservatism [though would the recent electoral win by the Democratic Party of Japan later be regarded in the same vein as the Meiji reforms?], b) the continued hostility of neighbors reinforces its security dependence on the US, especially to counter challenges from China and North Korea, and c) the start of depopulation in 2005, retirement wave in 2010′s as the 1950′s baby boomers retire, and the prospective massive aging of the population (medium age 50 by 2025, more 80+ than 0-14 year olds by 2050). Japanese culture does not accept immigrants and it will not be saved by robots.

The author sees Islam being in a fractured state (secular / spiritual, Sunni / Shia / others, etc) in a difficult relationship with modernity, fighting the same internal civil war that charactered early modern Christianity. His short exegesis of the Koran finds that there is support for many interpretations of just how restrictive Islam has to be, and this forms an ideological battleground between the extremists and moderates. Signs of this backwardness include the Iranian fatwa against Rushdie, the prevalence of bizarre conspiracy theories on the Arab street, and Islamic countries accounting for just 2% of the world’s scientific publications. [To this we can add the Mohammed cartoons controversy and the 2003 UN Arab development report that produced the astonishing statistic that more books are translated into Spanish per year than have been translated into Arabic in all history]. There are several inequalities within the ummah (e.g. oil-rich Saudi Arabia and Pakistan) and internal instability, in part cased by the demographic explosion [usually in water-stressed environments, I'd add] which results in youth bulges – young men with no job prospects who are susceptible to joining violent groupings. Even as the region simmers, the outside world will be forced to take an interest due to its stranglehold over the world’s oil supplies (the five Persian Gulf nations produced about 1/3 of the world’s oil in 2005, and this figure is projected to rise substantially).

It is evident he knows his stuff when talking about Russia, or at least is well-read on it. Contrary to most analysts, he believes it is resurgent in a real way, even though its longer-term prospects are uncertain. He lists its strengths as being an energy superpower (especially with respect to gas) with a big intellectual capacity and a formidable military that is being rearmed with newer-generation weapons. However, he foresees significant challenges in the form of its cyclical, hydrocarbons-based economy [as confirmed by the 2008 crisis, though the deeper problem is dependence on foreign credit], its unstable democracy, the Islamist insurgence in the Caucasus, and above all its negative demographic trends [I've written a lot about this, just search the site].

China is gradually returning to its old position of global economic predominance, its growth helped by Deng Xiaoping’s economic liberalization, FDI, the one-child policy, a cheap, disciplined and relatively skilled labor force, mass urbanization and migration to the coasts, and a certain degree of innovation (state-funded research facilities, as well as flouting of IP and large-scale industrial espionage). It is “a Communist government guaranteeing a docile work force that labors without rights and often in military camp conditions in Western-financed factories so that multi-national companies can expand their profits, increase Western trade deficits, and shrink non-Asian manufacturing”. It is economically mercantile, seeking resources around the world and if current growth trends continue, China could match US military spending by 2020. However, there are substantial problems with a) the population (severe 118:100 male-female imbalance, rapid aging and undeveloped pension system), b) the economy (huge rural-urban inequality, high taxes on peasantry and violent expropriations by business-state symbiosis), c) the environment (deforestation and soil erosion from Maoist era, little arable land per capita that is shrinking from salinization, desertification and urban expansion, needs more food but irrigation is constrained by water shortages and crops are already very intensively fertilized, falling water tables and toxic rivers, very poor air quality and now leading CO2 emitter), and d) cultural mediocrity (not as much soft power as the US).

India is nowhere near as powerful as China, and the same factors limiting the latter militate against India. It’s GDP is twice smaller; though its Gini index of income inequality is better (35 versus 45), this is a product of its underdevelopment, besides its deep social stratification / de facto caste system persists; malnutrition, immunization rates and adult illiteracy are all much worse in India; China has 3x the electricity-generating capacity and 17x the container port capacity. Though democratic, it is likewise deeply corrupt, bureaucratic and ecologically degraded. It faces a nuclear-armed Pakistan and the prospect of tens of millions of Bangladeshi refugees spilling over once their country sinks under the rising seas.

Smil is an all-round pessimist, believing the United States may go the way of the Roman Empire. According to him, its woes include increasing economic and foreign policy challenges [see Shifting Winds], uncontrolled Hispanic immigration that threatens its long-term territorial integrity and Protestant “work ethic” values, and perennial budget deficits (in particular the structural nature of the current account deficit, formed due to its reliance on oil imports to sustain the suburban arrangements and the collapse of its domestic industrial base – mundane manufacturing, the auto industry, and now even aerospace and the food industry. It has a poor education system (see results of PISA international standardized tests), retiring baby boomers about to cash in on state obligations and their savings, obesity and a general cultural decline. However, the possibility of open discussion of these failings is a persistent American strength.

He then proceeds to make the argument that “US leadership is in its twilight phase” and that the “coming transition will be unprecedented” due to the global nature of its hegemony. He plausibly affirms that no nation is strong enough to replace the US as the sole superpower, meaning that there will probably be more chaos, instability and wars. Smil predicts that in sum the world will regret its passing.

Smil concludes with an analysis of globalization, making the points that it is an ongoing historical process originating in the 16th C and blossoming from the 1950′s with the arrival of the tanker revolution, now blossoming in the intricate production chains and JIT system exemplified by Wal-Mart’s relation with China. There is a stabilizing force, interdependence, which expands the economic scope of every globalized nation far beyond the limited autarkies of history, but at the same time makes them ever more vulnerable to disruption of these links; the destabilizing force is the growing inequality between nations (e.g. failed states), though a caveat is that when calculated by population there is an improvement mainly thanks to China (but nullified when taking into account the intra-national growth of inequality – which increase since 1970 in all the major countries like the US [35 to 47], Japan [25 to 37], China [25 to 50], Russia [25 to 40]. There is now no global “middle class”, according to Smil, which makes the system unstable. [Here I disagree - East-Central Europe, Latin America and even China fit the bill here].

