Obaron

When will the US bubble burst?

A number of experts are predicting that an crash in the American stock market is inevitable in the not too distant future. Stock prices have been rising and rising since just after the beginning of Obama's period in office. During this time America has had policies of loosening liquidity in order to combat the problems brought about the the sub-prime loan crisis. At that time there were a lot of bad debts but a lack of knowledge of which debts were sound and which not. This led to a fall in confidence and a corresponding down-turn in economic activity. To combat this the money supply was increased and interest rates were held low, even going into negative in real terms, at time. These are just about perfect conditions for the production of a bubble and that is what has happened. So far the bubble has not burst, but every day it gets inflated a little more. The old hands are saying, probably correctly, that this cannot go on indefinitely.

At the same time, the American government's debt has been steadily increasing. It is now around 18 trillion dollars. The American government currently runs on an overspend of roughly half a trillion dollars per annum. This overspend is less than it was. At the end of the Bush era and beginning of the Obama presidency it was more like a whole trillion, but it is still a lot. Here too, one feels instinctively, this cannot go on indefinitely.

Furthermore, these two are not unrelated. A government's ability to service debt depends on its income which ultimately depends on the value and profitability of its industry. A crash in either sector could therefore trigger one in the other and both have a long way to fall. The questions that hover are when will it happen and how far down will it go? If Mr Obama gets to the end of his term without some such meltdown occurring he will have been lucky. When it happens the knock on effect for other countries will be considerable.

In the meantime what can one do? Not a lot, it seems. Various people offer suggestions about how the individual investor might protect himself and, as in all crashes, not everything goes down. In general, however, it does seem likely that we are soon to see a disaster that will touch just about everybody. Economists call this kind of thing a "correction". This is an accurate term because it is a return to sanity after a period of inflated ideas. It does seem, however, that once we have got into an inflating sequence it is very difficult to get off. It is like a drug that one cannot stop taking. The public will not tolerate a massive cut back in public spending without there being a major crisis. Investors will not give up the possibility that stocks are going to edge that bit higher. Thus we do not stop inflating the balloon. However, this week, or next week, or maybe next month or next year, but not too long from now, we are going to have another big crisis born in America.

One would think that after the last one, other countries would have taken steps to protect themselves, but I imagine that most are still just as vulnerable as they were when the sub-prime crisis broke, only, this time, the wave is likely to be a bigger one.

Of course, the future is not predictable. It may never happen. Perhaps the American government will get on top of the problem; perhaps American investors will make wiser decisions than people have generally done in the past, but I would not put money on either of these possibilities. Probably things will take their natural course the way they usually do and in a few years time we will be debating how to cope with the fallout, and most of us will be poorer than we currently think we are.

Europe's turn now?

The economic up-turn that is beginning in Europe will, I suspect, prove more long lasting and go further than most commentators suspect. There is a general assumption that Europe is slow and inefficient and that although it may now have a cyclical up-turn this will be relatively weak compared with that of the USA or countries in Asia. However, in Europe today one cannot assume that the past is a good guide to the future. Europe is changing. Painfully, and often reluctantly, reforms are happening and as an economic unit Europe is becoming more efficient and effective. 

When the euro was introduced many commentators predicted that it would fail. Months after its introduction it was worth much less than at original floatation and this was widely taken as confirmation that the euro was a failure. The reverse was the truth. The value fell because the euro was so successful. One euro for all Europe was much more efficient than a score of different currencies. Since it was more efficient you did not need so many to do the same job. There were, therefore, surplus euros and so the value fell. Any first year student of classical economics could understand this but the "experts" did not. They did not because they were opinionated in a negative way. I suspect that we are currently seeing a repeat performance.

The up-turn in Europe has been slow coming and so far appears rather feeble. This is just like the early days of the euro. Why might it be this way? Is it a parallel phenomenon? Quite likely the answer is affirmative. For instance, unemployment has stayed higher longer in Europe than elsewhere. Why? Well there are two possible answers. One is that Europe has declined industrially. The other is that Europe has become more efficient in its use of labour. 

If the second alternative is the one contributing the greatest effect then we can expect that the rebound will start slowly but be more powerful in the long run. A comparison with Britain under Margaret Thatcher may be instructive. At that time Britain lost about a third of its industry, but it became a more efficient economy and since then the country has not suffered from the boom-and-bust cycles that were crippling it before to anything like the same extent. With some regional exceptions such as Greece and Portugal, European industry has not been as severely devastated as was that of Britain and, in any case, the backbone of the economies of those regions never was productive industry. Nonetheless, something rather similar has been happening. 

European leaders from across the political spectrum have been aware that there has to be an increase in efficiency and in a vast number of small ways and in some major ones, such as the reform of the banking sector, this has been happening. It could profitably go further, but there are limits to what can be achieved in a confederation of democracies in which most of the public have little idea of what is really happening. Nonetheless, palpable progress has been made.

It seems to me likely, therefore, that just as the euro eventually rose well above its floatation level and is now worth quite a bit more than the US dollar, the economy of Europe taken as a whole, which is already the largest economy in the world if taken that way, will now outstrip predictions. Even if it does not reach the "economic miracle" level, what we are probably going to see is a steadily strengthening economic growth that is not merely cyclical.

This will have political as well as economic consequences. It creates power and where there is power there will be struggle to take control of that power and then the power will be used. Europe has taken a bit of a back seat in international affairs so far, but this is already changing and we can expect it to change more. Whether this will be a good thing for the world as a whole will depend upon the wisdom of those who take the helm and, unfortunately, humankind has so far failed to find any system that guarantees such wisdom. The "American century" - actually more like about eighty years - may be drawing to a close. Whether a new European one is dawning remains to be seen, but it is not an impossible scenario.

Europe has found itself an enemy

The project of European unification which draws its ultimate strength and momentum from a revulsion for the carnage that devastated the continent twice in the twentieth century and many times in previous ones, has gradually gathered momentum. Now the project of European unification has reached the point where a further quantum leap is required. Angela Merkel, who is the nearest thing to a president of Europe that has been created so far, has famously declared “We need more Europe, not less Europe.” To achieve the next step in the process of unification, however, Europe needs an enemy. Through the so called Ukrainian crisis it has found one. This follows a familiar logic.

The Ukrainian crisis has been precipitated by European expansionism, which is, of course, one form of “more Europe, not less.”. The absorption of territories that were formerly part of the Russian sphere of influence was bound to provoke resistance eventually. Europe will claim that it is absorbing these territories because that is what their people's want. However, as soon as a tiny bit of the territory that Europe wants shows that it does not want to be absorbed, that its people speak Russian, feel Russian and want to be part of Russia, we cry foul. This is not playing fair, but then this is not really about fairness. It is the age old logic of politics.

You cannot unify a state without having an enemy. A certain amount of unification has been achieved by having the abstract “enemy” of an economic crisis. People unite out of fear. This is often for their own good, but, often enough, people do not do what is for their own good in a rational manner. Sometimes they have to be frightened into it.

Ideal world would be one without any boundaries at all. Alas, humans are not made like that. As the world population has grown and means of travel have become more developed, some of the old boundaries have given way. This is a boon. However, it has not led to a general easing, but rather to a process of raising higher the barriers that remain. This is in the interests of staving off panic. Hence, Fortress Europe and increasingly strident concern about immigration control.

There are huge benefits to be had from European unification. Broadly speaking, going by such basic indicators as child mortality, longevity, nutrition standards, health care, social security, freedom from danger of violent death or starvation and so on, the people of Europe are the most fortunate human beings who have walked this earth. On most of these criteria, Europe is already a more advanced civilisation than China, India or even the United States of America. Only a few much smaller political units can match it. In achieving so much over such an area in such a diversity of folk, Europe is already a pinnacle of human achievement and it is clear that the potential could be a great deal more still.

