Asia's passing pleasure moment
By R Taggart Murphy
The boardrooms and finance ministries of Seoul, Bangkok, Jakarta and Kuala Lumpur are today filled with a fair degree of schadenfreude at America's troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once defined it as "unanticipated delight in the sufferings of another". But asking Asia's business and governing elites to repress shivers of pleasure at the meltdown of the American financial system is probably demanding more than flesh and blood can bear.
The spectacle of the politicians, pundits and academics of Washington and Chicago thrashing about in attempts to justify the vast amounts of money being shoveled at their, um, cronies on Wall Street is just a little too rich. That is particularly so since much of the money will have to be borrowed from the very people who a decade ago at the time of the so-called Asian financial
crisis were being pooh-poohed for their "crony capitalism," "opaque" banking systems, "incestuous" government-business relations, not to mention their supposed absence of transparent financial reporting, good corporate governance, or accountable executives and regulators.
But the glee in seeing the United States hoisted by its own petard must surely be mixed with a good deal of apprehension. Not only because Asia cannot escape this crisis unmarked, but because the crisis could conceivably force Asia's elites to engage in the open political discussions they have largely avoided until now - discussions about the kinds of economies they expect to shape in the wake of the American debacle; discussions that carry with them all kinds of risks.
The economic and financial dangers to Asia of the crisis need not detain us long for they are obvious. The region's stock markets are caught in the global downdraft. Asia's financial institutions are just as closely linked as those in every other part of the world to Lehman Brothers, AIG, Merrill Lynch and their devil's spawn of credit default swaps and "toxic waste" assets. We have already seen bank runs in Hong Kong and widespread layoffs by some of the regions' leading financial institutions. We are likely to see more of these troubles in Asia before the crisis plays itself out.
The United States appears headed into a recession that may be as bad as anything the country has faced since the 1930s. That in itself will spell trouble for a region that directly or indirectly relies on the United States as the final engine of demand. Japan last month, for example, ran its first trade deficit since 1982, something that is widely attributed to falling demand from the US.
But while this is all generally understood and prudent business and financial leaders in the region are already battening down the proverbial hatches, there is more going on here than simply the shrinking of the region's most important external market. For what we are seeing strikes at the heart of the entire process by which the region transformed itself over the past 50 years.
To be sure, Asia had little to do with the "subprime" mortgages, the slicing and dicing of rotten credits, the heads-I-win, tails-you-lose ethos on Wall Street that form the immediate causes of this catastrophe. But as Charles Kindleberger pointed out in his classic Manias, Panics, and Crashes, manias of the type that have just ended so spectacularly on Wall Street cannot occur in the absence of rapid credit creation. That credit creation in the present case stems directly from the ability of the United States to pawn off on the rest of the world an endless flood of dollar obligations, obligations that for a good 40 years now have never been presented for redemption with anything other than more US government paper.
It has been so long now that the United States had to obtain the money to service its debts by the usual means - selling more goods and services abroad than are bought; borrowing in a currency controlled by the lender rather than the borrower - that its politicians no longer have any institutional memory of what it all implies: the hard trade-offs of falling living standards and forced savings.
Like an alcoholic's wife who furtively keeps her husband plied with booze while managing to avoid thinking about exactly what she is doing, Asia has long facilitated the US addiction to drowning its problems in endless dollar cocktails. But the current crisis suggests that the days of cirrhosis of the American liver and delirium tremens are upon us. Without a clear grasp of the ways in which Asia's economic methods have facilitated American political pathologies, without a plan to replace Asia's reflexive reliance on exports to the United States with another economic driver, Asia too will be drawn into the economic and political maelstrom that now engulfs Washington.
Asia did not set out to become America's pusher; it happened through historical accident and the logic of the situation rather than any thought-through strategy. To see this, we have to go back to the circumstances of the late 1940s. The United States had emerged from World War ll with something over half the intact production capacity of the entire planet. But Washington was haunted by two fears: that the end of the pumped-up demand of the war years would mean the return of the Great Depression, and that a militant, monolithic communism would capitalize on the war's devastation to bring much of the world under its control. The so-called Iron Curtain had descended to divide Europe and Korea, Mao Zedong's Communist Party had driven the American-allied Kuomintang out of mainland China, while communist-led anti-colonialist insurgencies were emerging in French Indochina and British Malaya.
The US economic response was two-fold. First, at home, the United States adopted the new-fangled tools of Keynesian demand management to keep the country from sliding back into Depression. Meanwhile, abroad, the United States through such measures as the Marshall Plan and aid to occupied Japan, essentially offered to finance on very easy terms the transfer of production capacity to war-devastated nations. The US then agreed to accept the exports manufactured thereby without reciprocal demands for imports of American products. The notion that places like Japan could ever pose a serious economic threat to American industry did not occur to anyone on either side of the Pacific. What Washington cared about was that Japan and Western Europe not follow China and Poland into what was seen then as Moscow's orbit.
But the Keynesian synthesis that so electrified economists and policy makers of the time in the United States seemed to have little relevance to the challenges faced by an Asia emerging from colonialism and war. Keynes had addressed himself to the problems of a highly developed economy finding itself stuck in a trough of structural unemployment and idle production capacity; in 1946, Japan and Korea did not have production capacity to idle. Instead, there were two alternative models of development on offer. One was the Marxist-Leninist; the other went under the rubric of import substitution or dependency theory - that is, that the goal of development ought to be the freeing of a country from dependence on foreign financing and imported capital equipment. Both called for state-directed capital accumulation and autarkic development, although the latter did allow for market mechanisms to function at the local level. Both boasted an extensive theoretical literature. In early postwar Asia, China would be the champion of the former, India of the latter.
Japan, however, adopted neither. With the United States providing the initial wherewithal to rebuild its economy (albeit at the price of aligning its foreign policy with Washington's and ensuring that leftists were kept away from the levers of power), Japan chose instead to engineer an economic structure that focused on the rapid accumulation of dollars so that it could buy the capital equipment it needed. This meant the deliberate channeling of scarce domestic savings into externally competitive export industries. It is here that we see the origins of the distinctive Asian model of export-led growth.
The distinction between this and the import substitution model then being championed by India's Mahatma Gandhi and, subsequently, Jawaharlal Nehru may appear a semantic one in that both called for the development of domestic industry behind protectionist walls. But they differed crucially in their stance towards the existing global financial order. India sought to eliminate its dependence on that order; Japan to accumulate sufficient dollars in order to exploit it for its own domestic needs. Largely for geopolitical reasons, the architect and designated care-taker of that order - the United States - was perfectly willing and even happy to see Japan use it to cement postwar recovery and join the ranks of the non-Communist developed nations.
I wrote above that Japan "chose" its postwar path of development, but this is not quite correct. It happened not, as in Beijing or New Delhi, through any deliberate choice of an overarching theoretical model, but because the pressures and opportunities of the time made it seem inevitable to Japan's decision makers. The priority of recovery from the war's devastation was so obvious that it required no political discussion to give it legitimacy. The war years had left Tokyo with an intact institutional apparatus that could be used to channel scarce financing into targeted industries - it was easy enough to redirect the flows from munitions makers to promising export industries. With the fortuitous (for Japan) outbreak of the Korean War, the United States suddenly began placing large orders for Japanese goods needed to equip its military. Thus through a process more akin to biological evolution than conscious political choice, Japan found itself in a niche that functioned well-nigh perfectly for the country in the economic ecology of the era.
The results exceeded anyone's expectations. Between 1955 when the final elements of the postwar Japanese system were put into place and 1969 when its growth began to alter the global economic ecology which had fostered it, Japan boasted the highest growth rates that had ever been recorded by any economy in human history. But the circumstances of its birth - its coming into being without any real debate on the matter or generally accepted theoretical foundation - help explain what is happening today.
The late 1960s provided the first evidence that things could not keep on going as they had without adjustment. The rigid international financial architecture of the time, labeled the Bretton Woods system for the small New Hampshire resort town where it had been hammered out in 1944, could not accommodate the emergence of Japan's export surpluses - joined to a lesser extent by those of West Germany - and their mirror images, the first substantial trade deficits run by the United States for a century or more. Attempts to rework the formal arrangements of the Bretton Woods system collapsed in the political chaos surrounding the Watergate scandals and the American defeat in Vietnam.
The world economy limped through the rest of the 1970s until Paul Volcker was appointed chairman of the Federal Reserve in 1979 with a mandate to do what it took to halt the inflation that threatened to destroy the dollar as a store of value. Japan's vote of confidence in Volcker's policies - snapping up US dollar securities - permitted the rebuilding of the organizing principle of Bretton Woods: the dollar's central role in the international financial system. But instead of Bretton Wood's formal arrangements that required the United States to back the dollar with gold while other participants maintained fixed exchange rates with the dollar, the Asia's passing pleasure moment
By R Taggart Murphy
new system was predicated purely on the willingness and ability of the likes of Japan to continue to accumulate and hold stores of dollars.
Meanwhile, Japan's 25-year sprint from devastation to the front ranks of the world's industrial powers provided an overwhelming example to the region. South Korea, Taiwan and Malaysia all pro-actively adopted export-led growth strategies with concomitant suppression of domestic demand, undervalued currencies, and savings channeled into the development of internationally competitive industries.
With the coming to power in 1977 of Deng Xiaoping and Beijing's tacit adoption of the Japanese economic model, the region turned decisively away from autarkic development models. Vietnam
would arrive at the party in the late 1980s, and in 2000 India would formally abandon Nehru's legacy of import substitution to join in the scramble to build industries for export.
But not only did most Asian countries emulate Japan in making the highest national priority the building of internationally competitive export industries, they followed Japan in accumulating reserves in dollars - a trend that accelerated after the crisis of a decade ago. Most countries in the region, whether they had suffered badly (Thailand and South Korea), or largely escaped the worst effects (Malaysia and China) resolved they would never again be in a position where emissaries from Washington - or anywhere else, for that matter - would be in a position to dictate their macroeconomic policies or how they ought to structure their banking systems. They redoubled their efforts to build impregnable fortresses of international reserves against the slings and arrows of future balance of payments crises.
That effectively meant accumulating reserves in US dollars. Aggregate two-way trade and investment flows between Europe and Asia are not large enough to permit the euro to circulate yet in sufficient quantities in the region to see the euro substitute for the dollar as the region's reserve currency, even if the region's businesses were willing to switch from dollars to euros as their primary cross-border settlements currency.
As for the yen, neither Japan nor China for separate reasons want to see the Japanese currency supplant the dollar in the region. China is not prepared to cede that kind of economic leadership to Japan, while the wrenching changes that the emergence of the yen as a major international currency would pose to the Japanese economic and political order insure that Tokyo will move to bring that about only when there is no alternative.
But when a country accumulates reserves in dollars, it is effectively leaving its export earnings inside the American banking system where they can be used, among other things, to finance the building of houses for people who do not earn enough to afford those houses. The result is seven-figure salaries for gamblers with other people's money and tax cuts enacted while spending soars on entitlements and wars of choice.
The latest surge of dollar holdings in Asia on top of a generation of dollar accumulation in countries such as Japan and Korea coincided with the coming to power of the most fiscally irresponsible administration in American history. Not only did Asia's soaring dollar holdings help the George W Bush administration avoid the usual financial consequences in ripping open the sutures its predecessor had stitched up between America's taxes and government spending. They also facilitated a horrendous asset bubble in American housing while Alan Greenspan's Federal Reserve watched idly from the sidelines.
The era of American "deficits without tears," in the famous phrase of the French economist Jacques Rueff, has ended with the Panic of 2008. The core institutions of American finance are collapsing. The United States is still - and will remain for some time to come - the world's largest and most productive economy. But it can no longer act as the world's engine of demand, no matter how many dollars Asia throws at it.
For while those dollars may be "owned" by Asian central banks and businesses, they reside inside a ruined financial system whose panicked participants will not lend to those who need credit to keep their businesses running. As the Japanese can explain from their own experience of the mid-1990s, you can pour all the money you want into tottering banks and brokers, but when they are paralyzed by fear and will do nothing but lend back to the government, it does little for your economy.
The days of export-led growth for Asia are over, or at least exports outside the region. Intra-regional trade is another matter provided importers in the region can be found to equal exporters and the final demand is in Asia; that is, exports of parts and supplies from one Asian country to another for finished products headed for the US market don't count.
