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3:20PM

Western Hemisphere's Shale Men as Oil Industry's New "World Swing Producers"?

 

FASCINATING BRIEFING IN A RECENT ECONOMIST (23 JAN 16) ADDS A NEW TWIST TO AN ARGUMENT I'VE BEEN RECENTLY ADVANCING ON HOW NORTH AMERICA'S EMERGING ENERGY INDEPENDENCE DRAMATICALLY REDEFINES ITS OWN SENSE OF ECONOMIC RESILIENCE AND – ULTIMATELY – AMERICA'S GLOBAL SECURITY PERSPECTIVE. Think of the future as mostly about energy and water, with the latter accounting for food production. Any country seeking to ensure its economic resilience going forward wants to be either rich in both, or rich in secure access to both. This is essentially where China is weakest now and in coming decades (hence the aggressive military behavior on display off its coast), because it must import both food and energy in ever increasingly amounts (and overwhelmingly via seaborne trade). This is also where America (and North America in general) is strongest now and in coming decades, relative to just about every great power out there – save perhaps Russia. But even there, America has little reason to unduly worry about the widely-perceived renewal of strategic rivalry with Moscow, which invariably becomes China's economic vassal on that basis:

China, please meet Russia, an energy-business-masquerading-as-a-government, which is incredibly vulnerable on the subject of lower energy prices but stands as the world's largest exporter of energy.

Russia, please meet China, which is the world's largest importer of energy and the stingiest, most aggressively demanding trade partner in the world.

Please go about you co-dependency with all the respect and friendship that you've each bestowed upon the other's culture and civilization over the years.

As I've pointed out, North America is already the world's de facto swing producer on grains, which gives us an enormous strategic advantage – and power – that we scarcely realize.

We are, in effect, the Saudi Arabia of grain. So, if, in our imagination, they have the world over an oil barrel, then we've got the world over a breadbasket.

Guess who cries "uncle" first?

And yes, we'll maintain that status in spite of climate change, because we're that clever and that resilient and that blessed by circumstances.

But here's where the Economist's analysis of the recent slide in oil prices is so intriguing: what if North America were to become the world's swing producer on energy – as well?

From the piece:

Now the fear for producers is of an excess of oil, rather than a shortage. The addition to global supply over the past five years of 4.2m barrels a day (b/d) from America’s shale producers, although only 5% of global production, has had an outsized impact on the market by raising the prospects of recovering vast amounts of resources formerly considered too hard to extract. On January 19th the International Energy Agency (IEA), a prominent energy forecaster, issued a stark warning: “The oil market could drown in oversupply.”

Amazing what the fracking revolution in North America has wrought, and don't – for a minute – discount how that sense of energy independence influenced President Obama's decision to see a Nixon-like detente with Iran, identified in the piece as "the most immediate cause of the bearishness."

[Iran] promises an immediate boost to production of 500,000 b/d, just when other members of OPEC such as Saudi Arabia and Iraq are pumping at record levels. Even if its target is over-optimistic, seething rivalry between the rulers in Tehran and Riyadh make it hard to imagine that the three producers could agree to the sort of production discipline that OPEC has used to attempt to rescue prices in the past.

But it gets even more disruptive – again, because of the fracking revolution in North America:

Even if OPEC tried to reassert its influence, the producers’ cartel would probably fail because the oil industry has changed in several ways. Shale-oil producers, using technology that is both cheaper and quicker to deploy than conventional oil rigs, have made the industry more entrepreneurial. Big depreciations against the dollar have helped beleaguered economies such as Russia, Brazil and Venezuela to maintain output, by increasing local-currency revenues relative to costs. And growing fears about action on climate change, coupled with the emergence of alternative-energy technologies, suggests to some producers that it is best to pump as hard as they can, while they can.

So we witness the Saudis – yet again – trying to shake out the market, not to mention its fierce regional rival, through an extended period of self-destructive over-production relative to market demand. It will definitely hinder Iran's re-entry into the world and its energy market, but in the US?

Yet there is also a reason for keeping the pumps working that is not as suicidal as it sounds. One of the remarkable features of last year’s oil market was the resilience of American shale producers in the face of falling prices. Since mid-2015 shale firms have cut more than 400,000 b/d from output in response to lower prices. Nevertheless, America still increased oil production more than any other country in the year as a whole, producing an additional 900,000 b/d, according to the IEA.