To achieve this more, however, some degree of political unification is almost certainly required. The recent and, for many areas, still current economic crisis, has provided the leverage for a degree of such unification. It has certainly made the Central European Bank into a much more powerful institution than it was formerly. Banking has suddenly and surreptitiously become an instrument of social control. It is, however, not enough.

Now, however, a more potent and traditional lever has been found. Fear of economic crisis provides sufficient driving force for people to allow themselves to be corralled into measures like the banking union, which they would never have agreed to without such crisis, but an external enemy onto whom all wickedness can be projected is much more potent.

The sense of a threat to Europe provides the psychological condition for people to start thinking of themselves as European as opposed to Russian rather than as French as opposed to Italian or German. To create a unified Europe requires people to make a shift in their sense of identity and identity is built in contra-distinction. Only be putting emotional energy into distinguishing ourselves from something or somebody else do we identify ourselves. Identity is about “Who goes there? Friend or foe?”

Now, there can and will be a discourse about European military strength and preparedness. The United States of America is united first and formerly in having a single army with a single commander in chief. The not-so-united states of Europe have many armies loosely allied together. Through NATO, this military confederation remains substantially under American leadership even though European and American interests do not always coincide. Europe as a unit has been noticeably ineffective militarily in recent decades. All that may now be about to change.

If Europe has to establish and defend an eastern border, there will be a discourse about the creation of an effective European military capability. This inevitably involves centralisation of control. Establishing a unified economy and banking system goes so far. Establishing a unified military goes a lot further. It is one of the basic foundation stones of nation building.

Inflating the Ukrainian situation into a crisis thus serves a crucial purpose. It is exactly what Project Europe needs. It is not that the Russians have acted in an irrational or wicked manner. They haven't. Any other power in their situation would have done the same and if it had not it would have been failing in its duty. Why, after all, should the people of Crimea not live under the regime of their choice? The Russians have actually, paradoxically, acted on the side of what democracy would demand. However, this conveniently provides Europe with just what it needs, just when it needs it. The more the bear can be provoked into snarling the more united Europeans will feel a need to become.

Crimeanisation

It seems very odd to see the powers that claim to be representing democracy in the world imposing sanctions on another country because it rattifies a referendum in which there was an overwhelming majority. It seems that when it comes to it they do not really want the people to decide.

I imagine that at the back of this is a fear of what might happen if other people started to also decide what they want. All over Europe (and also China) are ethnic groups that might unilaterally decide to hold a referendum of their own and decide to redraw boundaries. Every country bordering Hungary, for instance has a substantial Hungarian minority within its boundaries. Might those people all vote to rejoin Hungary? How terrible would that be? People might actually get what they want and be able to live with people who speak their language under a government that understands them better - what a disaster! 

I also imagine that there is power politics at work. The Western powers would like to wrest the whole of Ukraine out of the Russian sphere of influence and are peeved that there might be an important bit that they fail to gobble up. But do we really want Crimea to ultimately become part of the European Union if the people there do not want that? Is that how we spread democracy in the world? Is it even sensible? Would we not be asking for further trouble in the future? The European Union should include those people that want to belong to it, not those that do not.

All in all I feel very uncomfortable about what the Western governments are doing at the moment in regard to this issue. Perhaps the Russians will act in improper ways in the future, but what they have done in this matter so far appears entirely sensible and in recognition of the will of the people. Something strange and new is happening in our world when it is Russia that supports democracy and the Western powers that want to suffocate it under treaties that are now evidently anachronistic.

How far are we from being in a police state?

Disturbing developments.

Didn't somebody in ancient Greece say something about how democracy inevitably leads to tyranny? It happens like this. The more democratic a country becomes the more what we might call intervening communities - that is groups with some independent power existing between the citizen and the state - are eliminated. This tends to make the power of the state increasingly absolute. People think that this does not matter because, after all, the government is elected by the people, of the people, for the people. Of course it is not quite like that since the government increasingly consists not of ordinary citizens with a sense of civic duty but rather of career politicians who have done nothing other than be politicians since they left university, and, indeed, since the time when they still were at university. The intervening communities generally had some function of looking after their members. As they disappear, the only protection available is the state itself. As things continue to move in this direction, the role of the state comes to be seen more and more in terms of protecting the citizen. The traditional state responded when there were misfortunes, but the new state is expected to prevent them from happening. The only way to do this is widespread surveillance. All the apparatus of the police state thus gradually comes into being. This is not experienced as a threat by the citizenry because they think it is there to protect them. Then some kind of external threat occurs. Now the police state apparatus can be stepped up several notches. We can have detention without trial, confiscation without redress, interrogation without charge or due process, torture even. It's all for the protection of the citizenry and Mr and Mrs Average believe that they will themselves never be the victim of such procedures. After all the state is there to protect them. They do not consider the possibility that it may be the state that they will need protection from (which, ironically, was the possibility that gave the initial impetus to the development of democracy in the first place - how things come full circle).

In the UK and America this is about where we have got to so far. If it goes much further I will no longer be allowed to write articles like this. Journalists will soon be unable to publish criticisms of the government without considerable risk. Those who enjoy being at the centre of these increasingly draconian structures do, of course, have a vested interest in exaggerating the risk level. Doing so can lead not just to a police state at home but also to wars abroad - we have seen several such in the past decade. Does anybody now really believe that Saddam Hussain's Iraq was ever a serious threat to the UK or America? Did the "Axis of Evil" ever exist? No, it was a propaganda stunt to get popular acquiescence to a campaign of mass murder and pillage of another country's resources. Unfortunately we are mostly blind to what is happening. Most people still believe that what happened in Russia under Stalin could never happen here. Seeing an American dissident fleeing to Russia really turns thing up-side-down, doesn't it? It must be a mistake, surely. Things don't change do they? However, the extent of surveillance in Britain now is probably greater than it ever was of citizens in Soviet Russia and the steadily increasing use of unaccountable coercive power should be alarming. Soon it may be too late.

How Snowdon & Manning have changed the game

Geoffrey Manning and Ed Snowdon's action have changed the world in two significant ways that will have long term consequences. Both are in the area of goodwill or the lack of it. The first is that they have changed the image of Russia and of Latin America to a small but significant degree. The second, and even more important, is that they have made Germany and a number of other countries suspicious of the USA to an altogether new degree. Unless this latter factor can be speedily reversed, and it probably will not be, the fall-out is likely to be major in the medium term.

The sight of an idealist dissident being hunted by a great power and fleeing to safety with another such is not new to us. All through the Cold War there was a steady stream of such people leaving Russia and fleeing to the USA which thereby retained its credentials as the land of freedom, openness and justice. The recent sight of just such a person going in the opposite direction is of enormous significance and will change the way people in many lands feel about the overall balance of good and evil in the world. The revelation of American spying activities and the realisation that the internet has become the largest public surveillance machine ever invented is also going to change attitudes. Todays news about Lavabit seems to be just the latest twist. In Germany there is now distinct paranoia around what the USA uses its spying for. Germany depends heavily of intellectual property and there is more than a suspicion that US espionage is not just used for combatting terrorism, but is used to give American industry an unfair advantage.

Germany is the leading power in Europe. It's attitude will affect policy in Europe as a whole. Does this matter? Most certainly. Europe is significantly under-estimated. Most people are unaware that the EU is the largest economy in the world. The EU is going through quite a bit of internal stress as a result of substantial internal restructuring that is going on, but these changes will, in due course, bear fruit. If it were to become the case that it could no longer be assumed that Europe will view the USA as a favoured and trusted partner, but rather was coming to see it as a “false friend” as Der Spiegel headlines in its current issue, we would be in a very different world. I have been suggesting for some time that such a world is on its way.