As the Koreans and Thais can easily testify given their own recent traumas, the United States cannot recover from the mess it is in without more savings - another way of saying less consumption. That in turn means the US after 40 years of profligacy will have to export more than it imports. For this to happen, much of the production capacity that has been steadily transferred to Asia over the last 50 years will have to be repatriated back to the United States so that Americans will have enough factories again in which to go to work to pay off the debts that their politicians and bankers so recklessly ran up. Otherwise, all those dollars Asia holds will quickly be worth very little. What, after all, is a dollar other than a claim on the output of an American? The Americans will have to have the means to create that output if the dollar is to have value.
Meanwhile, what of Asia? How is Asia going to wean itself from its dependence on the US market? One lesson the world may finally learn from this crisis is that genuine, long-term prosperity comes not from continuously shoveling money at distant foreigners so they can keep buying your stuff, and certainly not from games-playing and speculation by would-be plutocrats. Rather, prosperity comes from a large, economically secure middle class - a middle class with the means to purchase the output of a nation's factories, farms, and service providers.
Here is where we see a connection between the meltdown of American finance and the political turmoil that has been wracking practically every country in the region. Each specific example has it own local causes and flavors: the struggle in Thailand over former prime minister Thaksin Shinawatra's buy-rural-votes-populism; the political insurrection led by Anwar Ibrahim in Malaysia against the entrenched UMNO elite; the seemingly out-of-proportion demonstrations in South Korea over beef imports; the palpable rage in China at the inability of the government to enforce safety standards in construction and food provision; the challenge posed by Japan's first serious, united opposition in 50 years to the Liberal Democratic Party's control of that country's formal political institutions.
Behind these varied struggles one can hear a common theme: a demand for accountable, responsible government that puts the interests of the middle class first. I wrote at the beginning of this piece that the political discussion necessary to restructure the region's economies carries with it all kinds of risks. We have been seeing those played out in the streets of Bangkok and Seoul or on-line behind the firewalls that Beijing builds in its attempts to contain and control discussion of China's future.
These struggles threaten, among other things, the workings of essential economic machinery, as Thailand's tourist-related businesses can readily testify. The struggles provide a profound challenge to elites that are accustomed to effecting minor corrections behind closed cockpit doors to national trajectories that have long been taken for granted.
But the meltdown of American finance has closed the destination of an economy humming with industries for export. Whether Asia's economies have the political will and ability to chart a new course will determine how they ride out the present storm.
R Taggart Murphy, a former investment banker, is professor in the MBA Program in International Business at the University of Tsukuba's Tokyo campus and a Japan Focus associate. He is the author of The Weight of the Yen (Norton, 1996) and, with Akio Mikuni, of Japan's Policy Trap (Brookings, 2002).
This is a substantially expanded version of an article that appeared in The Brief. Magazine of the British Chamber of Commerce Thailand. It was posted at Japan Focus on October 24, 2008.
Wednesday, October 29, 2008
Sunday, October 26, 2008
Pretenders all of us
Pretenders all of us
By Chan Akya
I am highly inspired by the testimony provided by Alan Greenspan, former chairman of the Fed and formerly the most powerful man in financial markets, to the US House Committee of Government Oversight and Reform on Thursday. Headlines immediately captured the essence of the prepared testimony, namely that "the" Alan, as we can call him in the style of the times, had admitted some shock but hadn't really fessed up to any major mistake on his own part.
Now of course, there is the whole ego, superego and id thing; but the little matter of continuing employment wherein the former chairman derives some tidy income from consulting for the world's major financial companies in sectors such as mutual funds (PIMCO) and banking (Deutsche Bank). Then there is always the matter of book sales [1], which may be adversely affected by any notions of fallibility.
In any event, many commentators have in the past attempted to create a dictionary of what Greenspan means when he uses any particular phrase. His commentaries and numerous testimonies during his tenure were famous (or infamous, depending on how much you actually understood) for the use of code, with specific phrases designed to excite the markets but leave lay people utterly befuddled.
In the same spirit, the following few phrases that appeared in his testimony on Thursday have been translated for the benefit of Asia Times Online readers. I have also added a comment on what a certain fictitious chairman of the Fed (let us call him Paul V) might have said in the same place.
The Alan: "We are in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures. You, importantly, represent those on whose behalf economic policy is made, those who are feeling the brunt of the crisis in their workplaces and homes."
What he meant: "I am really glad it's you not me doing the heavy lifting. Furthermore, my opening with the tsunami reference is designed to make this whole mess seem like an unpredictable seismological event rather than the simple effect of various policy mistakes."
What Paul might have said?: "I messed up."
The Alan: "What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage-backed securities being 'subprime' were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with US home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a 'steal'."
What he meant: "Hey don't look at me; all my data said this sort of stuff could never happen. It's the fault of all those poor people who couldn't see that they were supposed to turn away the free money being offered to them, and the fault of all my rich buddies for trusting these poor folks in the first place."
What Paul might have said?: "Firstly, it is not true that economic policies had worked well in the past four decades, as the series of crises in the US and around the world from 1968 to the present would tell us. I should have tightened credit policy and banking supervision when the growth in higher risk mortgages appeared to increase disproportionately to actual income growth in the United States. Furthermore, the billions of dollars flowing into the US should have alerted me to potential bubbles and forced me to hike rates drastically. Or in short, I messed up."
The Alan: "It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment."
What he meant: "Nobody really knew how to price or trade these things. They even managed to confuse the idiots on the Nobel committee. So don't blame me for believing the balderdash. Also no one told me Nicholas Nassem Taleb was writing a book [2] that would point out all these model fallacies and so sell more copies than my book did."
What Paul might have said: "We had enough experience of other crises, such as the Latin America debt crisis that blew up our banks in the late '80s, to know the effect of false assumptions and poor data on the integrity of our financial system. This should have alerted us to the potential for mispricing and false profit generation; that should have forced us to intervene on the regulatory and accounting side of these transactions to make them less attractive for our banks to do. That was my job as Fed chairman, and I failed. Or in short, I messed up."
Fessing up
Having translated some of the comments for Asia Times Online readers, I will now fess up to my own mistakes in assuming that the end of the Group of Seven leading industrialized countries [3] could be hastened by the emergence of new giants such as Russia and some Asian countries.
In particular, three countries have recently performed a whole lot worse than my expectations, in effect denting any claims they can have in coming years for being considered serious (and independent) investment destinations. These three countries are Russia, South Korea and India: I have left out for now other countries that seem in greater danger of tipping over, such as Indonesia, as they were never considered anything more than exotic destinations. The three above though were talked of in some earnest as breaking their historic moulds but instead may well have been exposed as fraudsters being pulled up by the global economic prosperity.
I show below the performance of the countries' equity indices and their currencies against the US average, and for good measure those of China. While the relative equity performance is nothing to boast about for China (indeed, as equity returns are currency adjusted it means that nominal performance in China was the worst across that column), the trio of Russia, South Korea and India show some eye-popping bad numbers. The most difficult to believe is the significant decline of the Korean won against the US dollar this year; shocking for a country that showed an improving current account balance until the middle of this year.
YTD Equity
Return % YTD Currency
Return %
Russia -72 -9.10
Korea -63 -49.62
India -62 -26.34
US -38 NA
China -62 +6.33
This is however not all of the bad news - as the current crisis is very much one rooted in the credit markets, it makes sense to evaluate the relative riskiness of the various governments underpinning the economies. This we can do by looking at sovereign credit default swaps (CDS), that is, the insurance payment being demanded by a market counterparty to cover your risk of that government failing to repay its obligations. These are traditionally shown in basis points or one-hundredth of a percentage point (thus 500 basis points means 5%).
From the CDS value, the implied probability of default being assigned to that sovereign can be worked out provided we can assume a certain "loss given default", (or LGD, which is fixed here at 60%); this is shown in the column after the CDS. Note that the figure below for India pertains to its largest state-owned bank (State Bank of India) because the government itself doesn't have any externally traded obligations.
Oct 23rd 5yr
CDS spread Implied Prob of Default %
Russia 1100 61
Korea 600 41
India 750 48
US 25 2
China 235 15
From the above, it is clear that none of the pretenders and especially not the first three countries can claim to be in a position to overtake the existing global benchmark for risk-free assets, namely the United States. It is shocking and rather amazing that despite holding about US$1 trillion of reserves between them, the three countries average a default probability of 50% within five years. That one-in-two chance of default within the period shows that these countries have never truly learnt the lessons of the past few decades.
Russia
The simple matter of evaporating market confidence has belied Russia's claims to great-power status, resurgence under president and now Prime Minister Vladimir Putin and so on. For a country with more than $500 billion in reserves (itself down around $100 billion from just August this year), market signals are not so much about the government as they are about the overall level of confidence in the economy and its business representatives.
The first point of the market's loss of confidence is the mounting debt maturities of various Russian companies and the country's largest banks, all of which tapped the short-term (one- to two-year) markets to finance their expansion plans. With many of these facilities now coming due for payment, and no prospect that any investor would agree to postpone payments for another couple of years (refinancing), the Russian government has been expected to step up.
The only other alternative for investors in such nominally private
companies, namely to convert the debt into equity stakes, doesn't apply in the case of Russia, due to the high-handed behavior of the government. Thus, despite very little in the way of direct obligations, the shadow of the 1998 debt default by Russia along with a string of Kremlin-inspired malfeasance has scared investors and caused a flight from Russia. Many oligarchs are rumored to be urgently stashing away their wealth in destinations far away from Russia, adding to the pressure on the currency - this is even being cited as one reason for private companies to deny payments to foreign creditors as their owners make off with the bank balances.
It is still possible for Russia to take remedial steps that could prevent an escalation of the current crisis into a full-blown economic collapse. After underpinning the viability of Russian banks, it must undertake quick steps to improve investor confidence; for example by avoiding arbitrary closure of its stock markets whenever prices fall [4], avoiding the temptation to indulge in currency intervention and implementing steps to improve bankruptcy procedures, corporate governance and the like which can help create equilibrium much faster.
South Korea
Perhaps the country that shocked me the most by its presence on this list, South Korea has failed to learn the basic lessons of asset-liability and liquidity management from its previous crisis in 1997-98. Most recently, the Korean government has had to unveil a $100 billion guarantee program for the offshore debt of its banks, taking away a rather substantial chunk of the $240 billion or so of foreign exchange
reserves that it boasts.
Given the escalating current account deficit and poor prospects for investment
inflows, it is possible (albeit very unlikely) for Korea to run out of foreign exchange by the beginning of 2010. This must be problematic for any country, and more so for one with international pretentions, as shown by the abortive global takeovers attempted by South Korean companies such as KDB [5] and Samsung in recent months.
There are numerous culprits here. Most notable is the Bank of Korea, which followed an ill-advised policy of maintaining an onshore US dollar shortage in order to deflect the potential for Korean won appreciation. In so doing, it created the conditions for greater offshore borrowings to fund the economic reliance on the export market rather than domestic consumption. In turn, this left banks and companies with the same mix of short-term liabilities against longer-term assets that marked South Korea's first descent into a balance of payments crisis in the Asian financial crisis of 1997.
Ironically, many equity index managers were finally upgrading Korea from its perch in "emerging markets" to a new "developed markets" level; instead it appears that Korea will have to negotiate to stay afloat in the emerging markets category; its most recent equity, currency and credit performance certainly put it in the same category.
India
To a number of people who bought into the BRIC - Brazil, Russia, India and China - hoopla, India's fall from grace parallels that of Russia. Here again, it is not the external borrowing practices of the sovereign itself that are to blame; funnily enough, neither are the borrowings of local companies in global markets considered to be excessive. In any event, less than $25 billion of Indian corporate and bank debt falls due by the end of next year compared with $275 billion of foreign exchange reserves that the country boasts. Even accounting for zero capital inflows and continued current account deficits, the overall cushion will remain close to $200 billion.
Achilles though still has a heel. The loss of confidence can be traced to the haphazard decision-making of the central bank, which came late to the inflation-fighting party this year in a futile attempt to prevent foreign exchange appreciation, thereby causing policy about-turns that stun even the most adept of investors.
Secondly, political noise in the country has been increasing ahead of next year's elections. This has turned investors naturally cautious, and in turn made crisis management a bit trickier for the government (in which respect there is much in common with the recent US experience).