And here's where US technological resilience gets truly interesting:

During the year the number of drilling rigs used in America fell by over 60%. Normally that would be considered a strong indicator of lower output. Yet it is one thing to drill wells, another to conduct the hydraulic fracturing (“fracking”) that gets the shale oil flowing out. Rystad Energy, a Norwegian consultancy, noted late last year that the “frack-count”, ie, the number of wells fracked, was still rising, explaining the resilience of oil production.

The roughnecks used other innovations to keep the oil gushing, such as injecting more sand into their wells to improve flow, using better data-gathering techniques and employing a skeleton staff to keep costs down. The money is no longer flowing in. America’s once-rowdy oil towns, where three years ago strippers could make hundreds of dollars a night from itinerant oilmen, are now full of abandoned trailer parks and boarded-up businesses. But the oil is still flowing out. Even some of the oldest shale fields, such as the Bakken in North Dakota, were still producing at the same level in November as more than a year before.

No, we don't want to overestimate the economic boost to the US economy from all this. Our economic restructuring challenges are significant – as evidenced by voter anger in this year's presidential race. But others have it far worse:

Unsurprisingly some of the biggest splashes of red ink in the IMF’s latest forecast revisions were reserved for countries where oil exploration and production has played a significant role in the economy: Brazil, Saudi Arabia, Russia (and some of its oil-producing neighbours) and Nigeria. Weaker demand in this group owes much to strains on their public finances.

Russia has said it will cut public spending by a further 10% in response to the latest drop in crude prices (see article).

So where do we go from here? The article discusses "peak demand," something I've long argued would naturally precede the much-feared "peak oil" moment, primarily due to efficiency and environmental concerns.

Then the Economist lays out the crown-jewel argument – from my perspective – of the piece:

More likely, the oil price will eventually find a bottom and, if this cycle is like previous ones, shoot sharply higher because of the level of underinvestment in reserves and natural depletion of existing wells. Yet the consequences will be different. Antoine Halff of Columbia University’s Centre on Global Energy Policy told American senators on January 19th that the shale-oil industry, with its unique cost structure and short business cycle, may undermine longer-term investment in high-cost traditional oilfields. The shalemen, rather than the Saudis, could well become the world’s swing producers, adding to volatility, perhaps, but within a relatively narrow range.

Bingo!

Please keep that in mind when all the politicians and national security experts are trying to scare you to death during our ongoing transition from one president to the next: when it comes to food/water and energy, North America – and America in particular – is sitting pretty.

Why?

Because our national resilience on both continues to contradict the pessimists while amazing even the optimists like me!

 

10:21AM

America’s Post-Oil Grand Strategy

[Wrote this last June as possible publication, but it was a bit beyond the pale for journal, which wanted dramatic changes. Not unusual for me - happens with every new tack I undertake (the "new map" suffered similarly). I liked it as it was, so we parted on that disagreement. I later used it in China as a written version of the presentations I gave there in Beijing and Shanghai (August 2015). I post it here now because I've recently received a number of requests based on my 2015 presentation in DC (a further iteration of my presentations in China). I also post it because these things just get lost over time if I don't.]

 

America's Post-Oil Grand Strategy
by 
Thomas P.M. Barnett

June 2015


The United States defaulted to a Middle East-centric grand strategy in the waning years of the Cold War and has remained stuck there ever since – sometimes in denial (like now) and sometimes in fervent embrace (George W. Bush and his neocons) but always in a manner that demanded some measure of White House attention.  That seemingly unbreakable focus – particularly in relation to allies Israel and Saudi Arabia – now rapidly dissipates, falling victim first to a technological curveball and ultimately to a demographic shift that leaves Americans less willing to police the world and more interested in recasting their pursuit of happiness.  

America’s political leaders have taken to describing this era as one of unprecedented uncertainty, but this is hardly the case.  Globalization is either winning or has won across all the world’s regions, leaving only the question of which global “brands” (American, Chinese, Indian, European, Russian) will dominate where.  President Obama and much of Washington now project the nation’s grand strategic ambitions in the direction of Asia, but they are mistaken.  America’s historical scheme of integrating the world “laterally” (West to East) since World War II is largely complete, meaning these United States now enter an age of “vertical” integration (North to South) in the Western Hemisphere. This latitudinal expansion of the American System once imagined by our Founding Fathers will define U.S. foreign policy across the rest of this century.