The technology of fracking is going to make the USA self-sufficient in energy and even an exporter. This is going to extend the world's dependence upon fossil fuel by at least a couple of decades, and especially in the USA. At the same time, Europe, and especially Germany, is straining to reduce its dependence on fossil fuel. Initially this is to make Europe less dependent on Russia, but it also makes it less dependent on the USA. The shift to renewables is also a stimulant to technological change and growth, a stimulus that will not be felt much in North America. All this means that the style of economy and technology on opposite sides of the Atlantic is set to diverge. America may well start to rely upon its energy exports and this will have a dampening effect on other aspects of its industry. Many think that energy independence will make America richer, but it may simply make it less progressive - look at other resource rich countries around the world.

Most of the talk of change in the world order has focussed on the emergence of the BRICS. This is surely over-played. Certainly China, Brazil, India and Russia, and even South Africa, are making progress, but there are substantial obstacles to them achieving parity with the USA and Europe in terms of living standards. Only Russia has any real chance of dong so. However, there is now an increasing likelihood of Europe balancing its external relations by co-operating more with the BRICS countries and less with the USA. This will lead to more tensions and less certainties.

Another crucial test is what happens in Syria. Having created chaos and insecurity in Iraq and Libya the Western powers are now doing their best to repeat the story in Syria, probably with some hope of doing it again in Iran later. However, the yet further demonstration in Egypt that the West's commitment to democracy is a paper thin mask, as if one were still needed, may be producing a gradual shift in what is possible in that region. Besides the create-chaos-and-exploit-the-weakness strategy may be seen as less necessary now that in their different ways, the USA and the EU re making themselves less dependent on Middle Eastern oil. In Syria, Russia has a strong stake and for this reason alone, the Assad regime is tougher than was that of Gaddafi. If the West proves unable to unseat Assad, it will be the end of an era, and a great many people in the region will rightly be relieved.

Eventually the Middle East might sort itself out if outside powers would leave it alone - a forlorn hope, I'm afraid. Gradually the BRICS will advnce, but not as much as many people are predicting. The really big players are still the USA and the EU. Much depends on relations between them and I foresee these becoming increasingly strained as the two great powers move in opposite directions over energy and trust each other less. This shift has not been caused by Manning and Snowdon, it was already under way, but their exposure of American spying is likely to have proved to be one of those turning point events that crystalises a change the conditions for which were accumulating waiting for just such a trigger.

Why should Moslems believe in Democracy if as soon as they get an Islamic Government elected it gets overthrown?

The situation is Egypt is truly lamentable. A government gets elected with a solid majority. It tries to implement its programme and is overthrown by representatives of the previous dictatorial regime. How can we see this as anything other than simply wrong and bad? If it is the fact that the old regime was more pro-Western than the elected government is what sways us then we simply reveal that we are not really interested in democracy, we are merely self-interested. This is repeatedly the case. Whenever Islamic groups have a popular mandate the |West tries to undermine them. If the reality is that Western governments are really only concerned about their own short term interests, then they really should stop all this hypocritical posturing about being in favour of an Arab democratic revival. The reality seems to be that the last thing the West wants is for the popular will to prevail in Moslem countries. All this makes the intervention in Syria seem ill advised. The West may not like the Assad regime, mostly because it leans toward Russia, but would they like any of the rebel factions any better? If Assad were to go, what would happen then? The decision to arm rebel groups probably actually has very little to do with a desire for democracy and a lot to do with embarrassing Russia. Syria is to Russia rather as Israel is to the USA. Russia is not going to give it up passively. One of the main effects of arming the rebels with American weapons is that it will give the Russians an opportunity to test out how effective their own weapons are against the American ones. The Syrian situation will not be a rerun of Libya because it is much closer to Russia's core interest. Libya can become part of the European sphere of influence, but Syria is part of the Russian sphere and that means that one is taking on a much more formidable opponent. Western involvement in the Middle East has already done a huge amount of damage. What are really moves in a large scale geo-political game in which the real enemies are often Russia or China are dressed up to look like principled support for morally laudable objectives like freedom and democracy but as soon as local people show any signs of becoming free or democratic they are repressed again. This endless farce would be amusing if it were not tragic but the fact is that it is tragic in the extreme and one feels deeply disturbed to be implicated in it.

Game change in Britain?

 In Britain, the Conservative Party, uncharacteristically, appears to be in panic. This has come about through the rise of the anti-Europe and anti-immigarion UK Independence Party. The Conservatives have handled the situation about as badly as one could. When a new party appears on the scene, from a purely tactical perspective, the best thing that established parties can do in serving their own interests is to ignore the new-comer. In this case, however, the Conservatives have done just about everything that they could have to make UKIP seem to be correct. UKIP is saying openly what many Conservatives privately believe. The Conservative Party could have encompassed those views within a broad concensus of the liberal right, but they have failed to do so. This does create a situation where the balance of power in British politics could well shift in a major way.

As the Conservatives concede more and more to UKIP it becomes more and more difficult for the LibDems to remain within the coalition. UKIP and the LibDems are more at opposite extremes than Labour and Conservative. The LibDems, however, are in an invidious position electorally. Having conceded so much to the Conservative in order to remain in the coalition they have lost much of their credibility as a party of principle. Many of their former supporters feel betrayed. If they were to leave the coalition and thereby possibly precipitate a general election they could be destroyed at the polls. Is it possible, however, that they will leave the coalition but not seek to bring down the government, leaving the Conservatives to rule as a minority government? It must be thinkable because if one were the leader of the LibDems one would reason that Cameron is not likely to go to the polls at the moment unless he has to, as the Conservatives also stand to be decimated by UKIP. The best that the LibDems could do for themselves would be, at this point, to leave the coalition and change their leader. A change of leadership would give a clear signal of new direction. The obvious choice would be Vince Cable.

So much for tactics and party interests. What about the merits of the actual issues? UKIP is trading on xenophobia, but how much is the British public really that xenophobic? It is hard to judge. The fact is that Britain's prosperity in recent years has depended to a substantial degree upon membership of the EU and upon a high rate of immigation. By opposing these two factors, the UK is acting against its own interests. The really big problem for the UK is that its economy has become more and more dependent upon the profits earned by the City of London. Manufacturing and regular trade have given way to finance as the big earner for the country and while membership of the EU and high immigration is in the interests of manufacturing industry, the centralisation of finance in the EU that is proceeding apace is threatening to the interests of the City. This is a real threat, but it is not clear that it is one that can be avoided. If the UK is in Europe, then the City will eventually have to become part of the EU financial system. If the UK is outside of the EU it will be in competition with it. In the latter situation, the UK will be rather as Japan is vis-a-vis China. The EU economy without UK will still be vast in comparison with that of the UK alone. It could simply be a losing battle. British menufacturing will be sacrificed in the interests of the City and the City will lose ground anyway.

Those who favour such a course are misled by the impression that the euro is weak and the EU is a mess and not going anywhere. Nothing could be further from the reality. The EU taken together is already the largest economy in the world. It is having teething troubles getting its systems sorted out but is actually proceeding at a rather rapid pace. The euro may well replace the dollar in due course as the currency of choice for international trade and where will the City of London be then? Cameron thinks that he can reform the EU. He is mistaken. UKIP think that the UK can go it alone. It could, but only at great cost. Both, each in their different ways, think that the UK can negotiate with the EU from a position of strength and keep the bits they like and discard the rest. They will get a shock. No leading politician in Europe is interested in conceding anything to the UK any more. They have reached their limit. The attitude on the south of the Channel is that if the UK wants to leave, the sooner it goes the better and it can sink on its own if it wants to. Most would prefer that it had a wholehearted wish to be inside Europe and could contribute constructively to the future of the great project, but if its heart is not in it then it would be better for it to get out of the way and let the rest get on with the job. Although nobody will say this, the leading figures in Europe would actually have a vested interest in demonstrating that leaving the EU leads to disaster. They would, therefore, have no interest in making Britain's transition to independence smooth or desireable.