Thirdly, there is legitimate concern both domestically and offshore about the impact of low infrastructure investments by India over the past two decades. The problems seen in the poorest parts of the country offer a closer view, albeit one that the media have been slower to latch onto compared with the markets.
Recent violence in the state of Orissa between Hindu fundamentalists and Christian missionaries showed not so much the tinderbox of religious intolerance as it did the fairly low "price" that poor Indians assigned to their centuries-old culture and religion. For the destitute and the desperate whose battle for basic sustenance is all-consuming, manna from any source is welcome. Inconveniently enough for the people who believe in an India that can outshine its recent past, the images aptly conveyed the two sub-nations (the upwardly mobile and the downwardly stale) created by communist-inspired governments in the country. [6] As in the case of Russia, the response from investors has been to sell first and ask questions later.
And in closing ...
Perhaps the one quote from Greenspan's testimony that I find myself agreeing with, and especially the last sentence: "There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement, and securitization. It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today's markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime."
The fact that a market become overcautious at the drop of a hat (or a few billion dollars) is borne out by the experience of the US subprime mortgage market, as it is for countries such as Russia, South Korea and India. In all these cases, the loss of confidence that has been sparked by a combination of quantitative and qualitative factors will induce substantial behavioral shifts that will take years if not decades of patient reworking for these markets and/or countries to correct. Pretenders, whether they are government officials or market fallacies, will always be exposed.
Notes
1. The Age of Turbulence: Adventures in a New World, by Alan Greenspan. Penguin Press HC, 2007. (For review, see Reaping what is sown, October 6, 2007
2. The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb, Random House, 2007.
3. See among other Asia Times Online articles: Terminal Velocity, September 23, 2008; Deaf frogs and the Pied Piper, September 30, 2008; and A Fukuyama moment in Finance, October 18, 2008
4. A stone for Chris Cox, Asia Times Online, July 19, 2008
5. Lehman and the liars, Asia Times Online, June 14, 2008 6. India's real terrorists Asia Times Online, May 17, 2008.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
By Chan Akya
I am highly inspired by the testimony provided by Alan Greenspan, former chairman of the Fed and formerly the most powerful man in financial markets, to the US House Committee of Government Oversight and Reform on Thursday. Headlines immediately captured the essence of the prepared testimony, namely that "the" Alan, as we can call him in the style of the times, had admitted some shock but hadn't really fessed up to any major mistake on his own part.
Now of course, there is the whole ego, superego and id thing; but the little matter of continuing employment wherein the former chairman derives some tidy income from consulting for the world's major financial companies in sectors such as mutual funds (PIMCO) and banking (Deutsche Bank). Then there is always the matter of book sales [1], which may be adversely affected by any notions of fallibility.
In any event, many commentators have in the past attempted to create a dictionary of what Greenspan means when he uses any particular phrase. His commentaries and numerous testimonies during his tenure were famous (or infamous, depending on how much you actually understood) for the use of code, with specific phrases designed to excite the markets but leave lay people utterly befuddled.
In the same spirit, the following few phrases that appeared in his testimony on Thursday have been translated for the benefit of Asia Times Online readers. I have also added a comment on what a certain fictitious chairman of the Fed (let us call him Paul V) might have said in the same place.
The Alan: "We are in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures. You, importantly, represent those on whose behalf economic policy is made, those who are feeling the brunt of the crisis in their workplaces and homes."
What he meant: "I am really glad it's you not me doing the heavy lifting. Furthermore, my opening with the tsunami reference is designed to make this whole mess seem like an unpredictable seismological event rather than the simple effect of various policy mistakes."
What Paul might have said?: "I messed up."
The Alan: "What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage-backed securities being 'subprime' were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with US home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a 'steal'."
What he meant: "Hey don't look at me; all my data said this sort of stuff could never happen. It's the fault of all those poor people who couldn't see that they were supposed to turn away the free money being offered to them, and the fault of all my rich buddies for trusting these poor folks in the first place."
What Paul might have said?: "Firstly, it is not true that economic policies had worked well in the past four decades, as the series of crises in the US and around the world from 1968 to the present would tell us. I should have tightened credit policy and banking supervision when the growth in higher risk mortgages appeared to increase disproportionately to actual income growth in the United States. Furthermore, the billions of dollars flowing into the US should have alerted me to potential bubbles and forced me to hike rates drastically. Or in short, I messed up."
The Alan: "It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment."
What he meant: "Nobody really knew how to price or trade these things. They even managed to confuse the idiots on the Nobel committee. So don't blame me for believing the balderdash. Also no one told me Nicholas Nassem Taleb was writing a book [2] that would point out all these model fallacies and so sell more copies than my book did."
What Paul might have said: "We had enough experience of other crises, such as the Latin America debt crisis that blew up our banks in the late '80s, to know the effect of false assumptions and poor data on the integrity of our financial system. This should have alerted us to the potential for mispricing and false profit generation; that should have forced us to intervene on the regulatory and accounting side of these transactions to make them less attractive for our banks to do. That was my job as Fed chairman, and I failed. Or in short, I messed up."
Fessing up
Having translated some of the comments for Asia Times Online readers, I will now fess up to my own mistakes in assuming that the end of the Group of Seven leading industrialized countries [3] could be hastened by the emergence of new giants such as Russia and some Asian countries.
In particular, three countries have recently performed a whole lot worse than my expectations, in effect denting any claims they can have in coming years for being considered serious (and independent) investment destinations. These three countries are Russia, South Korea and India: I have left out for now other countries that seem in greater danger of tipping over, such as Indonesia, as they were never considered anything more than exotic destinations. The three above though were talked of in some earnest as breaking their historic moulds but instead may well have been exposed as fraudsters being pulled up by the global economic prosperity.
I show below the performance of the countries' equity indices and their currencies against the US average, and for good measure those of China. While the relative equity performance is nothing to boast about for China (indeed, as equity returns are currency adjusted it means that nominal performance in China was the worst across that column), the trio of Russia, South Korea and India show some eye-popping bad numbers. The most difficult to believe is the significant decline of the Korean won against the US dollar this year; shocking for a country that showed an improving current account balance until the middle of this year.
YTD Equity
Return % YTD Currency
Return %
Russia -72 -9.10
Korea -63 -49.62
India -62 -26.34
US -38 NA
China -62 +6.33
This is however not all of the bad news - as the current crisis is very much one rooted in the credit markets, it makes sense to evaluate the relative riskiness of the various governments underpinning the economies. This we can do by looking at sovereign credit default swaps (CDS), that is, the insurance payment being demanded by a market counterparty to cover your risk of that government failing to repay its obligations. These are traditionally shown in basis points or one-hundredth of a percentage point (thus 500 basis points means 5%).
From the CDS value, the implied probability of default being assigned to that sovereign can be worked out provided we can assume a certain "loss given default", (or LGD, which is fixed here at 60%); this is shown in the column after the CDS. Note that the figure below for India pertains to its largest state-owned bank (State Bank of India) because the government itself doesn't have any externally traded obligations.
Oct 23rd 5yr
CDS spread Implied Prob of Default %
Russia 1100 61
Korea 600 41
India 750 48
US 25 2
China 235 15
From the above, it is clear that none of the pretenders and especially not the first three countries can claim to be in a position to overtake the existing global benchmark for risk-free assets, namely the United States. It is shocking and rather amazing that despite holding about US$1 trillion of reserves between them, the three countries average a default probability of 50% within five years. That one-in-two chance of default within the period shows that these countries have never truly learnt the lessons of the past few decades.
Russia
The simple matter of evaporating market confidence has belied Russia's claims to great-power status, resurgence under president and now Prime Minister Vladimir Putin and so on. For a country with more than $500 billion in reserves (itself down around $100 billion from just August this year), market signals are not so much about the government as they are about the overall level of confidence in the economy and its business representatives.
The first point of the market's loss of confidence is the mounting debt maturities of various Russian companies and the country's largest banks, all of which tapped the short-term (one- to two-year) markets to finance their expansion plans. With many of these facilities now coming due for payment, and no prospect that any investor would agree to postpone payments for another couple of years (refinancing), the Russian government has been expected to step up.
The only other alternative for investors in such nominally private
companies, namely to convert the debt into equity stakes, doesn't apply in the case of Russia, due to the high-handed behavior of the government. Thus, despite very little in the way of direct obligations, the shadow of the 1998 debt default by Russia along with a string of Kremlin-inspired malfeasance has scared investors and caused a flight from Russia. Many oligarchs are rumored to be urgently stashing away their wealth in destinations far away from Russia, adding to the pressure on the currency - this is even being cited as one reason for private companies to deny payments to foreign creditors as their owners make off with the bank balances.
It is still possible for Russia to take remedial steps that could prevent an escalation of the current crisis into a full-blown economic collapse. After underpinning the viability of Russian banks, it must undertake quick steps to improve investor confidence; for example by avoiding arbitrary closure of its stock markets whenever prices fall [4], avoiding the temptation to indulge in currency intervention and implementing steps to improve bankruptcy procedures, corporate governance and the like which can help create equilibrium much faster.
South Korea
Perhaps the country that shocked me the most by its presence on this list, South Korea has failed to learn the basic lessons of asset-liability and liquidity management from its previous crisis in 1997-98. Most recently, the Korean government has had to unveil a $100 billion guarantee program for the offshore debt of its banks, taking away a rather substantial chunk of the $240 billion or so of foreign exchange
reserves that it boasts.
Given the escalating current account deficit and poor prospects for investment
inflows, it is possible (albeit very unlikely) for Korea to run out of foreign exchange by the beginning of 2010. This must be problematic for any country, and more so for one with international pretentions, as shown by the abortive global takeovers attempted by South Korean companies such as KDB [5] and Samsung in recent months.
There are numerous culprits here. Most notable is the Bank of Korea, which followed an ill-advised policy of maintaining an onshore US dollar shortage in order to deflect the potential for Korean won appreciation. In so doing, it created the conditions for greater offshore borrowings to fund the economic reliance on the export market rather than domestic consumption. In turn, this left banks and companies with the same mix of short-term liabilities against longer-term assets that marked South Korea's first descent into a balance of payments crisis in the Asian financial crisis of 1997.
Ironically, many equity index managers were finally upgrading Korea from its perch in "emerging markets" to a new "developed markets" level; instead it appears that Korea will have to negotiate to stay afloat in the emerging markets category; its most recent equity, currency and credit performance certainly put it in the same category.
India
To a number of people who bought into the BRIC - Brazil, Russia, India and China - hoopla, India's fall from grace parallels that of Russia. Here again, it is not the external borrowing practices of the sovereign itself that are to blame; funnily enough, neither are the borrowings of local companies in global markets considered to be excessive. In any event, less than $25 billion of Indian corporate and bank debt falls due by the end of next year compared with $275 billion of foreign exchange reserves that the country boasts. Even accounting for zero capital inflows and continued current account deficits, the overall cushion will remain close to $200 billion.
Achilles though still has a heel. The loss of confidence can be traced to the haphazard decision-making of the central bank, which came late to the inflation-fighting party this year in a futile attempt to prevent foreign exchange appreciation, thereby causing policy about-turns that stun even the most adept of investors.
Secondly, political noise in the country has been increasing ahead of next year's elections. This has turned investors naturally cautious, and in turn made crisis management a bit trickier for the government (in which respect there is much in common with the recent US experience).
Thirdly, there is legitimate concern both domestically and offshore about the impact of low infrastructure investments by India over the past two decades. The problems seen in the poorest parts of the country offer a closer view, albeit one that the media have been slower to latch onto compared with the markets.
Recent violence in the state of Orissa between Hindu fundamentalists and Christian missionaries showed not so much the tinderbox of religious intolerance as it did the fairly low "price" that poor Indians assigned to their centuries-old culture and religion. For the destitute and the desperate whose battle for basic sustenance is all-consuming, manna from any source is welcome. Inconveniently enough for the people who believe in an India that can outshine its recent past, the images aptly conveyed the two sub-nations (the upwardly mobile and the downwardly stale) created by communist-inspired governments in the country. [6] As in the case of Russia, the response from investors has been to sell first and ask questions later.
And in closing ...
Perhaps the one quote from Greenspan's testimony that I find myself agreeing with, and especially the last sentence: "There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement, and securitization. It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today's markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime."