 

The technological curveball that arrives just in time

In many ways, the hybrid U.S. economic system of big firms surrounded by a sea of small, technology-innovating start-ups represents the purest real-world expression of Karl Marx’s dialectic materialism – a theory of history that tracks causality from inexorable technological advance to altered economic reality to inevitable political change. What Marx never imagined was a political system able to structure itself so that those technological waves would just keep coming over the decades, consistently “buying off” the electoral acquiescence of the lower and middle classes in the face of elite domination (oftentimes real, sometimes just imagined) of the highest levels of government.  In Marxian terminology, America’s political “superstructure” has learned how to co-evolve with its economic “base” better than any nation-state in history.

The feedback loop that has allowed that successful co-evolution is America’s sometimes stunningly permissive rule of law.  Basically, you can try or invent just about anything in America that isn’t currently prohibited by law, whose construction trails innovation sometimes for decades. In too much of the rest of the world, one’s innovation and industry is limited to what is allowed by law.  Do Americans pay for that permissiveness?  Regularly – in the form of surges in criminality, environmental damage, labor abuse and sheer greed.  But thanks to our participatory regulatory and legal systems, the “little guy” can fight back and can make those bastards pay for what they’ve done!  So while the construction of protective laws trails crimes, disasters, and tragedies of the common, it never falls so far behind that the political system fractures – save for our unique historical experience with slavery.

Thus, it is only fitting that America’s historically recent Middle East-centric grand strategy, seemingly beholden as it was to the goal of assuring the world’s access to affordable energy, now falls victim to yet the latest in a long string of U.S.-triggered technological waves – the so-called fracking revolution.  This silver bullet development, coming as it does just as two new, energy-import-dependent superpowers (China, India) rise in the East, could not be more fortuitous for extending the global moratorium on great power war begun with the invention of nuclear weapons.  It essentially introduces enough slack in the world energy system to allow both Asian giants to step into their economic primes without needing to militarily challenge either the United States or its long-nurtured global trade system.  When combined with the Western Hemisphere’s most crucial resource advantage – namely, arable land in an age of global climate change, America’s new-found energy independence fundamentally prevents any historical repeat of the structural run-ups to World Wars I or II, much less any revivification of the Cold War’s East-West destructive superpower rivalry.  Thanks to fracking, it turns out that this town is big enough for the both of us – the U.S. and China in the Pacific Rim today, and China and India in Asia tomorrow.

Think about that for a minute: amidst all the continuing expert predictions of overpopulation and rising consumption bankrupting the planet to the point of non-stop “resource wars” among “thirsty” great powers (think oil and water), American ingenuity once again comes to the world’s rescue on both energy and food (i.e., water turned into human energy).

Just a decade ago, America imported almost two-thirds of its crude oil and entertained plans for new infrastructure to facilitate imports of liquid natural gas.  Today it surpasses Saudi Arabia on crude oil production and, according to the U.S. Department of Energy, will become a net exporter of crude oil in roughly a decade’s time. Moreover, by tapping into what is estimated to be the world’s second-largest shale gas reserves (China is number one), America has re-vaulted itself to the leading ranks of world natural gas producers – soon available for export.  This sort of technological turnaround is – quite frankly – just as impressive as China’s economic rise over the similarly long gestation period of the past quarter-century.  But – again – more importantly, America’s technological achievement essentially solves the structural challenge created by China’s rapid ascension in the world power system – but only if both Washington and Beijing become smart enough to realize that.

President Barack Obama was absolutely correct in downsizing America’s “war on terror” from the Bush Administration’s focus on regime toppling to hunting down and killing bad guys.  Frankly, that’s been America’s story on military interventions going all the way back to Panama and Manuel Noriega in 1989.  We don’t take on governments anymore; we take on bad/nonstate actors (the Milosevic gang in Serbia, Al-Qaeda and the Taliban in Afghanistan, the “deck of 52” in Iraq, Qaddafi in Libya, and so on). By re-symmetricizing what has long been described as radical Islam’s asymmetrical war on the West, Obama right-sized the terror war. But to cover his soft-on-defense vulnerability as a Democrat, he coupled that wise decision with the strategically unsound declaration of America’s “pivot to Asia” – in effect, shifting from a region in which globalization’s advance is still being violently contested to one where its victory is already complete.

But here’s where the strategic irony grows stunningly disturbing: by attempting to contain rising China’s natural military expansion in East Asia, Washington inadvertently prevents what must become Beijing’s progressive embrace of the role of extra-regional security Leviathan for the Persian Gulf.  Worse, by doing this, Washington actually encourages rival India to do the same when it must eventually partner with China in providing that regional security umbrella. In other words, just as America’s technological breakthrough on energy relieves it of its unwanted role in the Persian Gulf, Washington wrongheadedly works to prevent our historical relief from moving toward those “responsible stakeholder” roles. 