If the UK leaves and declines while the EU thrives, what then? Is the UK going to ask to rejoin? What terms can it hope for in such a situation? Who else in the world can the UK rely upon? It cannot go back to the old days of the Commonwealth. What use really is the so-called “Special Relationship” with the United States? The USA is itself in decline and its current government has no special feeling for the UK. Does Britain want to become the 51^st state? Surely not. Britain may be in for a rather rude awakening in a few year's time.

Of course, if a referendum were held now it could go either way. The anti-EU faction seems to be getting all the press, but I am surely not the only person who sees the dangers. If an in-or-out referendum were held this summer and the vote was for staying in what would be left of the government's position? On which side would Cameron have campaigned?

All these questions leave one with a distinct sense that the political situation in the UK is currently fragmenting. A referendum on EU membership is now almost unavoidable sooner or later. Whichever way it goes there will be a great deal of turmoil in its wake.

On the way to another boom-bust inflation?

 We do not hear much about monetarism these days, but perhaps we should. The key idea of monetarism is that the crucial variable in economic life is the money supply. Money occupies a distinctive position in that it is both a medium of exchange and a commodity. Money evolved out of commodities like gold and silver that could serve both functions. Gold is portable and can readily be broken down into smaller bits and so can function as a medium of exchange more conveniently than, say, cowrie shells. The purpose of a medium of exchange is to keep track of credit, of who owes who how much. Modern money has become what we call fiduciary issue. This means that it relies upon faith. The transition from gold to paper money was due to the fact that paper is easier to carry. A piece of paper that says “I owe the bearer such and such an amount of gold” issued by a reliable lender was more convenient than the gold itself. Then it was found that the lender did not, in practice, have to keep that much gold either because the borrowers did not, in practice, all ask for the gold at the same time. So paper gradually replaced metal and nowadays paper is being replaced in a similar way by electronic records. This has now reached the point where some are experimenting with issuing purely electronic currency, most notably the “bitcoin”.

Gold, therefore, was a commodity that functioned as a medium of exchange. In trade, a merchant gives a product to a buyer and the buyer then owes the value of that product. The buyer signifies this debt by transfering to the merchant an equivalent amount of medium of exchange. Let's put this differently. If I own x amount of the medium of exchange, what this actually signifies is that the world owes me x worth of goods. In a modern economy with plenty of opportunities for exchange in the form of shopping centres, I can go and get the goods I am owed more or less whenever I choose. When I get some goods, the amount I am owed goes down and I have less money. If I sell something my credit goes up – I have more money. What most people sell is their labour. Such is the nature of money. It measures what we are owed for our input. A variety of social conventions then determine how much this should be. Although a person may spend many hours looking after their own children the convention generally is that they are not owed anything for doing so, but if they spend that time looking after other people's children in accord with a legal contract then they will gain credit (money) for doing so.

Monetarists then realised that it makes a lot of difference (a) how much credit there is and (b) what happens to the value of the medium of exchange.

If the value of money is falling (inflation) then there is an incentive for me to go and get my goods as soon as possible, because later I will have to give up more of my credit than now to get them. If the value of money is increasing (deflation), then the incentive is opposite. It is better for me to wait. The goods I want will be less expensive next year so I may judge that it is better to do without them for the moment.

Also, each of these conditions is self-reinforcing. If the value of money is increasing and that of goods is therefore falling, there is also an incentive to get rid of goods and exchange them for money. This incentive to sell will itself depress the money value of goods further, which is to say, it will make the growth in the value of money more rapid. If the value of money is falling and goods are getting more expensive, there is an incentive to get rid of money as fast as possible, thus further depressing its value. Left to itself, therefore, without any regulation, there would be a tendency for the money supply to be unstable, suffering from periods of run-away inflation or deflation, either of which undermine money's ability to act as an efficient medium of exchange.

Thus, the basic function of a medium of exchange is to keep track of credit. If I give to another a motar car, the system should ensure that at some later date I am able to receive a motor car's worth of other goods. If, however, the value of the medium of exchange changes in the meantime, this no longer works and I either recveive much more than I deserve or I an cheated out of what I am owed. If these discrepancies become too great, the ordinary member of the public will become disaffected and political trouble will ensue.

Now there is a further twist. Some commodities other than money do act as more or less efficient stores of value. I am calling them stores of value rather than media of exchange because they are generally either not portable enough to act as the latter or they are too rare to be generally recognised in the latter capacity. Gold, since it ceased to be a medium of exchange, has reverted to being a store of value. However, the store of value par excellance is what we call real property, namely land and buildings. Sometimes it may serve me much better to invest my money in real property than to keep it in money form. Real property is a long term money store.

So far, so good. Now let us look at what is happening at the moment. With the opening up of international trade, a process now sometimes called globalisation, some people have become rich. This is not necessarily a bad thing. At various periods in history there have been expansions of trade, particularly in the aftermath of the creation of great empires such as those of the Romans or the Mongols, or in times of exploration and colonisation, and these have often been times of cultural eflorescence broadly beneficial to everybody as well as opportunities for a few to become rich. I am disinclined to see globalisation per se as a problem. It could be a boon to everybody.

However, there is a downside in that the rich tend to store rather than spend their money. If we go back to basics, if one person is owed a fabulous amount, then they are actually owed more than they will ever need and there is, therefore, no point in them claiming it. The rich, therefore, become a money sink. The emergence of a class of super-rich such as has occurred in recent decades, persons vastly more rich than anybody has ever been before, constitutes a sink in the money supply. This means that there is then less money to go round among the rest of the population. With no other intervention this would mean that the value of money would start to rise, a deflationary cycle would set in. Deflation favours those who hold money and therefore favours the already super-rich. The cycle is self-reinforcing and can only get more and more extreme unless there is some other intervention.

In the last decades of the twentieth century this tendency was countered by a different phenomenon which was the growth of credit. Deflation did not set in because there was enough general confidence in the growth of economic activity for people to simply create new measures of credit. There was an explosion of consummer credit mediated by banks who invented new ways of keeping track of who was owed what. Everybody acquired plastic cards that carried the information. People were able to spend money that they did not have. This, in effect, expanded the money supply. So although there was an underlying deflationary tendency already at work, it was disguised by a mechanism that permitted ordinary people to go into the red. For a couple of decades this continued to work. Money, which now included consumer credit, continued to lose value and we seemed to be in an inflationary cycle. This was, however, a bublle that burst and it did so in 2007.

Let us recap. Money is a fiduciary system. It relies on the confidence that people have in it and this confidence depends upon the ability of money to do what it is supposed to do which is provide a fair and accurate record of credit. As long as it does so people will trust it and use it. However, as we have seen, money has an inherent instability and is prone to run away into deflationary or inflationary cycles which do not correct themselves. This means that human intervention is needed to prevent these cycles running to an extreme. Such intervention does not always work. When they run to an inflationary extreme there arises the kind of situation that afflicted the Weimar Republic and has bankrupted various Latin American governments in the past. Sometimes this ends in war. When they run to a deflationary extreme, the kind of revolutionary situation described by Karl Marx is created with such extremes of wealth and poverty that the dispossessed feel they have nothing to lose in slaughtering the better off.

Since 2007 we have tipped over from an inflationary period into a deflationary one. So far the governments of the largest countries have intervened only to the extent of injecting some extra money (quantitative easing) into the system. This has dampened down the deflationary effect. However, the rich are still getting richer, economic activity is still at a very low ebb and the danger of collapse into a wild deflationary cycle is apparent. It is very likely, however, that this will not be allowed to happen.

In fact, we are probably about on the cusp. Japan's new government has decided to go for a reflation of the economy. One should note, in passing, that none of this has anything to do with “left' and “right”. While in Europe it is the left that urges some degree of reflation in Japan it is the right that has done it. There is some tendency for the right to favour deflation because it benefits the rich, but only in the short term. In the long term it provokes revolution and plays into the hands of the extreme left. Nonetheless, while this is not a left-right issue in the normal sense, a great deal does hinge on politics. Policy will determine how long the deflationary trend is allowed to run before we flip once again into inflation and policy will not be only a response to these economic factors. Other matters are always also in play.