The fact that a market become overcautious at the drop of a hat (or a few billion dollars) is borne out by the experience of the US subprime mortgage market, as it is for countries such as Russia, South Korea and India. In all these cases, the loss of confidence that has been sparked by a combination of quantitative and qualitative factors will induce substantial behavioral shifts that will take years if not decades of patient reworking for these markets and/or countries to correct. Pretenders, whether they are government officials or market fallacies, will always be exposed.
Notes
1. The Age of Turbulence: Adventures in a New World, by Alan Greenspan. Penguin Press HC, 2007. (For review, see Reaping what is sown, October 6, 2007
2. The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb, Random House, 2007.
3. See among other Asia Times Online articles: Terminal Velocity, September 23, 2008; Deaf frogs and the Pied Piper, September 30, 2008; and A Fukuyama moment in Finance, October 18, 2008
4. A stone for Chris Cox, Asia Times Online, July 19, 2008
5. Lehman and the liars, Asia Times Online, June 14, 2008 6. India's real terrorists Asia Times Online, May 17, 2008.
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
Friday, October 10, 2008
Fun With Bailout Numbers
The financial pages discover the word quadrillion.
Posted Thursday, Oct. 9, 2008, at 6:50 PM ET You know the economy is in trouble when economists start bandying around numeric terms previously associated with astronomy and particle physics. You can't open a newspaper these days without seeing the phrase "trillion dollars" placed in disturbing proximity to the word losses. According to the Nexis database, these terms appeared together in 1,774 English-language news reports between July and October 2008. During the same three-month period in 2007, they appeared in only 541, and during the same period in 2006, they appeared in only 316. Those were the good old days!
You may not even remember from grade-school arithmetic what comes after trillion. It isn't kajillion. (That's just a whimsical slang term for "unimaginably high number.") It's quadrillion. The phrase "quadrillion dollars" and the word losses appeared together in only two English-language news reports between July and October 2008, so no need to panic just yet. During the same three-month periods in 2007 and 2006, they appeared in one.
After quadrillion, you get quintillion, sextillion, and septillion. I'm relieved to report that the phrases "quintillion dollars," "sextillion dollars," and "septillion dollars" have yet to appear together with the word losses in any English-language news reports that I can find in Nexis. After septillion comes octillion, nonillion, and decillion. The phrase "octillion dollars" appears only once in Nexis (in a Sept. 27 snippet from the blog the Volokh Conspiracy). The phrases "nonillion dollars" and "decillion dollars" appear not at all, which suggests that even at this late date they defy human conceptualization. According to Slate's search engine, I am the first person ever to use any numeric terms above quintillion in this magazine. (Eat my dust, Chris Suellentrop, Daniel Engber, Emily Bazelon, John Dickerson, and Dahlia Lithwick!)
What are these large numbers that the financial pages throw around as they describe the credit crisis, and what relation do they bear one another? Allow me to attempt a crude summary.
The $700 billion potential price tag on the just-passed bank bail—ahem, rescue package—constitutes roughly one-quarter of the annual total cost of operating the U.S. government, which by last year had reached $2.9 trillion. The $2.9 trillion that went out exceeded by $276 billion the $2.6 trillion that came in, mostly from income taxes. Ten months later, the Congressional Budget Office today puts the budget deficit at $438 billion. To cover the difference between spending and revenue, the Treasury borrows money, which leaves the government in debt. Right now, the national debt is $10.2 trillion. That number is so big that a National Debt Clock in Times Square had to eliminate its dollar sign last month to make room for an extra digit. The national debt is approaching the size of the entire U.S. economy. According to the Commerce Department's Bureau of Economic Analysis, the U.S. gross domestic product for 2008 is $14.3 trillion. Of that, $10.1 trillion went to personal consumption. If everybody in the United States decided that starting today they wouldn't consume anything for one year and that instead they would set all that money aside in a piggy bank the size of the Houston Astrodome, that still wouldn't be quite enough money to pay off the national debt.
(Forgive me if I'm starting to sound like the rector who describes eternity in James Joyce's Portrait of the Artist as a Young Man—"and imagine that at the end of every million years a little bird came to that mountain and carried away in its beak a tiny grain of that sand").
The U.S. economy constitutes roughly one-quarter of the world economy. That is to say, the U.S. GDP of $14.3 trillion accounts for one-fourth of the GDP of all nations, which the World Bank calculated at $54.3 trillion for 2007. Have you ever said you wouldn't do something "for all the money in the world"? What you meant literally, probably without knowing it, was that you wouldn't do that thing even if somebody paid you $54.3 trillion. Want to reconsider?
As of last month, bank losses on subprime mortgages for homes in the United States totaled $518 billion. The alchemy of finance doubled that into $1.4 trillion in losses on U.S.-based loans and securities, according to the International Monetary Fund. These losses, which may well grow—the IMF keeps recalculating as the financial crisis worsens—constitute 50 percent of the annual total cost of running the U.S. government; 10 percent of the entire U.S. economy (as expressed in GDP); and 3 percent of the entire world economy (as expressed in GDP). This mess was made in the USA, but in today's globalized economy it is now every nation's problem.
One interesting difficulty, though. As the numbers get bigger, the opportunities for misunderstanding among nations increase exponentially, because of a peculiar and most annoying cultural difference. Human civilization has advanced to the point where it can split the atom and put a man on the moon, but it hasn't advanced far enough to arrive at a common understanding of what the word billion—and therefore the words trillion, quadrillion, etc.—actually means. It's a little bit like the international split between countries that use the Metric system of weights and measures (almost everybody) and countries that stick to the English system (the United States; the United Kingdom gave up on it in 1965). In this instance, however, the confusion is greater because the same terminology is used to describe different quantities.
It all goes back to the 15th century, apparently, when the French worked out a system for describing numbers above 999,999,999. At first, they decided that 1 billion would be 1 million to the second power (i.e., what Americans today call 1 trillion); 1 trillion would be 1 million to the third power (i.e., what Americans call 1 quintillion); and so on. What I would call 1 billion they called 1 milliard. Then, two centuries later, they decided that terms like "1 thousand billion" and "1 thousand trillion" were unwieldy and therefore redefined all numbers above 999,999,999 as multiples not of 1 million but of 1,000. This was inelegant, because the actual numbers designated—billion, trillion, and so forth—were now inconsistent with their Latin roots (bi, tri, etc.). But language's loss was arithmetic's gain; the new designations were much easier to use.
Unfortunately, the earlier, inferior system had taken hold throughout Europe—with the Enlightenment due any minute numbers were getting a lot of use—and many of these countries were unwilling to submit to the inconvenience of an upgrade. Today, the antiquated system is used just about everywhere except the United States, the United Kingdom, Italy, Russia, Turkey, Greece, Portugal, and Brazil. Even France eventually reverted to the old system. In a nice reversal of the Metric system story, in which the United States plays the role of know-nothing villain, here the United States is the sensible hero trying in vain to peddle a superior quantification system to its hidebound, impractical fellow nations.
Astronomers and other big-number scientists have learned to steer around the varying-definition problem by avoiding terms like billion and trillion altogether, instead designating them as powers of 10. But economists and government officials around the world, having only recently become big-number users, still say billion and trillion and, increasingly, quadrillion. When they do so, there's no telling what they mean. This tower of arithmetic Babel has some potential to create a farcical scene when the G-7 finance ministers gather this Saturday at the White House.
Timothy Noah is a senior writer at Slate.Article URL: http://www.slate.com/id/2201961/
Wednesday, October 8, 2008
Martin Wolf: It is time for comprehensive rescues of financial systems
The time for a higgledy-piggledy, institution-by-institution and country-by-country approach is over, writes Martin Wolf. So what should be done? In a word, 'everything'. But first of all, the panic must be dealt with. It is time for comprehensive rescues of financial systems
via FT.com - Martin Wolf on 10/7/08
via FT.com - Martin Wolf on 10/7/08
Tuesday, October 7, 2008
Hockey moms and capital markets By Spengler
Asia Times Online :: Asian news and current affairs
It is true that Asian economies depend on American consumers and an American recession is bad for Asian currencies. But why don't Asians consume what they produce at home? The trouble is that rich Asians don't lend to poor Asians in their own countries. Capital markets don't work in the developing world because it is too easy to steal money. Subprime mortgages in the US have suffered from poor documentation. What kind of documentation does one encounter in countries where everyone from the clerk at the records office to the secretary who hands you a form requires a small bribe? America is litigious to a fault, but its courts are fair and hard to corrupt.
It is true that Asian economies depend on American consumers and an American recession is bad for Asian currencies. But why don't Asians consume what they produce at home? The trouble is that rich Asians don't lend to poor Asians in their own countries. Capital markets don't work in the developing world because it is too easy to steal money. Subprime mortgages in the US have suffered from poor documentation. What kind of documentation does one encounter in countries where everyone from the clerk at the records office to the secretary who hands you a form requires a small bribe? America is litigious to a fault, but its courts are fair and hard to corrupt.
Monday, October 6, 2008
Debt capitalism self-destructs By Henry C K Liu
Asia Times Online :: Asian news and current affairs
The once-dynamic US economy has turned itself into a system in which it is difficult to find any institution, company or individual not over their head in speculative debt. Undercapitalized capitalism, also known as debt capitalism, has been the engine of growth for the US debt bubble in the last two decades. This debt capitalism cancer is caused by a failure of central banking.
The once-dynamic US economy has turned itself into a system in which it is difficult to find any institution, company or individual not over their head in speculative debt. Undercapitalized capitalism, also known as debt capitalism, has been the engine of growth for the US debt bubble in the last two decades. This debt capitalism cancer is caused by a failure of central banking.
Americans play Monopoly, Russians chess
Americans play Monopoly, Russians chess
By Spengler
Aug 19, 2008
http://www.atimes.com/atimes/Central_Asia/JH19Ag04.html
On the night of November 22, 2004, then-Russian president - now premier - Vladimir Putin watched the television news in his dacha near Moscow. People who were with Putin that night report his anger and disbelief at the unfolding "Orange" revolution in Ukraine. "They lied to me," Putin said bitterly of the United States. "I'll never trust them again." The Russians still can't fathom why the West threw over a potential strategic alliance for Ukraine. They underestimate the stupidity of the West.
American hardliners are the first to say that they feel stupid next to Putin. Victor Davis Hanson wrote on August 12 [1] of Moscow's "sheer diabolic brilliance" in Georgia, while Colonel Ralph Peters, a columnist and television commentator, marveled on August 14 [2], "The Russians are alcohol-sodden barbarians, but now and then they vomit up a genius ... the empire of the czars hasn't produced such a frightening genius since [Joseph] Stalin." The superlatives recall an old observation about why the plots of American comic books need clever super-villains and stupid super-heroes to even the playing field. Evidently the same thing applies to superpowers.
The fact is that all Russian politicians are clever. The stupid ones are all dead. By contrast, America in its complacency promotes dullards. A deadly miscommunication arises from this asymmetry. The Russians cannot believe that the Americans are as stupid as they look, and conclude that Washington wants to destroy them. That is what the informed Russian public believes, judging from last week's postings on web forums, including this writer's own.
These perceptions are dangerous because they do not stem from propaganda, but from a difference in existential vantage point. Russia is fighting for its survival, against a catastrophic decline in population and the likelihood of a Muslim majority by mid-century. The Russian Federation's scarcest resource is people. It cannot ignore the 22 million Russians stranded outside its borders after the 1991 collapse of the Soviet Union, nor, for that matter, small but loyal ethnicities such as the Ossetians. Strategic encirclement, in Russian eyes, prefigures the ethnic disintegration of Russia, which was a political and cultural entity, not an ethnic state, from its first origins.
The Russians know (as every newspaper reader does) that Georgia's President Mikheil Saakashvili is not a model democrat, but a nasty piece of work who deployed riot police against protesters and shut down opposition media when it suited him - in short, a politician in Putin's mold. America's interest in Georgia, the Russians believe, has nothing more to do with promoting democracy than its support for the gangsters to whom it handed the Serbian province of Kosovo in February.
Again, the Russians misjudge American stupidity. Former president Ronald Reagan used to say that if there was a pile of manure, it must mean there was a pony around somewhere. His epigones have trouble distinguishing the pony from the manure pile. The ideological reflex for promoting democracy dominates the George W Bush administration to the point that some of its senior people hold their noses and pretend that Kosovo, Ukraine and Georgia are the genuine article.