 

America’s Long(itudinal) War: It only gets worse

Understand this from the start:  the Persian Gulf still matters to Europe in terms of energy flows but not to the United States.  From the five top-10 global oil exporters located in the Gulf (Saudi Arabia, Iran, Iraq, UAE, Kuwait), only negligible amounts of crude oil currently flow to the Western Hemisphere.  The vast majority of Persian Gulf oil exports (roughly four-fifths) flows into East Asia, with China and India alone accounting for half of that flow.  Anti-war protestors got it only half-right: it may have been American blood, but it was never our oil.

If you’re paying attention to Barack Obama’s second-term boldness in foreign policy, this newfound swagger clearly tracks back to a growing sense of both America’s energy independence and its ability to influence global energy markets.  The recent bottoming of global oil prices was due in no small part to rising American production.  In the case of Venezuela’s flagging financial support to Cuba, this left the Castro brothers more open to Obama’s offers of normalizing bilateral relations. In the case of Iran, this increased the White House’s confidence in moving ahead on the nuclear power deal – despite Riyadh and Israel’s obvious displeasure.  Even in the case of Russia’s ongoing squeeze of Ukraine, the Obama Administration reveals no penchant for “blinking,” and why should it?  The more Vladimir Putin isolates Russia from the West, the more Moscow is forced to sell off its vast natural resources to the world’s largest buyer of the same – those notoriously stingy and difficult Chinese.  Putin’s reward for grabbing the Crimea is pitiable: the right to sell off Russia at bargain-basement prices to Beijing.

But make no mistake: there is genuine strategic risk in Obama’s mistimed Asian “pivot.”

In Asia alone, Washington risks a number of stumbling-into-great-power-war pathways, several of which could be driven by local powers (Japan and Vietnam especially) over-reacting to Beijing’s latest – literally – dredged-up beachhead or the right shooting incident between patrol craft operating above, on, or below the disputed waters.  A rising superpower like China has wont of an appropriate whipping boy to demonstrate its growing military prowess.  When America reached that jingoist apogee late in the 19th century, it was smart enough to target the comatose Spanish Empire in the Caribbean (Cuba) and Pacific (Philippines).  For China, still nurturing regional grudges over past “humiliations,” East Asia is a sufficiently target-rich environment.  And with the Pentagon locked and loaded to prove its AirSea Battle Concept, one cannot help but worry that some Asian variant of Archduke Ferdinand is now figuratively riding through the streets with his car-top down. Granted, the resulting shooting war is more likely virtual than real, but there too we find burgeoning cyber-warfare forces on both sides of the Pacific itching to press those keys and reveal to the world the damage they’re truly capable of inflicting.

Should the United States increasingly put at risk its greatest foreign policy achievement in history – namely, the rapid and planet-wide spread of our economic source-code (aka, globalization) – with this China-centric “pivot” to East Asia?  No. In Beijing’s eyes, any U.S. effort to block their naval expansion leaves the Mainland vulnerable to military pressure from the sea – the oft employed attack vector of Western powers seeking China’s “humiliation.”  All Americans have to do to approximate the average Chinese’s nationalism on this point is to imagine Chinese aircraft carriers, submarines and aircraft patrolling just beyond America’s declared national waters.  Think of just how far Fox News could run with that.

Predictably – if not fortunately, crises in the Middle East routinely erupt to recapture America’s dangerously short strategic attention span.  Here, the Obama Administration’s modus operandi of “leading from behind” is a preview of coming distractions. With Washington locally perceived as backing out of its longtime regional Leviathan role, and with relief (China, India) nowhere in sight, we collectively enter a nobody-is-minding-the-stove period in which the region’s preeminent three-sided rivalry between Saudi Arabia, Iran and Turkey will come to a dangerous boil.

We’ve seen this already unfold in the Islamic State’s frighteningly rapid rise.  Fearing growing encirclement by the fabled Shia Crescent, Riyadh secretly bankrolled the group’s emergence in Syria and Iraq.  Ankara, with similar rivalrous instincts, allowed Turkey to become a smuggling sieve for foreign fighters and supplies transiting to and from ISIS.  Now, as their monstrous co-creation threatens them directly, both regimes are caught in the sort of strategic conundrum usually reserved for intervening extra-regional great powers – a truly telling development.  Iran too now faces a certain imperial “overstretch” throughout the wider region, making its determined effort to gain international recognition as a nuclear power oddly reminiscent of the Soviet Union’s efforts with the West during the Cold War, in that, the more Tehran engages in great-power meddling of its own, the more it wants to erase the threat of possible strategic retaliation against the homeland – a decidedly logical move.