Environmental Change & Conclusion

This next long section is a detailed analysis of the likely course and effects of global warming. Most of the stuff is pretty basic and I’ve already summarized in my reviews of Six Degrees (Mark Lynas) and The Last Generation (Fred Pearce).

His most interesting discussions are of human influence of the nitrogen cycle (which they’ve affected to a far greater degree than the carbon cycle) and the spread of antibiotic resistance. “Losses of nitrogen from synthetic fertilizers and manures, nitrogen added through biofixation by leguminous crops and nitrogen oxides released from combustion of fossil fuels are now adding about as much reactive nitrogen (c.159 Mt N/year) to the biosphere as natural biofixation and lighting does” (in contrast human interference in carbon cycle through land use changes and fossil fuel burning amounts to 10% of annual photosynthetic fixation of the element and sulfur is equal to 1/3. This leads to mass leaching, eutrophication, growth of algae and phytoplankton, and the subsequent decomposition deoxygenates water and kills bottom-dwelling aquatic species. The worst hypoxic zones are the Gulf of Mexico, the lagoon of the Great Barrier Reef, the Baltic Sea, the Black Sea, the Mediterranean, and the North Sea. Nitrogen oxides formed during combustion contribute to photochemical smog in urban areas around the world and acid rain. It’s use will increase as Asia demands higher crop yields and Africa needs to stop its increasing nutrient mining.

The other worrying trend he discusses at length is the rise of antibiotic resistance on the part of pathogens, as peniccilin and its descendants become increasingly less effective. This is inevitable, but is much facilitated by widespread self-medication, over-prescription and poor sanitation in hospitals. If these negative trends continue, influenza deaths will sky-rocket due to the inability to treat bacterial pneumonia, and treating tuberculosis and typhoid fever will become very difficult. A nightmare scenario can arise if this is accompanied by increasing malnutrition and AIDS, which make people far more susceptible to these secondary diseases.

In the last chapter, “Dealing with Risk and Uncertainty”, Smil sums up and embellishes his ideas, asserts the necessity of properly quantifying risks, cautions on the fallacies of linear extrapolation of current trends, and notes that even during a collapse there are silver linings, using the construction of the basilica of Santa Sabina in Rome (422-483) during the waning years of the Roman Empire (ended in 476) as an example.

In conclusion, this is a very good and entertaining book. There are some East European-style grammatical mistakes and perhaps a bit too much personal boasting, but otherwise it provides a realistic appraisal of the real potential catastrophes facing humanity (i.e. big wars and pandemics, not terrorism, earthquakes or “grey goo”) and the dominant trends of the next fifty years (geopolitical flux / non-polarity, climate change & pollution, the energy transition). He approaches the subject very rigorously-scientifically so one gets a good perspective of possible futures, my only major disagreements with him being on his disbelief in the oil peak theory and paying too little attention to the social and geopolitical ramifications of climate change (he doesn’t really consider the catastrophic possibilities, sticking to the middle-of-the-road consensual IPCC forecasts).

(Republished from Sublime Oblivion by permission of author or representative)
 
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The Next 100 Years by George Friedman, published in 2010. Rating: 3/5

George Friedman at Stratfor is one of my favorite analysts on world geopolitics. This is because he tries to look at the world as it is, without the pointless moralizing, neoliberal ideologizing and end-of-history triumphalism that clouds too much American geopolitical thinking. Hence whenever I come across new and substantial material from him, although I might not agree with some (or most) of what he says, I nonetheless adjust my beliefs (in a good Bayesian fashion).

And lo and behold!, he comes out with a new book – The Next 100 Years. Funnily enough, it is about the next 100 years, or more specifically, the interplay between technological and demographic trends and geopolitical dynamics that will shape the twenty-first century.

I was originally going to copy out its entire first chapter, Overture (which is available online) and just comment on it. Unfortunately this makes it far too long and I had problems publishing it. So I’ll headline and summarize Friedman’s main points instead and leave my original commentary largely unchanged.

1. The future is unpredictable: “Be practical, expect the impossible”.

Friedman starts off by summarizing the history of the last century in twenty year chunks. Thus we got from the globalized idyll of 1900, through the chaos of 1940, the gathering storm clouds of 1940, the American dominance in 1960, the rising Soviet challenge in 1980 and culminating in the renewed globalized idyll of 2000 – only to be again disrupted by 9/11.

Completely agreed – most commentary is about the short-term, or at best linear extrapolations of short-term things. Good futurists think in terms of differentials, exponents and tipping points.

2. However, some trends are dominant and can be foreseen.

It was possible to forecast European wars on the basis that a newly united and powerful Germany was in an insecure position in between France and Russia; it would have been harder to predict how devastating these wars would have and that they’d have led to the dissolution of the European empires.

Interestingly, one of the best seers in this respect was Friedrich Engels. As early as 1887, he envisaged “a world war of never before seen extension and intensity…eight to ten million soldiers will slaughter each other…the devastations of the Thirty Years War condensed into three or four years and spread all over the continent; famines, epidemics, general barbarization of armies and masses…collapse of the old states and their traditional wisdom in such a way that the crowns roll in the gutter by the dozens and there will be nobody to pick them up…general exhaustion and the creation of circumstances for the final victory of the working class”. He even got the casualties and timeline correct! Other great prophets were the Warsaw banker Ivan Bloch, Moltke the Elder and Colmar von der Goltz.

Friedman sees the United States as the dominant pivot of the twenty-first century due to its unrivaled economic, military and political power. This was due to its overwhelming naval power and strategic position that allow it to control both Atlantic and Pacific trade. Because of its wealth and the vast resources needed to build a comparable blue-water fleet, it’s continued dominance is assured.

Although ostensibly overwhelming, American naval dominance is going to be challenged by new developments in military technology such as supercavitating torpedoes, UAV’s and advanced cruise missiles. As its own war games from 2002 demonstrated, the age of the aircraft carrier battle-group is drawing to an end even against relatively unsophisticated foes.