Think of it this way: Russia is playing chess, while the Americans are playing Monopoly. What Americans understand by "war games" is exactly what occurs on the board of the Parker Brothers' pastime. The board game Monopoly is won by placing as many hotels as possible on squares of the playing board. Substitute military bases, and you have the sum of American strategic thinking.
America's idea of winning a strategic game is to accumulate the most chips on the board: bases in Uzbekistan and Kyrgyzstan, a pipeline in Georgia, a "moderate Muslim" government with a big North Atlantic Treaty Organization base in Kosovo, missile installations in Poland and the Czech Republic, and so forth. But this is not a strategy; it is only a game score.
Chess players think in terms of interaction of pieces: everything on the periphery combines to control the center of the board and prepare an eventual attack against the opponent's king. The Russians simply cannot absorb the fact that America has no strategic intentions: it simply adds up the value of the individual pieces on the board. It is as stupid as that. But there is another difference: the Americans are playing chess for career and perceived advantage. Russia is playing for its life, like Ingmar Bergman's crusader in The Seventh Seal.
Dull people know that clever people are cleverer than they are, but they do not know why. The nekulturny Colonel Ralph Peters, a former US military intelligence analyst, is impressed by the tactical success of Russian arms in Georgia, but cannot fathom the end-game to which these tactics contribute. He writes, "The new reality is that a nuclear, cash-rich and energy-blessed Russia doesn't really worry too much whether its long-term future is bleak, given problems with Muslim minorities, poor life-expectancy rates, and a declining population. Instead, in the here and now, it has a window of opportunity to reclaim prestige and weaken its adversaries."
Precisely the opposite is true: like a good chess player, Putin has the end-game in mind as he fights for control of the board in the early stages of the game. Demographics stand at the center of Putin's calculation, and Russians are the principal interest that the Russian Federation has in its so-called near abroad. The desire of a few hundred thousand Abkhazians and South Ossetians to remain in the Russian Federation rather than Georgia may seem trivial, but Moscow is setting a precedent that will apply to tens of millions of prospective citizens of the Federation - most controversially in Ukraine.
Before turning to the demographics of the near abroad, a few observations about Russia's demographic predicament are pertinent. The United Nations publishes population projections for Russia up to 2050, and I have extended these to 2100. If the UN demographers are correct, Russia's adult population will fall from about 90 million today to only 20 million by the end of the century. Russia is the only country where abortions are more numerous than live births, a devastating gauge of national despair.
Under Putin, the Russian government introduced an ambitious natalist program to encourage Russian women to have children. As he warned in his 2006 state of the union address, "You know that our country's population is declining by an average of almost 700,000 people a year. We have raised this issue on many occasions but have for the most part done very little to address it ... First, we need to lower the death rate. Second, we need an effective migration policy. And third, we need to increase the birth rate."
Russia's birth rate has risen slightly during the past several years, perhaps in response to Putin's natalism, but demographers observe that the number of Russian women of childbearing age is about to fall off a cliff. No matter how much the birth rate improves, the sharp fall in the number of prospective mothers will depress the number of births. UN forecasts show the number of Russians aged 20-29 falling from 25 million today to only 10 million by 2040.
Russia, in other words, has passed the point of no return in terms of fertility. Although roughly four-fifths of the population of the Russian Federation is considered ethnic Russians, fertility is much higher among the Muslim minorities in Central Asia. Some demographers predict a Muslim majority in Russia by 2040, and by mid-century at the latest.
Part of Russia's response is to encourage migration of Russians left outside the borders of the federation after the collapse of communism in 1991. An estimated 6.5 million Russians from the former Soviet Union now work in Russia as undocumented aliens, and a new law will regularize their status. Only 20,000 Russian "compatriots" living abroad, however, have applied for immigration to the federation under a new law designed to draw Russians back.
That leaves the 9.5 million citizens of Belarus, a relic of the Soviet era that persists in a semi-formal union with the Russian Federation, as well as the Russians of the Western Ukraine and Kazakhstan. More than 15 million ethnic Russians reside in those three countries, and they represent a critical strategic resource. Paul Goble in his Window on Eurasia website reported on August 16:
Moscow retreated after encountering fierce opposition from other countries, but semi-legal practices of obtaining Russian citizenship that began in former Soviet republics in the early 1990s continue unabated. There is plenty of evidence that there are one to two million people living in the territory of the former Soviet Union who have de facto dual citizenship and are reluctant to report it to the authorities. Russia did little to stop the process. Moreover, starting in 1997, it encouraged de facto dual citizenship.
Russia has an existential interest in absorbing Belarus and the Western Ukraine. No one cares about Byelorus. It has never had an independent national existence or a national culture; the first grammar in the Belorussian language was not printed until 1918, and little over a third of the population of Belarus speaks the language at home. Never has a territory with 10 million people had a sillier case for independence. Given that summary, it seems natural to ask why anyone should care about Ukraine. That question is controversial; for the moment, I will offer the assertion that partition is the destiny of Ukraine.
Even with migration and annexation of former Russian territory that was lost in the fracture of the USSR, however, Russia will not win its end-game against demographic decline and the relative growth of Muslim populations. The key to Russian survival is Russification, that is, the imposition of Russian culture and Russian law on ethnicities at the periphery of the federation. That might sound harsh, but that has been Russian nature from its origins.
Russia is not an ethnicity but an empire, the outcome of hundreds of years of Russification. That Russification has been brutal is an understatement, but it is what created Russia out of the ethnic morass around the Volga river basin. One of the best accounts of Russia's character comes from Eugene Rosenstock-Huessey (Franz Rosenzweig's cousin and sometime collaborator) in his 1938 book Out of Revolution. Russia's territory tripled between the 16th and 18th centuries, he observes, and the agency of its expansion was a unique Russian type. The Russian peasant, Rosenstock-Huessey observed, "was no stable freeholder of the Western type but much more a nomad, a pedlar, a craftsman and a soldier. His capacity for expansion was tremendous." In 1581 Asiatic Russia was opened. Russian expansion, extending even in the eighteenth century as far as the Russian River in Northern California, was by no means Czaristic only. The "Moujik", the Russian peasant, because he is not a "Bauer" or a "farmer", or a "laborer", but a "Moujik", wanders and stays, ready to migrate again eventually year after year.
Russia was never a multi-ethnic state, but rather what I call a supra-ethnic state, that is, a state whose national principle transcends ethnicity. A reader has called my attention to an account of the most Russian of all writers, Fyodor Dostoyevsky, of his own Russo-Lithuanian-Ukrainian background: I suppose that one of my Lithuanian ancestors, having emigrated to the Ukraine, changed his religion in order to marry an Orthodox Ukrainian, and became a priest. When his wife died he probably entered a monastery, and later, rose to be an archbishop. This would explain how the Archbishop Stepan may have founded our Orthodox family, in spite of his being a monk. It is somewhat surprising to see the Dostoyevsky, who had been warriors in Lithuania, become priests in Ukraine. But this is quite in accordance with Lithuanian custom. I may quote the learned Lithuanian W St Vidunas in this connection: "Formerly many well-to-do Lithuanians had but one desire: to see one or more of their sons enter upon an ecclesiastical career."
Dostoyevsky's mixed background was typically Russian, as was the Georgian origin of Joseph Stalin.
Russia intervened in Georgia to uphold the principle that anyone who holds a Russian passport - Ossetian, Akhbaz, Belorussian or Ukrainian - is a Russian. Russia's survival depends not so much on its birth rate, nor on immigration, nor even on prospective annexation, but on the survival of the principle by which Russia was built in the first place. That is why Putin could not abandon the pockets of Russian passport holders in the Caucusus. That Russia history has been tragic, and its nation-building principle brutal and sometimes inhuman, is a different matter. Russia is sufficiently important that its tragedy will be our tragedy, unless averted.
The place to avert tragedy is in Ukraine. Russia will not permit Ukraine to drift to the West. Whether a country that never had an independent national existence prior to the collapse of communism should become the poster-child for national self-determination is a different question. The West has two choices: draw a line in the sand around Ukraine, or trade it to the Russians for something more important.
My proposal is simple: Russia's help in containing nuclear proliferation and terrorism in the Middle East is of infinitely greater import to the West than the dubious self-determination of Ukraine. The West should do its best to pretend that the "Orange" revolution of 2004 and 2005 never happened, and secure Russia's assistance in the Iranian nuclear issue as well as energy security in return for an understanding of Russia's existential requirements in the near abroad. Anyone who thinks this sounds cynical should spend a week in Kiev.
Russia has more to fear from a nuclear-armed Iran than the United States, for an aggressive Muslim state on its borders could ruin its attempt to Russify Central Asia. Russia's strategic interests do not conflict with those of the United States, China or India in this matter. There is a certain degree of rivalry over energy resources, but commercial rivalry does not have to turn into strategic enmity.
If Washington chooses to demonize Russia, the likelihood is that Russia will become a spoiler with respect to American strategic interests in general, and use the Iranian problem to twist America's tail. That is a serious risk indeed, for nuclear proliferation is the one means by which outlaw regimes can pose a serious threat to great powers. Russia confronts questions not of expediency, but of existence, and it will do whatever it can to gain maneuvering room should the West seek to "punish" it for its actions in Georgia.
One irony of the present crisis is that Washington's neo-conservatives, by demanding a tough stance against Russia, may have harmed Israel's security interests more profoundly than any of Israel's detractors in American politics. The neo-conservatives are not as a rule Jewish, but many of them are Jews who have a deep concern for Israel's security - as does this writer. If America turns Russia into a strategic adversary, the probability of Israel's survival will drop by a big notch.
Notes
1. See National Review OnlineMoscow's Sinister Brilliance.
2. See New York Post, A czar is born: Bad Vlad wins war, dupes West & proves he's genius
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved.
By Spengler
Aug 19, 2008
http://www.atimes.com/atimes/Central_Asia/JH19Ag04.html
On the night of November 22, 2004, then-Russian president - now premier - Vladimir Putin watched the television news in his dacha near Moscow. People who were with Putin that night report his anger and disbelief at the unfolding "Orange" revolution in Ukraine. "They lied to me," Putin said bitterly of the United States. "I'll never trust them again." The Russians still can't fathom why the West threw over a potential strategic alliance for Ukraine. They underestimate the stupidity of the West.
American hardliners are the first to say that they feel stupid next to Putin. Victor Davis Hanson wrote on August 12 [1] of Moscow's "sheer diabolic brilliance" in Georgia, while Colonel Ralph Peters, a columnist and television commentator, marveled on August 14 [2], "The Russians are alcohol-sodden barbarians, but now and then they vomit up a genius ... the empire of the czars hasn't produced such a frightening genius since [Joseph] Stalin." The superlatives recall an old observation about why the plots of American comic books need clever super-villains and stupid super-heroes to even the playing field. Evidently the same thing applies to superpowers.
The fact is that all Russian politicians are clever. The stupid ones are all dead. By contrast, America in its complacency promotes dullards. A deadly miscommunication arises from this asymmetry. The Russians cannot believe that the Americans are as stupid as they look, and conclude that Washington wants to destroy them. That is what the informed Russian public believes, judging from last week's postings on web forums, including this writer's own.
These perceptions are dangerous because they do not stem from propaganda, but from a difference in existential vantage point. Russia is fighting for its survival, against a catastrophic decline in population and the likelihood of a Muslim majority by mid-century. The Russian Federation's scarcest resource is people. It cannot ignore the 22 million Russians stranded outside its borders after the 1991 collapse of the Soviet Union, nor, for that matter, small but loyal ethnicities such as the Ossetians. Strategic encirclement, in Russian eyes, prefigures the ethnic disintegration of Russia, which was a political and cultural entity, not an ethnic state, from its first origins.
The Russians know (as every newspaper reader does) that Georgia's President Mikheil Saakashvili is not a model democrat, but a nasty piece of work who deployed riot police against protesters and shut down opposition media when it suited him - in short, a politician in Putin's mold. America's interest in Georgia, the Russians believe, has nothing more to do with promoting democracy than its support for the gangsters to whom it handed the Serbian province of Kosovo in February.
Again, the Russians misjudge American stupidity. Former president Ronald Reagan used to say that if there was a pile of manure, it must mean there was a pony around somewhere. His epigones have trouble distinguishing the pony from the manure pile. The ideological reflex for promoting democracy dominates the George W Bush administration to the point that some of its senior people hold their noses and pretend that Kosovo, Ukraine and Georgia are the genuine article.