But it will be in the nuclear realm where this three-sided Gulf rivalry regularly rattles the world’s nerves in coming years. With Tehran on the verge of getting the Obama Administration to implicitly recognize its nuclear breakout capacity of a year-or-less, Riyadh is strongly rumored to be readying itself to cash in Pakistan’s long-offered promise of ready-to-use nuclear weapons.  Meanwhile, Ankara, with NATO nuclear weapons already on its soil, will likely resist the temptation for now.  Still, soon enough the world will find itself managing a three-sided nuclear standoff – however latent – among Israel, Iran, and Saudi Arabia.  That prospect has to scare even the most fervent believer in the system-stabilizing effect of nuclear weapons, myself included.

Frightening as it may be for the world to re-learn the fundamental logic of mutually assured destruction – particularly in a region chock-full of End Times-embracing millenarians, I have spent the last decade proclaiming the inevitability of this pathway simply because Israel’s regional nuclear monopoly was always unsustainable and a bit spooky with its Masada complex.  Now, the technological curveball that triggers America’s new strategic distance renders this outcome virtually inescapable.  In nuclear terms, the inmates are finally running the asylum.

 

Go South, Young Man

America’s shift from a “horizontal” grand strategy (West integrating East) to a “vertical” grand strategy (North integrating South) is preordained by demographics. Any country’s economic rise stems first and foremost from an advantageous national age distribution, meaning lots of labor relative to children and old people. This “demographic dividend” is typically triggered by improvements in healthcare for mothers and young children, which allows families to eschew additional pregnancies out of the growing assurance that their first two or so children will make it into adulthood. That turning-off-the-fertility-spigot creates a welcome labor bulge that comes with a time limit of roughly a generation’s time – like the journey of America’s Boomer generation from youth to (now) old age.  If you’re lucky, your society gets rich before it gets old.

America took advantage of a fortuitous demographic dividend in the 1950s and 1960s to power the global economy with manufacturing.  Compared to all of its competitors that suffered great loss of young life, the U.S. was overloaded with labor relative to dependents – a glorious run extended somewhat by the first Boomers’ arrival in the workplace in the mid-to-late 1960s. Japan was next to ride a lifting demographic wave, rising like a rocket across the 1970s and 1980s, only to see that trajectory fizzle out since the 1990s as the nation rapidly started stockpiling old people due to stunningly low fertility.  China was next in the 1990s and 2000s, but then predictably saw its demographic dividend peak in 2010.  Now, with fertility still low (the one-child policy became a hard habit to break), China will age (mean age) three times as fast as the U.S. through the middle of the century.

Whose up next?  Southeast Asia enjoys a demographic dividend now, with India’s coming on its heels.  Beyond them lay the Middle East and Africa, the latter looking at the biggest dividend that the world has ever seen (the better part of a billion people).

Why this economic history matters: Once a nation embraces manufacturing to leverage its demographic dividend, it starts “climbing the ladder of production,” moving from cheap and assembled goods to higher-order manufacturing.  A rite of passage is seen in automobile manufacturing, which dovetails with any rising economy’s growing middle-class demand for mobility.  As it climbs that ladder, the nations in question must slough off their lower-end manufacturing to those countries coming into their own demographic dividends.  In short, these nations become inexorably bound to their successors through direct investment and integration via expanding global production chains.  In many ways, then, the shifting center of gravity in the global economy’s cheap-labor surplus is a magnificently integrating and thus pacifying historical force.  China, for example, needs Southeast Asia’s demographic dividend to work for its own long-term economic health.  In the end, that’s the biggest brake on Chinese regional militarism.

Which brings us to why America must turn its welcoming gaze southward – now.

America is the Dorian Gray of great powers.  We’ll age far more slowly than the rest of the West and even most of the advancing East over the next several decades precisely because we enjoy immigration pressures from Latin America – a far younger and faster-growing region than North America. Demographically speaking, the two most important factors in economic growth are slowing social aging and integrating one’s economy with younger and faster-growing neighboring economies.  For the U.S., that’s Latin America, which is why America’s long-standing policy of focusing its foreign policy attention everywhere else in the world but Latin America must end, along with our nation’s highly costly and destructive “war on drugs” – a process thankfully begun in terms of individual states decriminalizing marijuana use.