The inherent power of the United States coupled with its geographic position makes the United States the pivotal actor of the twenty- first century. That certainly doesn’t make it loved. On the contrary, its power makes it feared. The history of the twenty- first century, therefore, particularly the first half, will revolve around two opposing struggles. One will be secondary powers forming coalitions to try to contain and control the United States. The second will be the United States acting preemptively to prevent an effective coalition from forming.

As Friedman points out in the book, “declinism” has been a recurrent feature of American history, mostly recently in the 1970′s and 1980′s when stagflation, oil shocks, the growing power of the Soviet Union, deindustrialization and soaring crime rates and perceived social and moral collapse led to feelings of despair over the future of the American empire.

On the other hand this does not mean that there won’t be potential setbacks. After abating somewhat in the 1990′s, the above trends returned in force during the 2000′s. Meanwhile, the national power of China and Russia have soared and are projected to continue doing so, at least in the medium-term. Nowadays the US can only afford plentiful butter and guns because of the flood of cheap credit it gets from abroad (due to the now disappearing “American alpha” and the status of the $ as the global currency reserve). It’s industry has been hallowed out and now faces the real risk of a debt-and-currency crisis within the next few years. Should that come to pass the strain of maintaining a superlative global military presence will become economically and politically unbearable.

3. The US will do its best to prevent the emergence of a Eurasian hegemon or hostile coalition is spot on.

If we view the beginning of the twenty- first century as the dawn of the American Age (superseding the European Age), we see that it began with a group of Muslims seeking to re- create the Caliphate—the great Islamic empire that once ran from the Atlantic to the Pacific. Inevitably, they had to strike at the United States in an attempt to draw the world’s primary power into war, trying to demonstrate its weakness in order to trigger an Islamic uprising. The United States responded by invading the Islamic world. But its goal wasn’t victory. It wasn’t even clear what victory would mean. Its goal was simply to disrupt the Islamic world and set it against itself, so that an Islamic empire could not emerge.

The United States doesn’t need to win wars. It needs to simply disrupt things so the other side can’t build up sufficient strength to challenge it. On one level, the twenty- first century will see a series of confrontations involving lesser powers trying to build coalitions to control American behavior and the United States’ mounting military operations to disrupt them. The twenty- first century will see even more war than the twentieth century, but the wars will be much less catastrophic, because of both technological changes and the nature of the geopolitical challenge.

True. It has a superb geographical location that is practically invulnerable, economically optimal and is still underpopulated (in comparison with Asia or Europe, though not from an ecological perspective). Therefore it will certainly remain one of the leading Great Powers, unlike Britain during the last century.

4. Russia will reconstruct its empire in the 2010′s, but will collapse irrevocably in the 2020′s.

As we’ve seen, the changes that lead to the next era are always shockingly unexpected, and the first twenty years of this new century will be no exception. The U.S.–Islamist war is already ending and the next conflict is in sight. Russia is re- creating its old sphere of influence, and that sphere of influence will inevitably challenge the United States. The Russians will be moving westward on the great northern European plain. As Russia reconstructs its power, it will encounter the U.S.- dominated NATO in the three Baltic countries—Estonia, Latvia, and Lithuania—as well as in Poland. There will be other points of friction in the early twenty- first century, but this new cold war will supply the flash points after the U.S.–Islamist war dies down.

The Russians can’t avoid trying to reassert power, and the United States can’t avoid trying to resist. But in the end Russia can’t win. Its deep internal problems, massively declining population, and poor infrastructure ultimately make Russia’s long- term survival prospects bleak. And the second cold war, less frightening and much less global than the first, will end as the first did, with the collapse of Russia.

Friedman has a lot of (fairly convincing) theories on how Russia’s geostrategic position influences it to “anchor” its position in Central Asia, the Caucasus and Ukraine, and expand as far west as possible on the North European Plain (see The Geopolitics of Russia: Permanent Struggle). However, this “imperial overstretch” alarms the European and oceanic powers, who interpret these moves as aggressive and threatening to their own national interests. They seek to contain Russia, which must bear occupation costs and devote more resources to maintaining a military balance. Eventually a breaking point is reached and centrifugal forces tear the country apart in periodic “times of troubles”, in which Russia in encircled and preyed upon by predatory Powers.

Viewing things from this perspective, a lot of things start to make sense, from the conflict in Georgia to its distracting the US by complicating its position in the Middle East and Latin America with arms sales, pursing friendly relations with regimes unfriendly to Washington, pushing for the creation of a common Eurasian (read: non American) security space, etc. He terms this the Medvedev Doctrine.

According to Friedman, Russia faces long-term collapse due to “deep internal problems, massively declining population, and poor infrastructure”. I would dispute both the severity and validity of this. “Deep internal problems” is simply too ambiguous. Population decline is unlikely to be massive; at worst, it will fall at a slow pace. As for infrastructure, even the Economist collates projections that Russia will invest heavily in infrastructure, accounting for some 10% of infrastructure spending among emerging markets from 2008 to 2017 (this is especially impressive when considering that unlike other heavyweights like China or India, Russia already has most of the physical infrastructure of a developed economy in place albeit it is dilapidated; and that it is a leader in per capita spending).

But even if demographic and development trends do not work out as I expect above, this would not necessarily lead to its collapse. For that to happen, a whole lot of other things must come into play simultaneously and for a prolonged period – ethnic discontent, violent insurrections, loss of national faith, economic sclerosis, unbearable social and military burdens, collapse in energy prices, etc.

No real trends indicate that this will be the case, however. The reality of peak oil will mean energy superpowers like Russia will be courted by all major industrial powers, at least until (and if) they wean themselves off it – the plausibility of which I very much doubt given the fluidity and “net energy” of oil and gas. It also has strong positions in nuclear technology and space technologies, and is devoting huge resources and effort into developing hi-tech clusters in areas like nanotechnology and microelectronics. What I expect to see is countries like China and Germany getting guaranteed energy supplies in return for transfers of machinery and know-how, which will lead to Russia’s rapid convergence to developed country income levels around about 2020. Meanwhile, global warming will be opening up new hydrocarbons deposits, shipping routes and fertile land in Siberia and the Arctic. I’ve been writing about this since quite a while back.