Think of it this way: Russia is playing chess, while the Americans are playing Monopoly. What Americans understand by "war games" is exactly what occurs on the board of the Parker Brothers' pastime. The board game Monopoly is won by placing as many hotels as possible on squares of the playing board. Substitute military bases, and you have the sum of American strategic thinking.
America's idea of winning a strategic game is to accumulate the most chips on the board: bases in Uzbekistan and Kyrgyzstan, a pipeline in Georgia, a "moderate Muslim" government with a big North Atlantic Treaty Organization base in Kosovo, missile installations in Poland and the Czech Republic, and so forth. But this is not a strategy; it is only a game score.
Chess players think in terms of interaction of pieces: everything on the periphery combines to control the center of the board and prepare an eventual attack against the opponent's king. The Russians simply cannot absorb the fact that America has no strategic intentions: it simply adds up the value of the individual pieces on the board. It is as stupid as that. But there is another difference: the Americans are playing chess for career and perceived advantage. Russia is playing for its life, like Ingmar Bergman's crusader in The Seventh Seal.
Dull people know that clever people are cleverer than they are, but they do not know why. The nekulturny Colonel Ralph Peters, a former US military intelligence analyst, is impressed by the tactical success of Russian arms in Georgia, but cannot fathom the end-game to which these tactics contribute. He writes, "The new reality is that a nuclear, cash-rich and energy-blessed Russia doesn't really worry too much whether its long-term future is bleak, given problems with Muslim minorities, poor life-expectancy rates, and a declining population. Instead, in the here and now, it has a window of opportunity to reclaim prestige and weaken its adversaries."
Precisely the opposite is true: like a good chess player, Putin has the end-game in mind as he fights for control of the board in the early stages of the game. Demographics stand at the center of Putin's calculation, and Russians are the principal interest that the Russian Federation has in its so-called near abroad. The desire of a few hundred thousand Abkhazians and South Ossetians to remain in the Russian Federation rather than Georgia may seem trivial, but Moscow is setting a precedent that will apply to tens of millions of prospective citizens of the Federation - most controversially in Ukraine.
Before turning to the demographics of the near abroad, a few observations about Russia's demographic predicament are pertinent. The United Nations publishes population projections for Russia up to 2050, and I have extended these to 2100. If the UN demographers are correct, Russia's adult population will fall from about 90 million today to only 20 million by the end of the century. Russia is the only country where abortions are more numerous than live births, a devastating gauge of national despair.
Under Putin, the Russian government introduced an ambitious natalist program to encourage Russian women to have children. As he warned in his 2006 state of the union address, "You know that our country's population is declining by an average of almost 700,000 people a year. We have raised this issue on many occasions but have for the most part done very little to address it ... First, we need to lower the death rate. Second, we need an effective migration policy. And third, we need to increase the birth rate."
Russia's birth rate has risen slightly during the past several years, perhaps in response to Putin's natalism, but demographers observe that the number of Russian women of childbearing age is about to fall off a cliff. No matter how much the birth rate improves, the sharp fall in the number of prospective mothers will depress the number of births. UN forecasts show the number of Russians aged 20-29 falling from 25 million today to only 10 million by 2040.
Russia, in other words, has passed the point of no return in terms of fertility. Although roughly four-fifths of the population of the Russian Federation is considered ethnic Russians, fertility is much higher among the Muslim minorities in Central Asia. Some demographers predict a Muslim majority in Russia by 2040, and by mid-century at the latest.
Part of Russia's response is to encourage migration of Russians left outside the borders of the federation after the collapse of communism in 1991. An estimated 6.5 million Russians from the former Soviet Union now work in Russia as undocumented aliens, and a new law will regularize their status. Only 20,000 Russian "compatriots" living abroad, however, have applied for immigration to the federation under a new law designed to draw Russians back.
That leaves the 9.5 million citizens of Belarus, a relic of the Soviet era that persists in a semi-formal union with the Russian Federation, as well as the Russians of the Western Ukraine and Kazakhstan. More than 15 million ethnic Russians reside in those three countries, and they represent a critical strategic resource. Paul Goble in his Window on Eurasia website reported on August 16:
Moscow retreated after encountering fierce opposition from other countries, but semi-legal practices of obtaining Russian citizenship that began in former Soviet republics in the early 1990s continue unabated. There is plenty of evidence that there are one to two million people living in the territory of the former Soviet Union who have de facto dual citizenship and are reluctant to report it to the authorities. Russia did little to stop the process. Moreover, starting in 1997, it encouraged de facto dual citizenship.
Russia has an existential interest in absorbing Belarus and the Western Ukraine. No one cares about Byelorus. It has never had an independent national existence or a national culture; the first grammar in the Belorussian language was not printed until 1918, and little over a third of the population of Belarus speaks the language at home. Never has a territory with 10 million people had a sillier case for independence. Given that summary, it seems natural to ask why anyone should care about Ukraine. That question is controversial; for the moment, I will offer the assertion that partition is the destiny of Ukraine.
Even with migration and annexation of former Russian territory that was lost in the fracture of the USSR, however, Russia will not win its end-game against demographic decline and the relative growth of Muslim populations. The key to Russian survival is Russification, that is, the imposition of Russian culture and Russian law on ethnicities at the periphery of the federation. That might sound harsh, but that has been Russian nature from its origins.
Russia is not an ethnicity but an empire, the outcome of hundreds of years of Russification. That Russification has been brutal is an understatement, but it is what created Russia out of the ethnic morass around the Volga river basin. One of the best accounts of Russia's character comes from Eugene Rosenstock-Huessey (Franz Rosenzweig's cousin and sometime collaborator) in his 1938 book Out of Revolution. Russia's territory tripled between the 16th and 18th centuries, he observes, and the agency of its expansion was a unique Russian type. The Russian peasant, Rosenstock-Huessey observed, "was no stable freeholder of the Western type but much more a nomad, a pedlar, a craftsman and a soldier. His capacity for expansion was tremendous." In 1581 Asiatic Russia was opened. Russian expansion, extending even in the eighteenth century as far as the Russian River in Northern California, was by no means Czaristic only. The "Moujik", the Russian peasant, because he is not a "Bauer" or a "farmer", or a "laborer", but a "Moujik", wanders and stays, ready to migrate again eventually year after year.
Russia was never a multi-ethnic state, but rather what I call a supra-ethnic state, that is, a state whose national principle transcends ethnicity. A reader has called my attention to an account of the most Russian of all writers, Fyodor Dostoyevsky, of his own Russo-Lithuanian-Ukrainian background: I suppose that one of my Lithuanian ancestors, having emigrated to the Ukraine, changed his religion in order to marry an Orthodox Ukrainian, and became a priest. When his wife died he probably entered a monastery, and later, rose to be an archbishop. This would explain how the Archbishop Stepan may have founded our Orthodox family, in spite of his being a monk. It is somewhat surprising to see the Dostoyevsky, who had been warriors in Lithuania, become priests in Ukraine. But this is quite in accordance with Lithuanian custom. I may quote the learned Lithuanian W St Vidunas in this connection: "Formerly many well-to-do Lithuanians had but one desire: to see one or more of their sons enter upon an ecclesiastical career."
Dostoyevsky's mixed background was typically Russian, as was the Georgian origin of Joseph Stalin.
Russia intervened in Georgia to uphold the principle that anyone who holds a Russian passport - Ossetian, Akhbaz, Belorussian or Ukrainian - is a Russian. Russia's survival depends not so much on its birth rate, nor on immigration, nor even on prospective annexation, but on the survival of the principle by which Russia was built in the first place. That is why Putin could not abandon the pockets of Russian passport holders in the Caucusus. That Russia history has been tragic, and its nation-building principle brutal and sometimes inhuman, is a different matter. Russia is sufficiently important that its tragedy will be our tragedy, unless averted.
The place to avert tragedy is in Ukraine. Russia will not permit Ukraine to drift to the West. Whether a country that never had an independent national existence prior to the collapse of communism should become the poster-child for national self-determination is a different question. The West has two choices: draw a line in the sand around Ukraine, or trade it to the Russians for something more important.
My proposal is simple: Russia's help in containing nuclear proliferation and terrorism in the Middle East is of infinitely greater import to the West than the dubious self-determination of Ukraine. The West should do its best to pretend that the "Orange" revolution of 2004 and 2005 never happened, and secure Russia's assistance in the Iranian nuclear issue as well as energy security in return for an understanding of Russia's existential requirements in the near abroad. Anyone who thinks this sounds cynical should spend a week in Kiev.
Russia has more to fear from a nuclear-armed Iran than the United States, for an aggressive Muslim state on its borders could ruin its attempt to Russify Central Asia. Russia's strategic interests do not conflict with those of the United States, China or India in this matter. There is a certain degree of rivalry over energy resources, but commercial rivalry does not have to turn into strategic enmity.
If Washington chooses to demonize Russia, the likelihood is that Russia will become a spoiler with respect to American strategic interests in general, and use the Iranian problem to twist America's tail. That is a serious risk indeed, for nuclear proliferation is the one means by which outlaw regimes can pose a serious threat to great powers. Russia confronts questions not of expediency, but of existence, and it will do whatever it can to gain maneuvering room should the West seek to "punish" it for its actions in Georgia.
One irony of the present crisis is that Washington's neo-conservatives, by demanding a tough stance against Russia, may have harmed Israel's security interests more profoundly than any of Israel's detractors in American politics. The neo-conservatives are not as a rule Jewish, but many of them are Jews who have a deep concern for Israel's security - as does this writer. If America turns Russia into a strategic adversary, the probability of Israel's survival will drop by a big notch.
Notes
1. See National Review OnlineMoscow's Sinister Brilliance.
2. See New York Post, A czar is born: Bad Vlad wins war, dupes West & proves he's genius
(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved.
Sunday, October 5, 2008
The Fall of America, Inc.
Published Oct 4, 2008
From the magazine issue dated Oct 13, 2008
http://www.newsweek.com/id/162401
http://www.newsweek.com/id/162401
The implosion of America's most storied investment banks. The vanishing of more than a trillion dollars in stock-market wealth in a day. A $700 billion tab for U.S. taxpayers. The scale of the Wall Street crackup could scarcely be more gargantuan. Yet even as Americans ask why they're having to pay such mind-bending sums to prevent the economy from imploding, few are discussing a more intangible, yet potentially much greater cost to the United States—the damage that the financial meltdown is doing to America's "brand."
Ideas are one of our most important exports, and two fundamentally American ideas have dominated global thinking since the early 1980s, when Ronald Reagan was elected president. The first was a certain vision of capitalism—one that argued low taxes, light regulation and a pared-back government would be the engine for economic growth. Reaganism reversed a century-long trend toward ever-larger government. Deregulation became the order of the day not just in the United States but around the world.
The second big idea was America as a promoter of liberal democracy around the world, which was seen as the best path to a more prosperous and open international order. America's power and influence rested not just on our tanks and dollars, but on the fact that most people found the American form of self-government attractive and wanted to reshape their societies along the same lines—what political scientist Joseph Nye has labeled our "soft power."
It's hard to fathom just how badly these signature features of the American brand have been discredited. Between 2002 and 2007, while the world was enjoying an unprecedented period of growth, it was easy to ignore those European socialists and Latin American populists who denounced the U.S. economic model as "cowboy capitalism." But now the engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society.
Democracy was tarnished even earlier. Once Saddam was proved not to have WMD, the Bush administration sought to justify the Iraq War by linking it to a broader "freedom agenda"; suddenly the promotion of democracy was a chief weapon in the war against terrorism. To many people around the world, America's rhetoric about democracy sounds a lot like an excuse for furthering U.S. hegemony.
The choice we face now goes well beyond the bailout, or the presidential campaign. The American brand is being sorely tested at a time when other models—whether China's or Russia's—are looking more and more attractive. Restoring our good name and reviving the appeal of our brand is in many ways as great a challenge as stabilizing the financial sector. Barack Obama and John McCain would each bring different strengths to the task. But for either it will be an uphill, years-long struggle. And we cannot even begin until we clearly understand what went wrong—which aspects of the American model are sound, which were poorly implemented, and which need to be discarded altogether.
Many commentators have noted that the Wall Street meltdown marks the end of the Reagan era. In this they are doubtless right, even if McCain manages to get elected president in November. Big ideas are born in the context of a particular historical era. Few survive when the context changes dramatically, which is why politics tends to shift from left to right and back again in generation-long cycles.