You may be thinking: shouldn’t America contest China’s spreading influence in places like East Asia, Central Asia, the Middle East and Africa?  The answer is no, for all the economic integration reasons cited above.  Good example: China and Africa are simultaneously engaging in a massive urbanization wave, giving Chinese construction companies clear economies-of-scale advantages in that vast building scheme.  Yes, American companies can and should be part of that build-up process, but we cannot hope to compete with the Chinese for influence brought about by progressively deeper economic integration.  America’s great accomplishment during its demographic heyday was to trigger and nurture and defend Asia’s integration into the global economy.  Now it’s Asia’s turn to extend that historical process to most of the remaining South – but not Latin America if the U.S. plays it smart.

With climate change making the planet’s middle lattitudes increasingly inhospitable over this century, migratory pressures will grow.  In choosing between heading south (Argentina, Brazil, Chile) or heading north (North America), most Latinos will continue to head north – as they should.  In terms of underutilized arable land, upper North America offers far more economic potential than South America’s southern cone.  Today America grows wheat in water-starved Texas.  By mid-century we’ll be growing it in water-rich Alaska.  No kidding.

Right now, one out of six Americans is Latino.  By mid-century, Latinos will approach a one-third share of the U.S. population – and voters.  Already, Miami is the de facto social and economic “capital” of Latin America – a sign of political integration to come.

No, adding new stars to the American flag won’t unfold as some modern, militaristic imperialism. Instead, led by its largest demographic cohort ever – those Millennials, these United States will get back in the historical business of attracting and accepting new members.  Remember, we began this journey of integration as a confederation of 13 colonies (1789), growing over the next 170 years to our current total of 50 states.  That’s averaging a new member roughly every half-decade. Then we shut that door following the admissions of Hawaii and Alaska (non-contiguous states, it must be noted) in 1959, adding nothing since.  Do you want America to stay competitive with those billion-person Asian behemoths China and India?  Well, the Western Hemisphere contains roughly a billion souls.

When America’s Founding Fathers dreamt of an American System of political, economic, social and territorial integration, they weren’t just contemplating our horizontal slice of North America.  Visionaries like Alexander Hamilton and later Henry Clay (who coined the term) imagined that system extending itself to welcome all Americans

The U.S. remade the world over the last seven decades by spreading its system of rules and economic model.  Globalization was a “conspiracy” hatched by Washington and it’s been called many things over the decades, from Teddy Roosevelt’s “open door” to Franklin Roosevelt’s “new deal for the world.”  Having successfully led that integration process from West to East, it’s now America’s duty – and self-preserving opportunity – to build out that American System across the entire Western Hemisphere.

And that process needs to begin now – as in, the next president.

11:08AM

Political Resilience Is Being Confident To Face Ugly Truths, Knowing Your System Will Survive The Encounter

AFTER AMERICA RODE A TIDAL WAVE OF ECONOMIC INTEGRATION AND EXPANSION FOLLOWING ITS CIVIL WAR (MOVING RAPIDLY FROM A SECTIONAL ECONOMY TO A TRULY CONTINENTAL ONE), A FRIGHTENING STRETCH OF BOOMS AND BUSTS IGNITED A LENGTHY PROGRESSIVE ERA (BREAKING FOR THE ROARIN' TWENTIES) WHEN POLITICAL ACTORS FROM BOTH PARTIES SOUGHT SYSTEMIC REFORMS - LEST THE COUNTRY SUCCUMB TO THE SORT OF RADICALISM LOOMING IN EUROPE (SEE FALLOUT OF WWI, CAUSES OF WWII). It was a frightening journey in many ways, with worried leaders concerned that the very nature of American democracy was at stake. But this is the usual price to be paid in return for a radical and lengthy expansion of economic activity, and it's one the world faces today after that quarter-century-plus boom that ended in 2008-09 and left the global economy with a bad hangover of toxic debt that is still largely to be processed.

Per a solid NYT story of late:

Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output ...

But it’s not just China. Wherever governments and central banks unleashed aggressive stimulus policies in recent years, a toxic debt hangover has followed. In the United States, it took many months for mortgage defaults to fall after the most recent housing bust — and energy companies are struggling to pay off the cheap money that they borrowed to pile into the shale boom ...

In theory, it makes sense for banks to swiftly recognize the losses embedded in bad loans — and then make up for those losses by raising fresh capital. The cleaned-up banks are more likely to start lending again — and thus play their part in fueling the recovery.