Re-ethnic discontent, firstly, it is unlikely, though not impossible, that the resurrected Russian empire will be of the old school variety (i.e. completely integrated politically). What both Friedman and I think more likely is that institutional ties like Eurasec (economic) and the CSTO (military) will become much more visible and all-encompassing, perhaps culminating in some kind of structure, let’s call it the Eurasian Union, that will lie somewhere in between the EU and the US in political integration. The member states will have a great deal of latitude in dealing with domestic issues, but their military-industrial, defense and foreign policy will be tightly linked and co-ordinated.

Secondly, even as Russia’s softer neo-imperial intentions become clearer this does not seem to have any effects on the popularity of its leaders in the countries that matter (i.e. the Near Abroad). Far more Ukrainians approve of Putin than of their own President (who languishes in the single digits) or any other Ukrainian leader. Same goes for Belarus, and the Central Asians too.

Some kind of confederation between Belarus, Kazakhstan, Russia and Ukraine enjoys the support of silent majorities in all four countries. If that were to happen, the population of the dominant Eurasian power will increase from 142mn to about 215mn and the combined industrial product will increase by at least 50%, due to both greater quantity, greater economies of scale and the restoration of severed supply chains from the Soviet era. The military-industrial complex will especially benefit.

Central Asia is an important geostrategic focus (part of the Heartland, in Mackinder’s geopolitics), a promising energy source and demographic reservoir. Although their immigration north and west will exacerbate tensions with Slavic peoples, this should not be critical since they are generally appreciative of Russian culture and are not prone to the radical Islamism prevalent further south or even in Caucasian Russian republics like Chechnya. Their inclusion would complete the basis for a superpower.

The major obstacle would be the Balts, Georgians and Poles. Extending the Russian empire to them would be costly, unproductive and undemocratic (since unlike the central Asians and Orthodox Slavic states, they do not want to partake of this enterprise). Thus the appropriate policy regarding them would be to insist on mutual cooperation and neutrality. Russia has levers against them – ethnic Russians in the Baltics, the pragmatism of ordinary Georgians towards Russia and gas and oil supplies to Poland. They are all of ultimately marginal economic significance, and are acceptable as neutral buffers against Western encroachment.

Thirdly, violent revolt is also becoming ever more unlikely. The economy will probably be expanding rapidly and populations throughout this empire will certainly be aging – hardly recipes for bloody wars of national independence. In the cases of the Slavic states or even Central Asia, it is next to inconceivable. Even the Caucasus will quieten down. One of the unremarked things about the 1990′s and the 2000′s is the region’s demographic transition to sub-replacement fertility levels (2.1 children per woman), including by this time even such places like Ingushetia and Daghestan. The only major exception is Chechnya, which today has a fertility rate of 3.1 children per woman. I think the fact that it was also the only region to flare up into open revolt was not coincidental. As the eXile‘s War Nerd points out, the only countries willing to fight bloody guerilla battles today are poor and have lots of children.

I could go on and on, but in summary I think Friedman’s vision of a new Russian empire is grounded in reality – he predicts that Russia will regain most of its old Soviet frontiers within the next decade, and will by the mid-2010′s be extending its influence back into the Baltics, the Balkans and Visegrad. However, I’m not so certain of his prognostications of its end – which is based on far less evidence.

Which is not to say its not going to happen. One possible scenario: growth of internal corruption and institutional dysfunction; slowdown or cessation of growth due to economic convergence being achieved, and an eruption of spillovers from bad loans as happened in Japan in the 1990′s which paralyze the economy; unchecked growth in entitlements; social and political strains; reduced European reliance on Russian natural gas due to new supplies from North Africa and the Middle East and effective energy conservation; and renewed pursuit of Prometheism on the part of the US, Polish proxies and perhaps some West European allies; and perhaps a temporary commodity crash.

Friedman predicts in his book that Russia and the US will be in a full-fledged New Cold War by the mid-2010′s; perhaps the onset of so many difficulties, simultaneously, will open up a “window of opportunity” for the US to break up the Russian empire to eliminate a strategic competitor and open up access to its natural resources. Far-fetched? Yes. But possible. After all, every great Atlantic / sea power tries to form alliances and undermine powerful Eurasian / land empires. Possible, because history hasn’t ended and won’t end for a long time if ever.

5. China will fragment in the 2010′s due to internal pressures and foreigners will recreate spheres of influence in it.

There are many who predict that China is the next challenger to the United States, not Russia. I don’t agree with that view for three reasons. First, when you look at a map of China closely, you see that it is really a very isolated country physically. With Siberia in the north, the Himalayas and jungles to the south, and most of China’s population in the eastern part of the country, the Chinese aren’t going to easily expand. Second, China has not been a major naval power for centuries, and building a navy requires a long time not only to build ships but to create well-trained and experienced sailors.

I find the emphasis on physical land barriers to be quaint in an era of railways, air transport and massive merchant marines. China already has the industrial capacity and (through economic acquisitions and espionage) the technological capability to rapidly create a powerful blue-water fleet. Although the German Empire had no naval tradition to speak of, the Kaiserliche Marine went from being a small coastal defense to the world’s second largest fleet with better ships and better training than the Royal Navy, all just in the twenty years prior to the First World War.

Third, there is a deeper reason for not worrying about China. China is inherently unstable. Whenever it opens its borders to the outside world, the coastal region becomes prosperous, but the vast majority of Chinese in the interior remain impoverished. This leads to tension, conflict, and instability. It also leads to economic decisions made for political reasons, resulting in inefficiency and corruption. This is not the first time that China has opened itself to foreign trade, and it will not be the last time that it becomes unstable as a result. Nor will it be the last time that a figure like Mao emerges to close the country off from the outside, equalize the wealth—or poverty— and begin the cycle anew. There are some who believe that the trends of the last thirty years will continue indefinitely. I believe the Chinese cycle will move to its next and inevitable phase in the coming decade. Far from being a challenger, China is a country the United States will be trying to bolster and hold together as a counterweight to the Russians. Current Chinese economic dynamism does not translate into long- term success.