Reaganism (or, in its British form, Thatcherism) was right for its time. Since Franklin Roosevelt's New Deal in the 1930s, governments all over the world had only grown bigger and bigger. By the 1970s large welfare states and economies choked by red tape were proving highly dysfunctional. Back then, telephones were expensive and hard to get, air travel was a luxury of the rich, and most people put their savings in bank accounts paying low, regulated rates of interest. Programs like Aid to Families With Dependent Children created disincentives for poor families to work and stay married, and families broke down. The Reagan-Thatcher revolution made it easier to hire and fire workers, causing a huge amount of pain as traditional industries shrank or shut down. But it also laid the groundwork for nearly three decades of growth and the emergence of new sectors like information technology and biotech.
Internationally, the Reagan revolution translated into the "Washington Consensus," under which Washington—and institutions under its influence, like the International Monetary Fund and the World Bank—pushed developing countries to open up their economies. While the Washington Consensus is routinely trashed by populists like Venezuela's Hugo Chávez, it successfully eased the pain of the Latin American debt crisis of the early 1980s, when hyperinflation plagued countries such as Argentina and Brazil. Similar market-friendly policies are what turned China and India into the economic powerhouses they are today.
And if anyone needed more proof, they could look at the world's most extreme examples of big government—the centrally planned economies of the former Soviet Union and other communist states. By the 1970s they were falling behind their capitalist rivals in virtually all respects. Their implosion after the fall of the Berlin Wall confirmed that such welfare states on steroids were an historical dead end.
Like all transformative movements, the Reagan revolution lost its way because for many followers it became an unimpeachable ideology, not a pragmatic response to the excesses of the welfare state. Two concepts were sacrosanct: first, that tax cuts would be self-financing, and second, that financial markets could be self-regulating.
Prior to the 1980s, conservatives were fiscally conservative— that is, they were unwilling to spend more than they took in in taxes. But Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit. Thus the Reagan tax cuts of the 1980s produced a big deficit; the Clinton tax increases of the 1990s produced a surplus; and the Bush tax cuts of the early 21st century produced an even larger deficit. The fact that the American economy grew just as fast in the Clinton years as in the Reagan ones somehow didn't shake the conservative faith in tax cuts as the surefire key to growth.
More important, globalization masked the flaws in this reasoning for several decades. Foreigners seemed endlessly willing to hold American dollars, which allowed the U.S. government to run deficits while still enjoying high growth, something that no developing country could get away with. That's why Vice President Dick Cheney reportedly told President Bush early on that the lesson of the 1980s was that "deficits don't matter."
The second Reagan-era article of faith—financial deregulation—was pushed by an unholy alliance of true believers and Wall Street firms, and by the 1990s had been accepted as gospel by the Democrats as well. They argued that long-standing regulations like the Depression-era Glass-Steagall Act (which split up commercial and investment banking) were stifling innovation and undermining the competitiveness of U.S. financial institutions. They were right—only, deregulation produced a flood of innovative new products like collateralized debt obligations, which are at the core of the current crisis. Some Republicans still haven't come to grips with this, as evidenced by their proposed alternative to the bailout bill, which involved yet bigger tax cuts for hedge funds.
The problem is that Wall Street is very different from, say, Silicon Valley, where a light regulatory hand is genuinely beneficial. Financial institutions are based on trust, which can only flourish if governments ensure they are transparent and constrained in the risks they can take with other people's money. The sector is also different because the collapse of a financial institution harms not just its shareholders and employees, but a host of innocent bystanders as well (what economists soberly call "negative externalities").
Signs that the Reagan revolution had drifted dangerously have been clear over the past decade. An early warning was the Asian financial crisis of 1997-98. Countries like Thailand and South Korea, following American advice and pressure, liberalized their capital markets in the early 1990s. A lot of hot money started flowing into their economies, creating a speculative bubble, and then rushed out again at the first sign of trouble. Sound familiar? Meanwhile, countries like China and Malaysia that didn't follow American advice and kept their financial markets closed or strictly regulated found themselves much less vulnerable.
A second warning sign lay in America's accumulating structural deficits. China and a number of other countries began buying U.S. dollars after 1997 as part of a deliberate strategy to undervalue their currencies, keep their factories humming and protect themselves from financial shocks. This suited a post-9/11 America just fine; it meant that we could cut taxes, finance a consumption binge, pay for two expensive wars and run a fiscal deficit at the same time. The staggering and mounting trade deficits this produced—$700 billion a year by 2007—were clearly unsustainable; sooner or later the foreigners would decide that America wasn't such a great place to bank their money. The falling U.S. dollar indicates that we have arrived at that point. Clearly, and contrary to Cheney, deficits do matter.
Even at home, the downside of deregulation were clear well before the Wall Street collapse. In California, electricity prices spiraled out of control in 2000-2001 as a result of deregulation in the state energy market, which unscrupulous companies like Enron gamed to their advantage. Enron itself, along with a host of other firms, collapsed in 2004 because accounting standards had not been enforced adequately. Inequality in the United States rose throughout the past decade, because the gains from economic growth went disproportionately to wealthier and better-educated Americans, while the incomes of working-class people stagnated. And finally, the bungled occupation of Iraq and the response to Hurricane Katrina exposed the top-to-bottom weakness of the public sector, a result of decades of underfunding and the low prestige accorded civil servants from the Reagan years on.
All this suggests that the Reagan era should have ended some time ago. It didn't partly because the Democratic Party failed to come up with convincing candidates and arguments, but also because of a particular aspect of America that makes our country very different from Europe. There, less-educated, working-class citizens vote reliably for socialist, communist and other left-learning parties, based on their economic interests. In the United States, they can swing either left or right. They were part of Roosevelt's grand Democratic coalition during the New Deal, a coalition that held through Lyndon Johnson's Great Society in the 1960s. But they started voting Republican during the Nixon and Reagan years, swung to Clinton in the 1990s, and returned to the Republican fold under George W. Bush. When they vote Republican, it's because cultural issues like religion, patriotism, family values and gun ownership trump economic ones.
This group of voters will decide November's election, not least because of their concentration in a handful of swing states like Ohio and Pennsylvania. Will they tilt toward the more distant, Harvard-educated Obama, who more accurately reflects their economic interests? Or will they stick with people they can better identify with, like McCain and Sarah Palin? It took an economic crisis of massive proportions from 1929 to 1931 to bring a Democratic administration to power. Polls indicate we may have arrived again at that point in October 2008.
The other critical component of the American brand is democracy, and the willingness of the United States to support other democracies around the world. This idealistic streak in U.S. foreign policy has been constant over the past century, from Woodrow Wilson's League of Nations through Roosevelt's Four Freedoms to Reagan's call for Mikhail Gorbachev to "tear down this wall."
Promoting democracy—through diplomacy, aid to civil society groups, free media and the like—has never been controversial. The problem now is that by using democracy to justify the Iraq War, the Bush administration suggested to many that "democracy" was a code word for military intervention and regime change. (The chaos that ensued in Iraq didn't exactly help democracy's image either.) The Middle East in particular is a minefield for any U.S. administration, since America supports nondemocratic allies like the Saudis, and refuses to work with groups like Hamas and Hizbullah that came to power through elections. We don't have much credibility when we champion a "freedom agenda."
The American model has also been seriously tarnished by the Bush administration's use of torture. After 9/11 Americans proved distressingly ready to give up constitutional protections for the sake of security. Guantánamo Bay and the hooded prisoner at Abu Ghraib have since replaced the Statue of Liberty as symbols of America in the eyes of many non-Americans.
No matter who wins the presidency a month from now, the shift into a new cycle of American and world politics will have begun. The Democrats are likely to increase their majorities in the House and Senate. A huge amount of populist anger is brewing as the Wall Street meltdown spreads to Main Street. Already there is a growing consensus on the need to re-regulate many parts of the economy.
Globally the United States will not enjoy the hegemonic position it has occupied until now, something underscored by Russia's Aug. 7 invasion of Georgia. America's ability to shape the global economy through trade pacts and the IMF and World Bank will be diminished, as will our financial resources. And in many parts of the world, American ideas, advice and even aid will be less welcome than they are now.
Under such circumstances, which candidate is better positioned to rebrand America? Barack Obama obviously carries the least baggage from the recent past, and his postpartisan style seeks to move beyond today's political divisions. At heart he seems a pragmatist, not an ideologue. But his consensus-forming skills will be sorely tested when he has to make tough choices, bringing not just Republicans but unruly Democrats into the fold. McCain, for his part, has talked like Teddy Roosevelt in recent weeks, railing against Wall Street and calling for SEC chairman Chris Cox's head. He may be the only Republican who can bring his party, kicking and screaming, into a post-Reagan era. But one gets the sense that he hasn't fully made up his mind what kind of Republican he really is, or what principles should define the new America.
American influence can and will eventually be restored. Since the world as a whole is likely to suffer an economic downturn, it is not clear that the Chinese or Russian models will fare appreciably better than the American version. The United States has come back from serious setbacks during the 1930s and 1970s, due to the adaptability of our system and the resilience of our people.
Still, another comeback rests on our ability to make some fundamental changes. First, we must break out of the Reagan-era straitjacket concerning taxes and regulation. Tax cuts feel good but do not necessarily stimulate growth or pay for themselves; given our long-term fiscal situation Americans are going to have to be told honestly that they will have to pay their own way in the future. Deregulation, or the failure of regulators to keep up with fast-moving markets, can become unbelievably costly, as we have seen. The entire American public sector—underfunded, deprofessionalized and demoralized—needs to be rebuilt and be given a new sense of pride. There are certain jobs that only the government can fulfill.
As we undertake these changes, of course, there's a danger of overcorrecting. Financial institutions need strong supervision, but it isn't clear that other sectors of the economy do. Free trade remains a powerful motor for economic growth, as well as an instrument of U.S. diplomacy. We should provide better assistance to workers adjusting to changing global conditions, rather than defend their existing jobs. If tax cutting is not a path to automatic prosperity, neither is unconstrained social spending. The cost of the bailouts and the long-term weakness of the dollar mean that inflation will be a serious threat in the future. An irresponsible fiscal policy could easily add to the problem.
And while fewer non-Americans are likely to listen to our advice, many would still benefit from emulating certain aspects of the Reagan model. Not, certainly, financial-market deregulation. But in continental Europe, workers are still treated to long vacations, short working weeks, job guarantees and a host of other benefits that weaken their productivity and will not be financially sustainable.
The unedifying response to the Wall Street crisis shows that the biggest change we need to make is in our politics. The Reagan revolution broke the 50-year dominance of liberals and Democrats in American politics and opened up room for different approaches to the problems of the time. But as the years have passed, what were once fresh ideas have hardened into hoary dogmas. The quality of political debate has been coarsened by partisans who question not just the ideas but the motives of their opponents. All this makes it harder to adjust to the new and difficult reality we face. So the ultimate test for the American model will be its capacity to reinvent itself once again. Good branding is not, to quote a presidential candidate, a matter of putting lipstick on a pig. It's about having the right product to sell in the first place. American democracy has its work cut out for it.
Fukuyama is professor of International Political Economy at the Johns Hopkins School of Advanced International Studies.
"Imperialism the Highest Stage of Capitalism"
Did Vladimir Lenin Predict The Banking Disaster Of 2008?
By V. I. Lenin
LCW vol.22,
Lenin enumerated the following five features characteristic of the epoch of imperialism:
The epoch of imperialism opens when the expansion of colonialism has covered the globe and no new colonies can be acquired by the great powers except by taking them from each other, and the concentration of capital has grown to a point where finance capital becomes dominant over industrial capital. Lenin enumerated the following five features characteristic of the epoch of imperialism:
(1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life;
(2) the merging of bank capital with industrial capital, and the creation on the basis of this "finance capital", of a financial oligarchy;
(3) the export of capital as distinguished from the export of commodities acquires exceptional importance;
(4) the formation of international monopoly capitalist associations which share the world among themselves, and
(5) the territorial division of the whole world among the biggest capitalist powers is completed. Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed. [Lenin, Imperialism the Highest Stage of Capitalism, LCW Volume 22, p. 266-7.]