To some extent, the situation where there are several major currencies controlled by more or less independent governments works against wisdom in either of the run-away scenarios. Whether it is a period of inflation or deflation, there is what in game theory is called a “Nash equilibrium”, named after the mathematician who identified the phenomenon. A Nash equilibrium is the situation that arises in a game where there will be one winner and many losers where winning requires action but whoever moves first will lose. This type of game is surprisingly common in many fields of human interaction. It results in no party being willing to make the first move even though they know that moving has to happen sometime. I suggest that we are in such a situation.

In a deflationary cycle, in theory, the first country to reflate risks seeing its currency lose value catastrophically. Whether this will actually happen to Japan or whether the Japanese initiative will spark reflation in other areas or policies designed to protect Japan from the raw consequences of its approach remains to be seen. A key player here is America. America is in a delicate position. It's economy is big enough to have an effect on other players and so it could risk reflation. On the other hand if the value of the dollar were to start to fall too precipitately this could also lead to a run away catastrophe since a vast amount of dollars are held overseas, most notably by China. Were these dollars to come out of storage and enter the world currency markets the value of the dollar would drop very rapidly indeed. America might then have to become proectionist in order to prevent its home economy from collapsing and it would certainly lose most of its remaining world role. America would become isolationist.

What about Europe? It appears to me to be the case that insofar as one can talk about the EU as one entity it is playing the long term game aiming to be the last player to reflate and, thereby, take the biggest prize, albeit at the cost of considerable internal tension in the meantime. The deflationary period in Europe favours centralisation and efficiency. These are the things that Europe needs in its present phase of development. To act as a single entity in the political world it has to be more than merely a confederation. Centralisation of control has to be achieved somehow. The population is becoming increasingly reluctant to vote for this so it will be achieved by non-democratic means. An example remarkable for its swiftness and effectiveness has been the implementation of the banking union over the past couple of years. This has created a mechanism for a degree of centralised economic control essential to the European project. The effectiveness with which the central authorities dealt with the Cyprus situation was a first demonstration of the power that has thereby been created. This centralised regulation will force higher levels of efficiency and lower levels of corruption upon those member states that have in the past been least efficient and most corrupt. Europe is getting its house in order. At best this will mean that when the inevitable eventual reflation occurs Europe will be in the optimum condition to take advantage of it and if Europe reflates last it will do so without any of the risks of currency devaluation that the early movers incur. At worst, however, the internal tensions generated by high unemployment, shortage of credit and deflationary pressures will cause the EU to fall apart or become internally dysfunctional before it reaches the point at which it is able to cash in its advantage. This is clearly a game of nerve and risk. Interestingly, a block like Europe with its collective leadership may well fare best in this particular game doing better than countries with aparently more effective, because singular, leadership. The fact that it take the EU longer to make decisions means that they lag behind the trend and in a game where the last player wins this may well be to the EU's advantage.

However the particular politics play out, a phase of reflation starting sometime in the not distant future, and possibly already beginning, is the only alternative to a world scale disaster. The hesitancy with which most countries are approaching this prospect is, however, very understandable. The danger of flipping into out of control inflation is real. Once it becomes apparent that the world as a whole is entering a reflationary phase, the incentives all reverse. Those who have hoarded money for the past six years will have a strong incentive to get rid of it and convert it into other stores of value or to simply enjoy its fruits. The rich will see the prospect of the value of their pile being eroded. All this will lead to a sudden up-swing in the money supply. This could be such as to make the consummer boom of the 80s and 90s seem small by comparison. Basically, the bigger the market the bigger the market fluctuations. Globalism has great advantages but with them come equally great dangers. Unless a degree of international co-operation never seen before occurs, and I doubt that it will occur, rapid inflation is on the way some time soon.

Who will win and who will lose? This is very hard to predict but my best guess is that the EU will come out of it rather well in the end, that America will emerge having lost influence in the world, still a substantial player on the economic scene, if somewhat isolationist compared with its present position, and that Japan will go through a period of considerable cultural change as its dash for growth will make it much more difficult for it to maintain its traditional insularity and self-sufficiency. The outcome for China is perhaps the most obscure. The danger of internal strife is perhaps now higher in China than in any of the other blocks. The authoritarian government holds its legitimacy by dint of its ability to deliver steadily increasing living standards to the majority of the population. If this falters, as it must sooner or later, there is likely to be trouble. If China can achieve a “soft landing” then it may end up normalised into being one major player in the international economic game with continuing overall increases in living standards and gradual democratization of its institutions at home. However, the chances of a rougher ride must be quite high and we have recently seen how the govenrment has tried, fairly successfully, to divert discontent into nationalist fervour, a route that is always tempting for a government in trouble, but one that can bring major unpredictable consequences at home and abroad.

So, in summary, it seems almost certain that in the near future there is going to be a widespread shift from deflationary to inflationary policy internationally; that this is unlikely to happen in an internationally co-ordinated fashion; that this lack of co-ordination will create significant winners and losers so we can expect the present differentials between economic blocks to shift; that there are greater dangers in this change of direction than formerly simply because the process of globablisation creates a bigger pool in which bigger waves can occur. Inflation is coming to a country near you sometime very soon. 

 

 

Cyprus: Europe is getting better at this

I have been following the Cyprus crisis quite closely, not least because, many years ago, I used to live there. Many commentators are opining that the whole thing is a disaster and that the EU has handled it badly. I disagree. I am much more in agreement with Peter Gumbel who points out that a short sharp shock is probably better than a long slow one and also highlights the fact that off-shore tax havens are a source of economic and political weakness to everybody. Gumbel writes, "by suddenly showing that even preferred tax havens aren’t 100 percent safe, the EU may have done a great service to international finance as a whole". The hit for wealthy people who hid their fortunes in Cyprus will have been massive in this case and this is important. As long as it is possible for the wealthy to simply move their money off-shore, serious wealth redistribution remains impossible everywhere. The EU was, therefore, absolutely right to deal decisively with the Cyprus problem. To have such a haven inside the EU would undermine the whole European project by introducing a laxity into fiscal affairs that would be a worst case of the disease that has brought the EU to its present crisis. Present measures do, however, make clear that the EU is dealing with this disease in an effective way. 

When historians look back on this period they will not be listening to the outraged voices of contemporary commentators. They will see, rather, how the advent and advance of the banking union will have been a key turning point in the history of the continent. The EU struggles with the fact that financial policy has mostly been in the hands of national member governments and some of those governments have a long history of less than good practice. When the present crisis started everybody assumed that it had to be dealt with by direct negotiations between the EU and the national governments and in such a forum national governments generally had the upper hand so that it was impossible to bring in any serious reform. Greece and Ireland were dealt with in this way. Then came Spain and it was suddenly realised that banks and governments could be separated. The Spanish problem was more a bank problem than a government problem so the EU proposed that it deal directly with the banks and this quickly led to the realisation that there could be an effective banking union across Europe without needing new treaties between governments. The Spanish government also realised that it was less painful to let the "troika" (European Central Bank, International Monetary Fund and the EU itself) step in and impose terms on its banks (and take some of the blame for the immediate effect of higher unemployment) and this set the tone for future interventions.

The one big problem standing in the way of a banking union has been the heritage of bad practice from the past. Starting from scratch, an Europe wide banking union can mean that the ECB becomes the bank to the bankers and the EU becomes the body that sets standards and ensures good practice and this offers some real guarantee that people may have confidence in European banks in the future. However, something had to be done about the heritage of bad debts and shady practice from the past. The Cyprus instance has been by far the most decisive surgical intervention to deal with this problem and it gives a clear message that the bad old days are over and any remaining vestiges of the old ways will be dealt with severely. The EU used to be criticised for ineffectiveness, but here we see a quite different spirit at work with the EU implementing and carrying through a radical and vital reform at a pace that it is difficult to imagine any other large country achieving.