He expands on this in the book. Still, I disagree. China’s industrial production is real enough and it is moving rapidly up the technology ladder (its export basket is far more advanced than its still low per capita income would normally indicate). China is now going to focus on creating its “harmonious society”, improving social services in rural areas and expanding domestic consumption. The period of maximum danger has already passed. What happened in the psychologically demoralized and mentally backward China of the nineteenth century is not really relevant to what will happen to it in the twenty-first.

That said, China does face some very real challenges – above all, resource depletion, environmental destruction and climate change. It has the resources to lock in energy supplies from abroad and has plentiful (but dirty) coal reserves. There’s also plenty of “coal gas”, an unfairly neglected but I suspect soon to become very important energy source (“There are also reports of Asian reserves of around 2,100 tcf – including 1,000 tcf in China, where the government is looking to rapidly increase production.” – Oil Drum). However, it faces severe environmental pressure as desertification and urbanization eat up agricultural land and water tables fall precipitously. Chinese grain production peaked in the mid-1990′s and has slowly fallen since. It possesses a fifth of the world’s population with just 7% of its arable land. Agricultural production is going to decline in traditional exporting breadbaskets like the US, Australia and Latin America with global warming, and competition for food will increase. Rising seas will threaten to inundate superdense settlements on its south-eastern seaboard and deserts will encroach from the northwest. This is going to be the crux of China’s challenge this century.

6. After 2030, three Great Powers will emerge to challenge the US: Japan, Turkey and Poland.

In the middle of the century, other powers will emerge, countries that aren’t thought of as great powers today, but that I expect will become more powerful and assertive over the next few decades. Three stand out in particular. The first is Japan. It’s the second- largest economy in the world and the most vulnerable, being highly dependent on the importation of raw materials, since it has almost none of its own. With a history of militarism, Japan will not remain the marginal pacifistic power it has been. It cannot. Its own deep population problems and abhorrence of large- scale immigration will force it to look for new workers in other countries. Japan’s vulnerabilities, which I’ve written about in the past and which the Japanese have managed better than I’ve expected up until this point, in the end will force a shift in policy.

I agree it will become more militarized and I suspect it will tackle its population troubles with increasing robotization. However it cannot match the military power of true superpowers like the US, China or a new Russian empire, largely for the reasons Friedman himself cited, and I believe it will bandwagon with the dominant Power in the region, China.

Then there is Turkey, currently the seventeenth-largest economy in the world. Historically, when a major Islamic empire has emerged, it has been dominated by the Turks. The Ottomans collapsed at the end of World War I, leaving modern Turkey in its wake. But Turkey is a stable platform in the midst of chaos. The Balkans, the Caucasus, and the Arab world to the south are all unstable. As Turkey’s power grows—and its economy and military are already the most powerful in the region—so will Turkish influence.

Considering that education is the elixir of growth, and that Turks (unlike Europeans, Americans and East Asians) aren’t the sharpest tools in the box according to international standardized tests of math / science literacy, I do not see them as a true Great Power any time soon. On the other hand I grant that Friedman’s scenario in the book in which Turkey melds the Arab nations into a new Caliphate and expands north into the Caucasus and the Balkans (the vacuum left over by the collapse of the Russian empire) is a distant possibility.

Finally there is Poland. Poland hasn’t been a great power since the sixteenth century. But it once was—and, I think, will be again. Two factors make this possible. First will be the decline of Germany. Its economy is large and still growing, but it has lost the dynamism it has had for two centuries. In addition, its population is going to fall dramatically in the next fifty years, further undermining its economic power. Second, as the Russians press on the Poles from the east, the Germans won’t have an appetite for a third war with Russia. The United States, however, will back Poland, providing it with massive economic and technical support. Wars—when your country isn’t destroyed—stimulate economic growth, and Poland will become the leading power in a coalition of states facing the Russians. Japan, Turkey, and Poland will each be facing a United States even more confident than it was after the second fall of the Soviet Union. That will be an explosive situation. As we will see during the course of this book, the relationships among these four countries will greatly affect the twenty- first century, leading, ultimately, to the next global war. This war will be fought differently from any in history—with weapons that are today in the realm of science fiction. But as I will try to outline, this mid-twenty-first century conflict will grow out of the dynamic forces born in the early part of the new century.

This is the “Promethean” scenario, in which the US helps in the collapse of the Russian empire using Polish proxies. Given his demographic emphasis, however, this is extremely unlikely since Polish demography is little better than German and worse than Russian (if measuring by total fertility rates); at just 40mn people, its population is simply too small to support a big arms burden and this will be true even if it were to recreate the old Polish-Lithuanian Commonwealth by incorporating Western Ukraine (20mn), Belarus (10mn) and Lithuania (5mn) to make a total of 75mn – less than Germany, lots of old people, and poorer.

Frankly, the idea of Japan, Turkey and Poland challenging the US for global primacy around 2050 is ridiculous – even if we follow Friedman’s advice to “expect the impossible”.

7. Space-based solar technologies will substitute for hydrocarbons.

After a damaging, hi-tech but very low casualty war between the US and the above Powers, the “concepts developed prior to the war for space-based electrical generation, beamed to earth in the form of microwave radiation, will be rapidly translated from prototype to reality” and the world’s energy will start coming from space-based solar installations, kicking off a massive economic boom.

The trend towards ever fewer casualties in the last century was not because of any moral or technological reasons, but because there were simply no wars between Great Powers – a nuclear conflict between the US and the USSR would have killed far more people than World War Two. I think future Great Power wars will be very bloody and intense as soon as mobilization for total wars occurs, and will be quickly return to megadeath levels if some of the combatants are all out virulent totalitarianisms. Such a possibility should not be excluded.