But in reality, this approach can be difficult to carry out. Recognizing losses on bad loans can mean pushing corporate borrowers into bankruptcy and households into foreclosure. Such disruption can send a chill through the economy, require unpopular taxpayer bailouts and have painful social consequences. And in some cases, the banks might find it extremely difficult to raise fresh capital in the markets.

Sounds like recent American history, yes? It's 2016 but there's still palpable anger over the Wall Street bailouts and far too many Americans still struggle with unsustainable credit debt. But, by way of comparison, the U.S. dealt with the financial crisis with genuine speed.

Yes, op-ed columnists are still arguing about the bailouts and the stimulus spending (the latter being somewhat irrelevant to curing a financial crisis), with plenty still arguing for more spending (like Paul Krugman).  And we most certainly have endured a strange era of name-calling: remember when President Obama was a "socialist" in the eyes of his enemies?

But now we have a serious Democratic candidate for president in Bernie Sanders who embraces the Social-Democrat moniker, and he gets enough traction with that to force Secretary Clinton into making her own claims at the progressive label.  On the other side, Republican candidates are struggling with the terms but reaching for the same sense of popular desperation - the feeling that the middle class has been under assault for years now. It's just that too many candidates in the GOP are having trouble separating that valid concern from the sort of anti-immigrant sentiment that is historically attached to such fears.

Still, all this shouting and posturing and name-calling reflects something positive: compared to the rest of the world, America was more confident in processing its toxic debt overhang. Plenty of work to be done, but the job is engaged. What the NYT article laments is the lack of similar progress elsewhere, and, in my mind, that progress reflects a political lack of confidence in the systems afflicted - one that prevents them from moving more aggressively because they fear the very fabric of their governments' political legitimacy might tear.

China is the scariest example in this regard.  Per the chart above, we see just how integrated and important the Middle Kingdom has become with regard to the global economy's functioning. Scarier still is the damaging precedent set by neighboring Japan:

Japan, economists say, waited far too long after its credit boom of the 1980s to force its banks to recognize huge losses — and the economy suffered for years after as a result.

But Japan stalled out during the go-go nineties, so it could only do so much damage on a global scale. But, as the world went on a growth tear over the next decade and a half, the stakes today are so much larger - as is the poster-child for not facing the truth with enough alacrity - again, China.

Headline figures for bad loans in China most likely do not capture the size of the problem, analysts say. In her analysis, [one prominent local observer] estimates that at the end of 2016, as much as 22 percent of the Chinese financial system’s loans and assets will be “nonperforming,” a banking industry term used to describe when a borrower has fallen behind on payments or is stressed in ways that make full repayment unlikely. In dollar terms, that works out to $6.6 trillion of troubled loans and assets.

None of that was truly unexpected.  You spend your way out of a financial crisis and you're simply delaying your day of reckoning - an essentially political process of regrading the economic landscape like the two Roosevelts (Theodore and Franklin) once did for the U.S. under similarly tumultuous circumstances (may I suggest Ken Burns' 14-hour documentary "The Roosevelts" on Netflix).

It's just that no one can spot that sort of leadership in China right now. We've seen some experts compare Chinese president Xi Jinxing to T.R. in terms of foreign policy machismo (largely on display only in the South China Sea), and Xi has definitely earned his corruption-busting stripes for his lengthy recent domestic campaign. But processing China's frightening large pool of toxic debt?

The looming question for the global economy, however, is how China might deal with a vast pool of bad debts.

After a previous credit boom in the 1990s, the Chinese government provided financial support to help clean up the country’s banks. But the cost of similar interventions today could be dauntingly high given the size of the latest credit boom. And more immediately, rising bad debts could crimp lending to strong companies, undermining economic growth in the process.

“My sense is that the Chinese policy makers seem like a deer in the headlights,” Mr. Balding said. “They really don’t know what to do.”

And that, my friends, is the biggest uncertainty right now in the global system. ISIS, for all its ferocity and atrocities, does not compare.  Sanders/Clinton v Trump/Cruz/Rubio does not compare. The Brexit/Grexit/Whoxit? dynamic in the EU does not compare.

And this is where multiparty, pluralistic democracies rule - when they choose to. They can "throw the bums out."  Heck, they're required to in the U.S. after 8 years - maximum (our presidential administration). Being able to apply the "clean slate" is a huge act of political resiliency, one that China, with its single-party state, is presently unable to employ.

And that is worrisome for the entire global economy as it continues to process the toxic overhang from that great global economic expansion that we all now remember so fondly.