We are seeing here a reform that

1. deals effectively with corruption

2. eliminates large scale tax evasion

3. drastically restructures over-inflated institutions turning them into workable and effective enterprises

4. brings a common standard of regulation

5. forces persons in authority to act in a responsible manner

6. in effect, brings about a substantial centralisation of economic control within the euro zone.

All of this will, in the medium term, mean that the euro will emerge as a very strong currency, quite possibly displacing the dollar in many areas.

The fundamental reason for my optimism about all this is that crises of this kind are fundamentally ethical and the only way to clear up an ethical shambles is to act in a way that cuts through the mal-practice rather than appeasing it even though doing so always initially raises shreeks of protest. In the way that the Cyprus banks have been dealt with there will be no bail-out of rich investors or top bankers by the tax payer.  In the earlier rescues, most notably in Ireland and to an extent in UK, it was the tax-payer who provided the funds for the rescue and everybody knew that this was not right, but nobody could think of another way of doing it that did not have even worse consequences. Now another way has been found. Rich investors who put their money in Cyprus banks will now see that money converted into equity. If the bank proves to be worth nothing that equity will become a loss to those rich people. Not a cent of tax-payer money will go into the pocket of the already rich. This is a great improvement on what happened in the past and it is in keeping with the supposed ethics of the capitalist system.

Some will argue that the capitalist system as a whole is unethical - I am not entering that debate here. However, every system does have its own ethic and if the capitalist system is what you have got then you have to deal with it in its own ethical terms. The ethiucs of capitalism are that the rich can get rich by taking risks. It is therefore essential that the risks be real ones. If you put your money into a failing enterpise you take the loss, you do not turn to the tax-payer and say, please bail me out.

When the dust settles I think we will see that the intervention in Cyprus will have significantly contributed to a higher standard of responsible governance in the whole financial sector of European affairs, not just on one island, but across the continent. 

US decline could now accelerate

President Obama must be the envy of many leading politicians. He has somehow managed to bring in an unpopular package of austerity measures in a way that has led the public to blame his opponants for them. This requires some very clever footwork. Not only that, but the cuts will fall disproportionately upon the military which is the last thing the Republican opposition would want. Quite a coup.

Of course it was unavoidable that some kind of austerity package would have to come in somehow. The US government is so in debt that it simply had to stop. The only other option would be a sharp devaluation of the dollar which would have many untoward consequences. As it is the dollar will probably continue its long term decline against the euro, but not as precipitously as would have happened without the "sequester" or some equivalent.

Cutting the military was also inevitable sooner or later. America spends far more than any other coutry on armaments. However, the USA has built its position in the world substantially on its military might. This has been noticably slipping away in recent years. Now with withdrawl from Afghanistan in sight the prospect of the USA becoming more isolationist once again becomes a distinct possibility. This will, however, bring economic consequences. If the US sphere of political influence shrinks and the dollar ceases to be the automatic currency of international trade, the American economy will be on a slide.

Another dimension is the oil situation. Human ability to thrive economically is often fundamentally a function of access to cheap energy. If you have energy you can do things. Energy is what does work. America has depended upon oil and over the past few years the idea has built up that the exploitation of shale oil deposits using methods called fracking would make the USA into the number one oil producer fairly soon, overtaking Saudi Arabia. Estimates of oil reserves looked promising and government policy will inevitably have factored these in. If the USA were self sufficient in oil there would have been no need to spend all that money on invading Iraq and then Afghanistan (don't believe all that nonesense about wars on terror or rescuing far away countries from tyranny). However, it seems now to be becoming clear that the estimates of reserves were over-blown and that the economics of fracking are nothing like as promising as was originally suggested. We might even see major oil companies going bankrupt. I don't imagine they will get bailed out the way that banks were.

None of this is good news. We shall probably see unemployment rates rising again and as the austerity measures have been brought in in a rather unplanned way dysfunctions will appear in a variety of weak points in the economic structure. To the outside observer it does appear that America has become less governable. It is far from descending into the kind of chaos that it has brought to some other nations, but it is difficult to avoid the conclusion that some difficult times lie ahead and America will have to face these on its own. 

 

 

 

Vagaries of the British Electoral System

The dynamics of voting and popular opinion are complex. The Lib Dem victory in Eastleigh was not expected by many. Even the victors seem relieved and a touch surprised that they pulled it off. Obviously a big factor has been the UKIP intrusion which has taken votes from both the governing parties. Many would have thought that Cameron's decision to call a referendum on Europe would have reduced the UKIP appeal by stealing their clothes. However, it does not always work that way. Voting is not a wholly rational process. What a party like UKIP, or any new or marginal party of whatever persuasion, has to struggle with is being taken seriously. This is a far bigger hurdle than the attractiveness or otherwise of particular policies. In fact, many of UKIP's policies are not particularly attractive and if opinion polls were held on them as separate issues many parts of its prospectus would be rejected by the public, but that is often not what counts. By saying that we need to hold a referendum on Europe, Cameron has, in effect, said to the public that what UKIP is saying is important. If the public then go on and vote for UKIP then it is not so strange. Having given them credibility, don't be shocked if they get more support. In fact, UKIP is the biggest danger to the Concervative's hold on power and the more Conservatives seem to be being influenced by UKIP the bigger that danger will be to them. If UKIP did not exist the Tories would be able to look at the next election with confidence. However, with the British first past the post electoral system the splitting of votes on the right could produce a very uncertain situation. If by the time of the next election Labour, Lib Dems, UKIP and Concervatives were all polling between 20 and 30 percent of the vote then the outcome of a general election could be a complete lottery. A party with 28% support could, in theory, obtain an over-all majority. That is a figure that is not inconceivable for any of the four. A rather similar situation already exists in Scotland. The Tories may yet regret having set themselves so firmly against proportional representation.

Britain prefers to keep bankers fat

The European Union has agreed some sensible policies to control banks, including putting a cap on bonuses paid to bankers. The UK is against controls of this kind and would like its bankers to get bigger bonuses. UK hopes in this way to lure the best bankers. What the British public think about their government subsidies going straight into the pockets of bankers will never come to light because the British press never tells them about the things that they would like that the EU does. It only ever reports the EU when it does things the public will disapprove. 

Why Don't We Measure Wealth of Nations?

There is something bizarre about the way that nations assess how they are doing economically. Many years ago I worked in accountancy. A company is required to produce two kinds of account at the end of each year, a balance sheet and a trading account. These accounts reveal, albeit in a somewhat rough and ready way, the value of the company and the profit or loss that it made in the preceding twelve months. The balance sheet is a measure of wealth. A profit and loss acount is a measure of how that wealth has changed over a period. Neither kind of account is available for nations, however.

A company that simply produced a total of what it had spent without any regard for what the money had been spent on would be regarded as remiss and the data from such a cash flow statement would not be regarded as being at all reliable as a guide to the wellbeing of the enterprise. However, it is precisely this latter kind of account that is used in the case of nations where it is called the gross national product. This leads to all manner of deception. 

Let's consider some simple examples of the folly of the GNP approach to assessing national economic functioning. If we now spend twice as much on washing machines as we did ten years ago this is seen as a doubling of that element of GNP over the period. However, if it happens to be the case that washing machines nowadays only last a quarter as long as machines did then, the reality is that although the cash turnover has doubled, the actual wealth has halved. The extension of this principle means that the current system contains a built in tendency to encourage the production of shoddy goods with quick turnover rather than quality goods that last. This is because governments are, to an extent, judged on their ability to increase GNP. The simplest way to increase it is to substitute shoddy short term activity for quality production that lasts.