I find Friedman’s focus on space-based solar technologies narrow (there are many other emerging technologies) and believe that the most transformatory changes will come from the GNR Revolution (genetics 2010-2030, nano 2020-2050 and robotics, including superintelligent AI by 2030-2050.

8. End of the population explosion and competition for immigrants.

After two centuries of rapid growth, the world population will level off by 2050 and advanced industrial nations will have rapidly falling populations. There will be incentives for immigrants to come and there’ll be more research into genetics and robotics so as to prolong productive lifespans and automate simpler tasks.

Agreed on the key role of robotics and genetics, though it would be nice if Friedman covered them in more detail. I also believe that due to the effects of global warming and resource depletion, which Friedman totally dismisses, it is more likely that rich northern countries will intensify attempts to keep immigrants out instead.

9. Mexico will emerge as a competitor to the US in North America by 2080.

Mexico will become economically developed and much of the US South-West will become de facto Mexican-ruled, thus threatening the territorial integrity of the US.

Disagree. Mexico will sooner become a failed state because of global warming, plummeting oil production and lack of advanced technologies and human capital. The prospect of tensions and unrest between Mexicans and Americans in the South-West are real, but will not pose a threat to US sovereignty because of Mexican weakness.

10. Philosophical ruminations on geopolitics – although details are hard to predict, the overall picture can be discerned based on history and current trends.

…Geopolitics applies the concept of the invisible hand to the behavior of nations and other international actors. The pursuit of short- term self- interest by nations and by their leaders leads, if not to the wealth of nations, then at least to predictable behavior and, therefore, the ability to forecast the shape of the future international system. Geopolitics and economics both assume that the players are rational, at least in the sense of knowing their own short- term self- interest. As rational actors, reality provides them with limited choices. It is assumed that, on the whole, people and nations will pursue their self- interest, if not flawlessly, then at least not randomly. Think of a chess game. On the surface, it appears that each player has twenty potential opening moves. In fact, there are many fewer because most of these moves are so bad that they quickly lead to defeat. The better you are at chess, the more clearly you see your options, and the fewer moves there actually are available. The better the player, the more predictable the moves. The grandmaster plays with absolute predictable precision—until that one brilliant, unexpected stroke.

Nations behave the same way. The millions or hundreds of millions of people who make up a nation are constrained by reality. They generate leaders who would not become leaders if they were irrational. Climbing to the top of millions of people is not something fools often do. Leaders understand their menu of next moves and execute them, if not flawlessly, then at least pretty well. An occasional master will come along with a stunningly unexpected and successful move, but for the most part, the act of governance is simply executing the necessary and logical next step. When politicians run a country’s foreign policy, they operate the same way. If a leader dies and is replaced, another emerges and more likely than not continues what the first one was doing.

…Geopolitical forecasting, therefore, doesn’t assume that everything is predetermined. It does mean that what people think they are doing, what they hope to achieve, and what the final outcome is are not the same things. Nations and politicians pursue their immediate ends, as constrained by reality as a grandmaster is constrained by the chessboard, the pieces, and the rules. Sometimes they increase the power of the nation. Sometimes they lead the nation to catastrophe. It is rare that the final outcome will be what they initially intended to achieve.

Geopolitics assumes two things. First, it assumes that humans organize themselves into units larger than families, and that by doing this, they must engage in politics. It also assumes that humans have a natural loyalty to the things they were born into, the people and the places. Loyalty to a tribe, a city, or a nation is natural to people. In our time, national identity matters a great deal. Geopolitics teaches that the relationship between these nations is a vital dimension of human life, and that means that war is ubiquitous. Second, geopolitics assumes that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term geography broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. In antiquity, the difference between Sparta and Athens was the difference between a landlocked city and a maritime empire. Athens was wealthy and cosmopolitan, while Sparta was poor, provincial, and very tough. A Spartan was very different from an Athenian in both culture and politics.

…The twenty- first century will be like all other centuries. There will be wars, there will be poverty, there will be triumphs and defeats. There will be tragedy and good luck. People will go to work, make money, have children, fall in love, and come to hate. That is the one thing that is not cyclical. It is the permanent human condition. But the twenty- first century will be extraordinary in two senses: it will be the beginning of a new age, and it will see a new global power astride the world. That doesn’t happen very often. We are now in an America- centric age. To understand this age, we must understand the United States, not only because it is so powerful but because its culture will permeate the world and define it. Just as French culture and British culture were definitive during their times of power, so American culture, as young and barbaric as it is, will define the way the world thinks and lives. So studying the twenty- first century means studying the United States.

This is perhaps the biggest point of disagreement. The twenty-first century will be unlike all previous centuries. As I’ve argued here, it’s a make or break century. Either we overcome limits to growth and survive long enough to usher in a technological singularity / Green Communism, or our industrial civilization tumbles into the dark depths of the Olduvai Gorge. The outcome will depend on three things – resource depletion and environmental degradation; technological development; and perhaps most importantly, our politics and values.

If there were only one argument I could make about the twenty-first century, it would be that the European Age has ended and that the North American Age has begun, and that North America will be dominated by the United States for the next hundred years. The events of the twenty-first century will pivot around the United States. That doesn’t guarantee that the United States is necessarily a just or moral regime. It certainly does not mean that America has yet developed a mature civilization. It does mean that in many ways the history of the United States will be the history of the twenty- first century.

The US will certainly dominate North America – its neighbors are geopolitical basketcases and even if catastrophic global warming occurs, it will conquer Canada and tranfer its population north. However, the pivot of the twenty-first century is as always before going to be on the Eurasian landmass, which has 70% of the world’s population and is the focal point of almost all new social ideas, wars and revolutions.

You might have gotten the impression that I criticize Friedman so much that my praise for him at the beginning was not genuine. That’s wrong. His short-term geopolitical analysis is superb. It is also a lot more nuanced when he gets more space to write down his views. I find the writings on Russian geopolitics, as well as things like his series of monographs on the geopolitics of Israel, Iran and China, to be of the highest caliber and essential for understanding geopolitical dynamics in Eurasia.