"[Imperialism] is something quite different from the old free competition between manufacturers, scattered and out of touch with one another, and producing for an unknown market. Concentration [of production] has reached the point at which it is possible to make an approximate estimate of all sources of raw materials (for example, the iron ore deposits)... [throughout] the whole world. Not only are such estimates made, but these sources are captured by gigantic monopolist associations [now called multi-national conglomerates]. An approximate estimate of the capacity of markets is also made, and the associations "divide" them up amongst themselves by agreement. Skilled labor is monopolized, the best engineers are engaged; the means of transport are captured – railways in America, shipping companies in Europe and America. Capitalism in its imperialist stage leads directly to the most comprehensive socialization of production; it, so to speak, drags the capitalists, against their will and consciousness, into some sort of a new social order, a transitional one from complete free competition to complete socialization.
"Production becomes social, but appropriation remains private. The social means of production remain the private property of a few. The general framework of formally recognized free competition remains, and the yoke of a few monopolists on the rest of the population becomes a hundred times heavier, more burdensome and intolerable." (p. 205)
"The development of capitalism has arrived at a stage when, although commodity production still "reigns" and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the "geniuses" of financial manipulation. At the basis of these manipulations and swindles lies socialized production; but the immense progress of mankind, which achieved this socialization, goes to benefit... the speculators." (p. 206-207)
Monopoly, oligarchy, the striving for domination and not for freedom, the exploitation of an increasing number of small and weak nations by a handful of the richest or most powerful nations – all these have given rise to those distinctive characteristics of imperialism which compel us to define it as parasitic or decaying capitalism. … It would be a mistake to believe that this tendency to decay precludes the rapid growth of capitalism. It does not. In the epoch of imperialism, certain branches of industry, certain strata of bourgeoisie and certain countries betray… now one and now another of these tendencies. On the whole, capitalism is growing far more rapidly than before."
Imperialism, the Highest Stage of Capitalism, VI Lenin, Selected Works in one volume, p 260
(ch.7) Parasitism and the Decay of Capitalism...parasitism is characteristic of imperialism... the deepest economic foundation of imperialism is monopoly. This is capitalist monopoly, i.e., monopoly which has grown out of capitalism and which exists in the general environment of capitalism, commodity production and competition, in permanent and insoluble contradiction to this general environment. Nevertheless, like all monopoly, it inevitably engenders a tendency of stagnation and decay....Certainly, the possibility of reducing the cost of production and increasing profits by introducing technical improvements operates in the direction of change. But the tendency to stagnation and decay, which is characteristic of monopoly, continues to operate, and in some branches of industry, in some countries, for certain periods of time, it gains the upper hand.... imperialism is an immense accumulation of money capital in a few countries, amounting, as we have seen, to 100,000-50,000 million francs in securities. Hence the extraordinary growth of a class, or rather, of a stratum of rentiers, i.e., people who live by "clipping coupons", who take no part in any enterprise whatever, whose profession is idleness. The export of capital, one of the most essential economic bases of imperialism, still more completely isolates the rentiers from production and sets the seal of parasitism on the whole country that lives by exploiting the labour of several overseas countries and colonies....
Imperialism....CH. 10... the bourgeoisie to an ever-increasing degree lives on the proceeds of capital exports and by "clipping coupons". It would be a mistake to believe that this tendency to decay precludes the rapid growth of capitalism. It does not. In the epoch of imperialism, certain branches of industry, certain strata of the bourgeoisie and certain countries betray, to a greater or lesser degree, now one and now another of these tendencies. On the whole, capitalism is growing far more rapidly than before; but this growth is not only becoming more and more uneven in general, its unevenness also manifests itself, in particular, in the decay of the countries which are richest in capital....
...the tendency of imperialism to split the workers, to strengthen opportunism among them and to cause temporary decay in the working-class movement, revealed itself much earlier than the end of the nineteenth and the beginning of the twentieth centuries; for two important distinguishing features of imperialism were already observed in Great Britain in the middle of the nineteenth century—vast colonial possessions and a monopolist position in the world market. Marx and Engels traced this connection between opportunism in the working-class movement and the imperialist features of British capitalism systematically, during the course of several decades. For example, on October 7, 1858, Engels wrote to Marx: "The English proletariat is actually becoming more and more bourgeois, so that this most bourgeois of all nations is apparently aiming ultimately at the possession of a bourgeois aristocracy and a bourgeois proletariat alongside the bourgeoisie. For a nation which exploits the whole world this is of course to a certain extent justifiable."[15] Almost a quarter of a century later, in a letter dated August 11, 1881, Engels speaks of the "worst English trade unions which allow themselves to be led by men sold to, or at least paid by, the middle class". In a letter to Kautsky, dated September 12, 1882, Engels wrote: "You ask me what the English workers think about colonial policy. Well, exactly the same as they think about politics in general. There is no workers' party here, there are only Conservatives and Liberal-Radicals, and the workers gaily share the feast of England's monopoly of the world market and the colonies."
[13] (Engels expressed similar ideas in the press in his preface to the second edition of The Condition of the Working Class in England, which appeared in 1892.)...
The distinctive feature of the present situation is the prevalence of such economic and political conditions that are bound to increase the irreconcilability between opportunism and the general and vital interests of the working-class movement: imperialism has grown from an embryo into the predominant system; capitalist monopolies occupy first place in economics and politics; the division of the world has been completed; on the other hand, instead of the undivided monopoly of Great Britain, we see a few imperialist powers contending for the right to share in this monopoly, and this struggle is characteristic of the whole period of the early twentieth century. Opportunism cannot now be completely triumphant in the working-class movement of one country for decades as it was in Britain in the second half of the nineteenth century; but in a number of countries it has grown ripe, overripe, and rotten, and has become completely merged with bourgeois policy in the form of "social-chauvinism".
[14] http://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch10.htm
Posted on ICH 04/10/08
By V. I. Lenin
LCW vol.22,
Lenin enumerated the following five features characteristic of the epoch of imperialism:
The epoch of imperialism opens when the expansion of colonialism has covered the globe and no new colonies can be acquired by the great powers except by taking them from each other, and the concentration of capital has grown to a point where finance capital becomes dominant over industrial capital. Lenin enumerated the following five features characteristic of the epoch of imperialism:
(1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life;
(2) the merging of bank capital with industrial capital, and the creation on the basis of this "finance capital", of a financial oligarchy;
(3) the export of capital as distinguished from the export of commodities acquires exceptional importance;
(4) the formation of international monopoly capitalist associations which share the world among themselves, and
(5) the territorial division of the whole world among the biggest capitalist powers is completed. Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capital is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed. [Lenin, Imperialism the Highest Stage of Capitalism, LCW Volume 22, p. 266-7.]
"[Imperialism] is something quite different from the old free competition between manufacturers, scattered and out of touch with one another, and producing for an unknown market. Concentration [of production] has reached the point at which it is possible to make an approximate estimate of all sources of raw materials (for example, the iron ore deposits)... [throughout] the whole world. Not only are such estimates made, but these sources are captured by gigantic monopolist associations [now called multi-national conglomerates]. An approximate estimate of the capacity of markets is also made, and the associations "divide" them up amongst themselves by agreement. Skilled labor is monopolized, the best engineers are engaged; the means of transport are captured – railways in America, shipping companies in Europe and America. Capitalism in its imperialist stage leads directly to the most comprehensive socialization of production; it, so to speak, drags the capitalists, against their will and consciousness, into some sort of a new social order, a transitional one from complete free competition to complete socialization.
"Production becomes social, but appropriation remains private. The social means of production remain the private property of a few. The general framework of formally recognized free competition remains, and the yoke of a few monopolists on the rest of the population becomes a hundred times heavier, more burdensome and intolerable." (p. 205)
"The development of capitalism has arrived at a stage when, although commodity production still "reigns" and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the "geniuses" of financial manipulation. At the basis of these manipulations and swindles lies socialized production; but the immense progress of mankind, which achieved this socialization, goes to benefit... the speculators." (p. 206-207)
Monopoly, oligarchy, the striving for domination and not for freedom, the exploitation of an increasing number of small and weak nations by a handful of the richest or most powerful nations – all these have given rise to those distinctive characteristics of imperialism which compel us to define it as parasitic or decaying capitalism. … It would be a mistake to believe that this tendency to decay precludes the rapid growth of capitalism. It does not. In the epoch of imperialism, certain branches of industry, certain strata of bourgeoisie and certain countries betray… now one and now another of these tendencies. On the whole, capitalism is growing far more rapidly than before."
Imperialism, the Highest Stage of Capitalism, VI Lenin, Selected Works in one volume, p 260
(ch.7) Parasitism and the Decay of Capitalism...parasitism is characteristic of imperialism... the deepest economic foundation of imperialism is monopoly. This is capitalist monopoly, i.e., monopoly which has grown out of capitalism and which exists in the general environment of capitalism, commodity production and competition, in permanent and insoluble contradiction to this general environment. Nevertheless, like all monopoly, it inevitably engenders a tendency of stagnation and decay....Certainly, the possibility of reducing the cost of production and increasing profits by introducing technical improvements operates in the direction of change. But the tendency to stagnation and decay, which is characteristic of monopoly, continues to operate, and in some branches of industry, in some countries, for certain periods of time, it gains the upper hand.... imperialism is an immense accumulation of money capital in a few countries, amounting, as we have seen, to 100,000-50,000 million francs in securities. Hence the extraordinary growth of a class, or rather, of a stratum of rentiers, i.e., people who live by "clipping coupons", who take no part in any enterprise whatever, whose profession is idleness. The export of capital, one of the most essential economic bases of imperialism, still more completely isolates the rentiers from production and sets the seal of parasitism on the whole country that lives by exploiting the labour of several overseas countries and colonies....
Imperialism....CH. 10... the bourgeoisie to an ever-increasing degree lives on the proceeds of capital exports and by "clipping coupons". It would be a mistake to believe that this tendency to decay precludes the rapid growth of capitalism. It does not. In the epoch of imperialism, certain branches of industry, certain strata of the bourgeoisie and certain countries betray, to a greater or lesser degree, now one and now another of these tendencies. On the whole, capitalism is growing far more rapidly than before; but this growth is not only becoming more and more uneven in general, its unevenness also manifests itself, in particular, in the decay of the countries which are richest in capital....
...the tendency of imperialism to split the workers, to strengthen opportunism among them and to cause temporary decay in the working-class movement, revealed itself much earlier than the end of the nineteenth and the beginning of the twentieth centuries; for two important distinguishing features of imperialism were already observed in Great Britain in the middle of the nineteenth century—vast colonial possessions and a monopolist position in the world market. Marx and Engels traced this connection between opportunism in the working-class movement and the imperialist features of British capitalism systematically, during the course of several decades. For example, on October 7, 1858, Engels wrote to Marx: "The English proletariat is actually becoming more and more bourgeois, so that this most bourgeois of all nations is apparently aiming ultimately at the possession of a bourgeois aristocracy and a bourgeois proletariat alongside the bourgeoisie. For a nation which exploits the whole world this is of course to a certain extent justifiable."[15] Almost a quarter of a century later, in a letter dated August 11, 1881, Engels speaks of the "worst English trade unions which allow themselves to be led by men sold to, or at least paid by, the middle class". In a letter to Kautsky, dated September 12, 1882, Engels wrote: "You ask me what the English workers think about colonial policy. Well, exactly the same as they think about politics in general. There is no workers' party here, there are only Conservatives and Liberal-Radicals, and the workers gaily share the feast of England's monopoly of the world market and the colonies."
[13] (Engels expressed similar ideas in the press in his preface to the second edition of The Condition of the Working Class in England, which appeared in 1892.)...
The distinctive feature of the present situation is the prevalence of such economic and political conditions that are bound to increase the irreconcilability between opportunism and the general and vital interests of the working-class movement: imperialism has grown from an embryo into the predominant system; capitalist monopolies occupy first place in economics and politics; the division of the world has been completed; on the other hand, instead of the undivided monopoly of Great Britain, we see a few imperialist powers contending for the right to share in this monopoly, and this struggle is characteristic of the whole period of the early twentieth century. Opportunism cannot now be completely triumphant in the working-class movement of one country for decades as it was in Britain in the second half of the nineteenth century; but in a number of countries it has grown ripe, overripe, and rotten, and has become completely merged with bourgeois policy in the form of "social-chauvinism".
[14] http://www.marxists.org/archive/lenin/works/1916/imp-hsc/ch10.htm
Posted on ICH 04/10/08
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