Countries that increase their GNP might be doing so because they are genuinely becoming more wealthy. However, it is just as likely that they are doing so by becoming lower quality. In large areas of our economic lives we no longer reward quality.

Again, an area of woodland may provide many benefits to the people who live in the viscinity but it adds very little to GNP. If we cut the forest down and replace it with a car park and charge people to use the car park, this will appear as a gain. But is this gain real? Has something not been lost in the process? What has been lost is invisible in GNP terms.

Again, if I employ you to look after my children so that I can go and work in a nursery looking after other people's children, including yours, this will appear as much better than us all looking after our own because money is changing hands at every stage.

All these movements of money say something, but they do not tell us much about the actual wealth of the nation and certainly nothing about whether it has increased or decreased. In fact, many of these cash flows are positively misleading if what we want to know is somehing about actual wealth.

This rather crazy state of affairs has led some people to argue that what is needed is a “no growth” approach. This is understandable, but is surely also a mistake. What we need is real growth, a growth in real wealth. Wealth means improvement, not a move towards more short term ends, increasingly shoddy output, and the substitution of money relations for ones based on real human sentiment. Improvement means that things of real lasting value come into being or are sustained.

It would be difficult to quantify what is of worth to a people and to assess whether there was more of it at a later date than at a former one or not, and any such account would, of necessity, be approximate. However, the measures that we use now are not that accurate either. It would surely be better to have an approximate measure of something real and important than an approximate measure of something that is misleading and tends to undermine real value.

 

 

 

 

 

 

The Possibility of Islamicist Revolution

History repeats itself. Communism, a secular, materialist puritanism, has fallen but Islamicism (I'm deliberately distinguishing this from Islam itself), a religious, transcendental puritanism has replaced it. Like the previous one, the new puritanism feeds on the natural revulsion that ordinary people feel about the corruption and cruelty of the dominant powers in the world.

It is a mistake to believe all that is implied in the Western press to the effect that we are always the innocent and good and the other guys are all bad. The Islamicist appeal rests on Westerm mal-practice and support for or connivance with mal-practice. We are in favour of democracy when it suits us but still prefer friendly autocracies. We rain down drones from the skies that do not just kill villains. We provide the market for most of the drugs the trade in which supports some of the least savoury characters in the political game in several parts of the world.

The dominant powers, however, are somewhat less dominant than they were. The position of the US is noticeably slipping and Europe is slow to fill the vacuum because it has troubles enough at home sorting out its own structural problems. This will pass, but for now there is an opportunity for insurrection.

Thus in Afghanistan the Western powers are trying to figure out how to get out. However the regime that they support that will supposedly be left to run the place is corrupt, implicated in torture and clearly not making the grade. Absconcions from the Afghan army out-number recruits. Often the absconders take their weapons with them and we can guess where they end up.

Afghanistan threatens to become a Taliban stronghold once again equipped to pose as the heroic centre of a worldwide revolution, much as the Bolshevics did. They can probably see that the world, or, at least, substantial parts of it, are ripe for revolution. This will be especially those parts where government has decayed. There are substantial parts of Africa, for instance, where the drug trade is the most thriving (sometimes the only thriving) industry.

Of course, the same people who are rightly revolted by profiteering, drug sponsored politics, corruption and torture tend soon to be dismayed by puritan repression whenever it gains control so the revolution will not be all plain sailing. Communism was eventually destroyed from within. Islamicism will probably have some successes, but in the end it will meet the same fate. By then, however, the world may be a rather different place from what we see today.

The Arab Spring may not be All it is Cracked Up to Be

The past few years have seen several regime changes in the Arab world. Many people are inclined to see this as the inevitable and long overdue emergence of democracy in the area. For a long time, the Western powers and especially the USA backed autocratic regimes in the area because they were friendly to US interests. At the same time, two-facedly, they maintained that democracy would be better and that it was only a matter of time before democracy triumphed, all the while supplying the old regimes with the means to keep popular unrest suppressed.

This confusing propaganda stance did, however, convince at least some people in the Middle East and eventually when popular up-risings were triggered by declining economic conditions, the West had to publicly support them. Actually the discontent in the Arab countries was not so very different from that in parts of Europe, like Greece. All were suffering from the economic downturn. Greece did not have the option to blame their system of government, but the Arabs did. 

The trouble is that changing the mode of government is unlikely to bring the benefits that people want which are largely economic. Democratic governments have just the same economic problems as their predecessors. Furthermore, as soon as they come to power, democratically elected parties in these countries soon realise why the country had an autocratic system in the past. The new governments realise that the country is not going to get out of its economic problems without discipline and austerity. That means tight control which in turn means over-turning the freedoms that the democratic wave sought. The resulting sense of betrayal and disappointment is bringing Egypt to the edge of disaster and the same thing could happen in Libya and, were the Assad regime over-thrown, eventually in Syria. Democracy does not put more bread in the shops. 

Nor is there any guarantee that the new regimes will be pro-Western. Although the West has belatedly supported the move to democracy in principle, Western countries will follow their national interest as soon as the immediate transition is past. The new regimes may well then find themselves with less Western support than their autocratic predecessors.

In power political terms, the interest of Europe and America is to keep north Africa and the Middle East under control and, if that is not possible, then to keep it weak and divided. No Western politician is going to say this openly so the double-faced stance will continue. The Islamic Jihad against the West is substantially grounded in the realisation by some of the rebel leaders that the only way that the Arab world could escape from such domination would probably be by uniting in some kind of pan-Arab commonwealth or, as they would have it, Sultanate. The likelihood of this happening, however, remains rather slim because the divide and rule policy works all too well and neither the move to democracy nor the rebellions in Mali and elsewhere will change this any time soon.

 

Europe would be Liberated by UK Exit

The general response of most Europeans outside Britain to the announcement that the UK government is thinking seriously about the possibility of leaving Europe has been an immediate, "Good riddance, they've caused nothing but trouble ever since they arrived". As one Belgian politician put it this morning regarding Europe there has never been a single constructive suggestion emanating from the UK. 

 The broad consensus within Europe and by commentators outside Europe is that the reason that there are economic difficulties in Europe at the moment is that you cannot have a single currency without some central control of fiscal, monetary and banking policy. As Chancellor Merkel repeatedly says, "We need more Europe, not less Europe." The British government wants the opposite. It wants a return of powers to individual governments. This would destroy the euro and undo most of the advantages that Europe has so far achieved. It is very unlikely that any of the other large countries in Europe would want to move in that direction.

 One of the reasons for these differences is the different distribution of information. Due to the way in which the press and other media is managed in UK and in other EU countries, the British public has a very different set of information about Europe from everybody else. Probably very few people in Britain know that the EU won this year's Nobel Peace Prize, for instance. Few of them realise that while economic advantage is important the primary reason for the existence of the EU is to ensure peace. Few have any sense of the reforms and changes that have occurred within the EU in response to the recent economic crisis.

 Another reason is that Britain still has a vague memory of having been the dominant country in the world, head of a vast empire. It is very hard to go from being the dominator to a position in which one has to be accountable to somebody else, especially when the somebody else is a group dominated by Germanh whom Britain defeated in two World Wars. From the UK perspective it is not too extreme to see the EU project as the reversal of those victories.

It is also possible to interpret current event in terms of the pressures that David Cameron is under within his own party. The conservative government of John Major was paralysed and then wrecked by the actions of the intransigent euro-sceptic faction within the party and this remain a serious threat. Somehow Cameron has to pose as euro-sceptic while actually wishing that the whole issue would go away. By saying that there will be a referendum after the next election, he may well be hoping hat this will kick the issue into touch for the rest of this term. If so, then he is mistaken. 

The impression from the mainland side of the Channel is that this is just a slightly more extreme version of the "British problem" and this escalation means that it is not just British people who will react. Opinion polls suggest that ordinary EU citizens have had enough. They do not want any more concessions to UK and this is likely now to spill over into not even wanting co-operation with UK. Europe is going through an enormously important period of reform. These reforms involve austerity. Austerity is hard to endure. In such circumstances there is commonly a hunt for a scape-goat. Now Britain is volunteering for the role and the offer may well be accepted.