Nonetheless, he has four critical failings as a serious futurist. Firstly, he discounts the role of non-geopolitical factors (economics, ideologies, culture and religion, etc) in driving history – as such, just like the realist, clash of civilizations, or idealist / end of history theses in international relations, the analysis is revealed as one-dimensional when stretched far enough into the future. Secondly, there is a near total lack of attention to ecological issues, as well as unrealistic projections of energy usage and technological development. Thirdly, far too much stock is put into semi-mystical “cycles” of history for particular countries, such as America’s 50-year cycles of transformation and China’s cycles of expansion, isolation and collapse. Never precise to scientific to begin with, they are ever more irrelevant in the accelerating world of today. Fourthly, there is too much emphasis on territorial and geographical features from a conventional military perspective, especially in the case of nuclear armed Powers – with next to nothing on the potential use of WMD’s, be it by nation states or terrorists and malcontents. As such, I would treat his long term prognoses in The Next 100 Years with a pinch of salt.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Year in Review: 2008

Again, a very happy and successful New Year to Sublime Oblivion readers. It has certainly been a successful year for this blog, founded as Da Russophile on Jan 9th 2008. The original site at blogger has nearly 16,000 visitors, while Sublime Oblivion has been graced by nearly 2000 from the date of its inception on Nov 24th 2008. Readers and commentators, in other words you, have contributed to this every bit as much as the author.

The world itself was a rather more turbulent and mixed story in 2008. The cardinal event is probably the credit crisis and unfolding economic crisis, the magnitude of which is becoming increasingly clear since September. In its sheer depth and breadth, I suspect it reflects something deeper than the periodical housing bubbles and basketcase-country currency crises of history, or even the pricking of the maniacal optimism that saw such a destructive proliferation of the ‘financial weapons of mass destruction’ that are CDO’s and other exotic, unstable financial constructs .

The immediate portent is the probable peaking of world oil extraction in 2008 – there might be another, even higher peak, in a few years, but not by much or for long. Since the prevailing growth-based model of development as it stands relies on cheap, high-density energy inputs to maintain itself, the post-peak oil historian may come to view 2008 as the year when industrial civilization experienced a fundamental discontinuity.

(Perhaps I’m being a bit premature, though. The bigger turning point may come when, in a few years, government-forced economic recoveries will collide with falling oil supplies due to secular geological trends and the price collapse of this year. On a poetic and mystical whim, let’s set that year to be 2012).

A major tenet of this blog, that overall things are improving and will likely continue improving in Russia. Birth rates rose and overall population decline fell to the tiny level of -1.0/1000 a year. Prior to the global economic crisis, which hardly anyone could claim to have foreseen, Russia’s automobile production increased by 40%, GDP grew at a rate of 8% and the grain harvest finally recovered and exceeded typical Soviet levels. More attention was paid to the hi-tech sector, with the expansion of ambitious long-term programs in nanotechnology, big increases in academic salaries and better funding and equipping of research, as reflected in the regional supercomputer statistics.

Although the economic crisis is an unwelcome interruption of the country’s comprehensive program of industrial and technological development, it is very unlikely to result in catastrophe, as I thoroughly explained in the (admittedly awkwardly-titled) Importance of Self-Sufficiency in Liquids. Claims that the crisis may precipitate the political downfall of the ‘Putin regime’ is nonsensical Kremlinology (the latter two words are a tautology). Their latest attempt at shoring up their ‘arguments’ were the protests over rising import tariffs on cars in Vladivostok and their ‘brutal suppression’ by units called in from other far-flung regions of the evil empire. In reality, as usual, the protestors there failed to get permission to forcefully close down the city’s thoroughfares – those that did, like the citizens of Moscow and St.-Petersburg, were not disturbed; neither were even those who didn’t get permission, but at least had the courtesy to demonstrate civilly. Furthermore, as outlined in an article by Ivan Yartsev, the protesters in Vladivostok a) numbered in the hundreds, not the thousands, and arrests were in the dozens, not the hundreds, b) the alleged brutality of the arrests was not confirmed by the available videotapes and c) most incriminatingly, there is evidence to connect the protest organizers with the mafia, since importing cars is big business and greater state regulation over them could decrease criminal profits. In the bigger picture, as of December only 21% of Russians are ready to take part in mass protests personally while 66% would be against (furthermore, the most favorable figures are found in Moscow and the big cities). Thus those hoping for regime change in Russia, as usual, are left clutching at dirty straws.

I extensively covered Georgia’s criminal invasion of South Ossetia and Russia’s success at restoring peace in the face of Georgian tactical surprise, disregard for the laws of war and hypocritical Western ‘moral’ condemnation of the victim (Russia, and above all South Ossetian civilians). It probably (hopefully) marked the high tide of neocon hypocrisy, deception and criminality, and possibly of the American Empire as argued in a cynical, but nonetheless incisive, article by Mark Ames. For it’s own and the world’s good, it is hoped that Obama – whose victory I predicted – will reinforce already latent tendencies in Washington’s foreign policy elite and take a more intelligent, conciliatory and multilateral approach.

Yet towering over the ultimately petty affairs of Men is Gaia, the system of the world’s biological, geological and climatic systems, and it is in slow-motion meltdown – quite literally, as the Siberian permafrost and Arctic Sea gas hydrates are starting to dissipate and release huge quantities of methane gas. This is a greenhouse gas that is twenty times more potent than CO2 and could potentially unleash runaway global warming and a mass extinction like the Permian-Triassic 250mn years ago, the most severe such event in Earth history. Ultimately, this news story from around August 2008 could turn out to be far more singularly important in the long run than petty things like new political leaders or wars or even peak oil; so important, that perhaps the only possible road to salvation left to us is Green Communism.