Another commentator on the radio this morning here in Belgium said, "Europe has lost twenty years due to Britain, we don't want to lose another twenty." It is easy to see the logic. Britain has resisted all attempts to achieve greater centralisation in Europe. Now Europe is suffering from a lack of central control. If the process had gone forward faster the whole euro crisis might have been averted. Who is to blame? This, of course, is an over-simplified picture, but over-simple pictures are what the public wants.

Economically Britain and the rest of the EU would suffer from a UK exit. However, that would be short term. Politically this could be just what the EU needs. In order to unite people have to be against something. These processes are not rational, they are emotional. Such emotions can have massive effect. Whether the EU succeeds will be a function largely of whether EU citizens want it to succeed. Some commentators think that the UK leaving would dishearten other Europeans and lead to EU failure. I would expect the opposite. If UK leaves it will strengthen Europe. It will make other Europeans pull together more. Being more aware of their difference from UK will make them more conscious of their commonality with one another, the challenge of UK scepticism will make them more determined to succeed, and the absence of Britain will make meetings of Europe's leaders easier to manage which should make them more efficient and productive. The centralising processes which are already underway will accelerate and as the developed world comes out of recession the EU will be in a stronger position to profit from the up-turn.

I suspect that David Cameron knows that being in the EU is good for Europe even though it is not popular with the British public nor with his party. He hopes that he can win a new deal that will keep the UK in the EU. This is a very bog gamble. If he gets anything it is likely to be cosmetic only and even this is likely to be resisted by many European leaders who will be sensitive to opinion in their own countries. More seriously they will also see giving Cameron what he wants as a recipe for another twenty years of acrimonious relations. I fear that there is no way the UK can get what it wants.

At the same time, there is a possibility that this debate may lead to further reform in the EU. Such reform may move in the opposite direction to what Cameron says he wants, but ideally it could be toward a greater democratization. If the European parliament came out of all this more powerful then there could be a way for the EU to get its needed centralisation and the UK to not lose face. The British government could pose as having forced democracy on those reluctant Europeans. This, however, is a long shot. We are in for a few years in which the question of Britain's place in Europe is up for more intense discussion. In itself that is good. The outcome, however, mat not be. 

 

Is America Going to get Serious about Climate?

The inauguration address of President Obama entering upon his second term suggests that we might be about to see a welcome change of direction in US policy in relation to the environment. There is a recognition here that (a) climate change is real as has been witnessed by ordinary Americans facing unusually severe weather events in recent years (b) the US is falling behind in the technology needed to deal with this. Obama was very skilful in pitching this within a Christian frame so as not to frighten people on the political right. He would certainly like this to be a uniting rather than divisive issue. Can America come together over this challenge? Could this be the stimulus needed to heal the deep wounds of recent years. America has rarely been so deeply or bitterly divided. There are two really big problems in the world - belligerence and environment. The US is far and away the biggest consummer of oil and the biggest spender on weapons. What America does matters to us all.

This new presidential term is beginning with less euphoria or wild expectation than the last and this is probably also a good sign. Modest real achievement is a great deal preferrable to gesture politics that can be swept away all too quickly. Climate change is certainly the kind of challenge that needs sustained reform across the spectrum of human activity. America has been built on a spirit of individual independence. This now translates into families each living in their own patch of land so that houses are spread out across the landscape rather than bunched together as they tend to be in the Old World. This means maximum energy loss and the necessity to use a car even to do the shopping or see a friend. President Bush had the idea that this American way of life was a holy matter that Americans had a right to. He was wrong. It will have to change in some way. Perhaps settlement patterns will change or perhaps every house in America will be roofed with photo-voltaic cells and the cars will be powered by batteries, but something has to give.

America is the sort of country where massive progress is possible. In the matter of transition to an ecologically sustainable economy they are already a long way behind in comparison with, say, Germany, but this does not have to mean that they will stay behind. It is going to be a huge job to change attitudes sufficiently, but it is not impossible. If America were to wholeheartedly embrace what is needed to move to an economic and social system that was not dependent on burning vast amounts of carbon it would set an example that most of the world would follow. This would make our grand-children's lives very different from how it will be if present trends continue.

Can they do it? Certainly. Will they do it? I'm not sure. It could all hinge on how big the next climate disaster is. They'll do it eventually, God will see to that, but he might have to send a few more thunder bolts before enough people really get the message.

 

 

I predict increasing European expansionism in Africa.

Can we take the French intervention in Mali as an indicator of a shift in the US-Europe balance? I think we can. The US is involved because American hostages have been taken, but he US is not involving itself any more than it can possibly avoid and the French have picked up the ball. For quite a while many US commentators and politicians have suggested that Europe should take a bigger share of the cost of policing the world and this is what is happening in this instance. This has to be in part because the US can hardly afford to continue in the role that it has had in the past. At the same time, Europe has both internal and external reasons for involvement.

I am sure that we will see more European expansionist activity in north Africa. Nor should we think that the events in Mali are unrelated to those in Libya. The Gaddafi regieme was essentially toppled by European intervention. NATO was the instrument, but it was European concern, including British pressure, that drove it. Now, many of the fighters who sided with Gaddafi have teamed up with Al Qaida and relocated to Mali to carry on the struggle. This may seem like isolated trouble spots, but it is really part of a larger slow-motion war and Europe can hardly avoid being drawn into it; the more so as the US increasingly stands aside.

Countries quite commonly get out of their economic difficulties in the short run by military means. Many parts of Europe currently have high enemployment. That means lots of young men hanging about with nothing to do but cause trouble. The temptation to sign them all up into the military and send them somewhere to do something exciting is always there. This could be a long-running saga.

As Europe strengthens militarily and economically North Africa will become part of its sphere of influence in the same way as Latin America used to be part of the US sphere. That does not mean that there will not be resistance - there will be plenty - but unless the basic rules of the political game really have changed more than I imagine, it seems predictable that Europe will find itself more and more drawn in.

Whether this means that some parts of North Africa will eventually become part of the EU it is too early to judge. The question of whether to admit Turkey is troublesome enough for now and the whole issue of cultural balance between Christian/Secular Europe and Muslim lands is loaded with insuperable difficulties. France gave up Algeria because it could see that if Algeria were incorporated into metropolitan France it would not be many generations before more than half of the electorate of the combined country was Islamic with potentially disastrous consequences for French culture as we know it. In a democratic age, incorporation of lands with completely different cultures is extremely problematic. On the other hand, dominating them is not. Democratic countries have never been shy of building empires ever since democracy was invented in Athens all those centuries ago. It could be that imperialism is about to make a comback, though, of course, the rhetoric will be different. Europe is only in Africa to liberate people from oppression, after all.

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Japan and China Edging Toward War

China and Japan are edging toward war says the Economist. Both countries are experiencing economic difficulties, Japan's being the more long-standing. They are rivals for leadership in East Asia. This is a classic of the kind of situation that used to lead to war and that was the root of war in Europe half a century ago. Most of us think that we have emancipated ourselves from those old time strategies and the idea of a real war between two such countries requires one to stretch one's mind considerably. Furthermore, if there were a war it could escalate. The USA would not want to be drawn in but it does have treaty obligations connecting it to Japan. Welching on these would bring the whole international position of America into question. Who would trust an American treaty after that? But going in could unleash a horror story with all kinds of fall out for politics, not just economics.

Nonetheless, whether China and Japan go to war or not, there is a pressure in East Asia from China's rising power, especially sea power. This is not just felt by Japan and Japan will want to make common cause with other East Asia nations in an attempt to contain Chinese expansion. This is the meeting of irresistible force and immovable object and something will have to give in the end. Dangerous times.