2009 Predictions

1. The US economy goes into freefall (around 5-10% annualized decline) in the first two quarters, but will bottom out and perhaps recover slightly in the second half as public spending stimuli kick in. Overall GDP loss of around 5% in 2009. The Dow Jones does not rise above 9000. Afghanistan continues simmering but on one of the few positives, Iraq remains stable

2. Global deleveraging is largely accomplished by mid-2009, and credit markets start working again. Deflation will cease around this time and concern about inflation mounts as commodities rebound and the results of the Fed’s recent monetary splurge work their way into the system. The inflation rate will start rising at a worrying pace, and may exceed 10% by year-end.

3. Commodities remain low in the first half of the year. However, an incipient global recovery in the second half will result in a rebound in oil prices from around 40-50$ per barrel in the first half, to 60-80$ in the second. The record 2008 harvest will be followed by a pitiful 2009 harvest, because of the twin shocks of a) the cyclical price collapse due to overproduction in summer 2008 and b) farmers having difficulties obtaining credit in many countries. Expect renewed global food riots.

4. Exporting countries contract at a fast rate as demand for their goods abroad plummets. Germany and Japan decline at -5%, and China sees only anemic growth of 2%. This is accentuated by increased protectionist sentiment around the world as countries raise barriers in order to get bigger multipliers for their fiscal stimuli, while doing everything they can to encourage exports. Among Iceland, Latvia, Ukraine, Georgia and Argentina, some may see GDP declines of more than 10% and government collapse. Venezuela’s GDP will decline but there will be no economic collapse and Chavez will remain in power.

5. The US dollar and yen weaken relative to the Euro. The US budget deficit will be somewhere in the range of 8-13% of GDP due to the reduced tax base and massive fiscal loosening. In a pessimistic scenario, investors start shunning T-Bills and capital inflows in the US reverse, precipitating a debt-and-currency crisis.

6. Russia will grow by 1% in 2009 – Q1 will see a very sharp downturn of -5% or more, but will abate in Q2 and will see a recovery in the second half as economic stimuli kick in, commodity prices start rising again and most importantly as affordable credit channels are finally unblocked. In particular manufacturing will receive a great boost due to the weakening ruble. Although there will be a small budget deficit of perhaps 1-2%, the trade balance will just about remain in the black for the year. The RTS will exceed 1000 by year-end as investors realize how extraordinarily cheap everything is. There are no major political protests, Medvedev remains President and Russian-American, and more generally Russian-West, relations improve.

7. Neither Saakashvili nor Yushscenko will survive 2009 as political leaders. The disillusioned people of Ukraine take to the streets and oust the bickering and incompetent Orange regime, replacing it with a more economically rational and Russia-friendly one. Saakashvili is either forced to resign or is removed in a coup under the twin weight of his disastrous war and collapsing economy. The profile of as yet obscure organizations like Eurasec, CSTO and GECF will increase (look them up in Wikipedia!).

8.In Russia, the birth rate will be between 11.5 and 12.5 / 1000, the death rate at 14.5 and 15.5 / 1000 and net migration will fall substantially to 0.5 / 1000. For comparison, the figures for the first ten months of 2008 were 12.1, 14.8 and 1.7 respectively.

9. There will be another major war in some region of the world (not counting the current struggle between Hamas and Israel). Probably the most likely is a pre-emptive Israeli pre-emptive air strike against Iranian nuclear facilities, before the Islamic state’s air defences become too strong with the addition of Russian S-300′s. Military confrontations in the former Soviet Union are now unlikely. It is possible that there will be a major terrorist attack against US assets or the global oil infrastructure.

10. By year-end the performance of the world’s top supercomputer will exceed 3 petaflops. Oil production in 2009 will be substantially lower than in the year before.There will be a major global-warming related event, e.g. a new European heatwave, an extreme hurricane or breakup of a major ice shelf.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Read these two posts by Krugman at Conscience of a Liberal, here and here.

1. A looming recession, after seven years of stagnation in the US median wage, means that the likelihood of positive income growth this year is very small. Even assuming it’s 0% would mean that the incumbent party’s nominee, McCain, can be expected to lose by an 8% margin in the straight line fit below. To break even income needs to grow by around 2%, which looks more unlikely with every new financial breaking story.

More likely, it will be around 0% or worse and McCain would be facing a landslide defeat, as in 1980.

2. Q1 growth was at 0.9% (practically all of it down to improvement in the balance of trade), although a slight amelioration is expected this summer due to the tax rebate coming into effect. But after that, with the housing bubble still far from popped, hundreds of banks facing the spectre of insolvency and the full ramifications of 130$+ oil coming online, it is hard to see the US avoiding a recession. So let’s say first half growth will be at 1%.

This would imply McCain getting 45-51% of the vote. And this is the part on which he performs best

3. According to opinion polls, Bush’ approval hovers around 30% and disapproval around 65%, giving a net approval of -35%. As the graph below shows, this is a record.

Going from this graph, McCain would do well to scrape 45%.

4. To add to McCain’s woes:

Also, a number of models find that there’s an 8-year itch: voters tend to turn against the incumbent party if it has held the White House for two or more terms.

In conclusion,

Right now, GDP is flat (falling in the monthly estimates); Bush has a negative net approval of 30 percent or more; and people are tired of Republicans. So it ought to be a smashing Democratic victory. When I plug current numbers into the Abramowitz model (making a guess about 1st-half GDP and assuming that Bush approval in June will be about where it is today), it says 57-43 Democrats.

Despite Obama’s numerous gaffes (Wright, gun-toting Bible-bashers, etc), even in (usually unreliable) pre-election opinion polls he is getting a lead over McCain. Of course there’ll also be a few third part candidates who’ll hack off 3-4%, and McCain has taken care to distance himself from Bush. Perhaps the Democratic win will be 44-52. Nonetheless, still crushing. Political science might be full of uncertainties, but those uncertainties must reveal miracles for McCain to have a chance.

This is why Obama will almost certainly win. I have put my money where my mouth is and bet 100$ on Obama (too bad the bookies are certain Obama will win too, lol). And I congratulate Americans for their good sense.

(Republished from Da Russophile by permission of author or representative)
 
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Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.