 

 

12:07PM

The Stunning Cancer Experiment That Is China, And How It Might Just Improve The World

IF NECESSITY IS THE MOTHER OF INVENTION, THEN TRAGEDY IS THE MOTHER OF RESILIENCE. Right now China, home to 19% of the world's population, is enduring a national tragedy when it comes to environmental pollution delivering carcinogens to the citizenry, who, in turn, now suffer extraordinary cancer rates. That's the bad news. The good new is that China, like so many economic "risers" before it, is certain to surmount its local pollution issues as its per-capita income reaches that level - seen in previously industrialized nations like the UK and the US - when the public begins to prefer a cleaner environment more than that next additional bit of income.

Environmntal_Kuznets_CurvePer the observed Kuznets Curve on environmental damage suffered by industrializing nations, we know that countries, when they traverse a certain per-capita income trajectory, begin to clean things up.  London's famous "fog" of the 19th century was really coal-burning-generated smog, and New York of a century ago was amazingly unhealthful due to local pollution.  But each metropolis, reflecting larger national trends, eventually cleaned themselves up. Better-off citizens simply began prioritizing that demand in political discourse, elections, candidates and the like. Didn't happen overnight, but like with everything witnessed in today's globalization era, we should expect it to happen at record speed with China.

(And yes, the environmental Kuznets Curve is subject to two key criticisms: 1) nations often clean-up by moving their dirtier industries to other nations (pollution haven effect); and 2) the notion applies well to local pollution, but not to global pollution of the sort represented by CO2 emissions. Of course, from my economic determinist perspective, these caveats only highlight the need to bring along - even faster - the less-developed parts of the global economy, so that they too reach proper national "incentivization" levels.)

But no matter how fast it happens, China's frightening cancer experiment is just beginning. Yes, we can cite the high smoking rates of the sort not seen in the U.S. since the 1940s-50s - a development that led to our own cancer-treatment boom in the 1960s-70s (when systematic work on virtually all of today's treatment protocols began).  But that's only responsible (it is estimated) for roughly one-quarter of China's current explosion of cancer cases. Another huge chunk is due to the population's unremitting exposure to carcinogens in their environment - the dark cost of the nation's rapid industrialization of the past several decades.

Now we get word of just how costly that trajectory, which lifted hundreds of millions out of poverty, is turning out to be in the realm of cancer.

From the Medical Daily website (along with the scary photo above, credited as bl  michael davis-burchat, CC by 2.0):

new report illuminates one aspect of this country’s current reality — the health of its citizens. Researchers estimate China endured 2.8 million cancer deaths during 2015 and 4.3 million new cancer cases, with lung cancer the most common of all.

“Cancer incidence and mortality have been increasing in China, making cancer the leading cause of death since 2010 and a major public health problem in the country,” wrote the researchers. Quality data from population-based registries has recently become available through the National Central Cancer Registry of China, giving researchers a better view of the country's health.

The key to the new understanding is meta-analysis of cancer registries around the country - in other words, Big Data to the rescue:

To penetrate the shadows and learn more about the current situation, a team of scientists from the American Cancer Society, University of Sydney, and National Cancer Center Beijing used mortality data compiled by 72 local cancer registries to estimate the numbers of cancer deaths in China in 2015.

Given the recent, rapid industrialization and the relative infancy of anti-smoking public campaigns in China, it's no surprise that the nation "outperforms" it global population share of 19% by accounting for 22% of new cancer diagnoses and a whopping 27% of global cancer deaths. But what really sticks out is the distribution of cases across organs:

Specifically, the four most common cancers diagnosed in China are lung, stomach, liver and esophageal cancer, representing 57 percent of all cancers diagnosed in the country. By comparison, these cancers account for only 18 percent of total incidence in the United States.

Have no doubt, Chinese are living longer and - in general - more healthy lives. As the study also notes, mortality rates have plummeted in the last decade alone - 21 percent for both males and females.  That's amazing.

But that also makes the spiking rise of invasive and fatal cancer cases all the prominent. People are living longer in China, but dying harder - and local pollution is the rising killer.

“Outdoor air pollution, considered to be among the worst in the world, indoor air pollution through heating and cooking using coal and other biomass fuels, and the contamination of soil and drinking water mean that the Chinese population is exposed to many environmental carcinogens,” wrote the authors.

Some efforts are being made to reduce the burden of environmental pollution in China, they say. Though the effects of these endeavors will not be felt immediately, the rates of cancer deaths could be reduced by increasing the effectiveness of care and treatment, particularly among the disadvantaged and those living in rural areas, the researchers conclude.

Having spent a lot of time in China over the past decade, I can attest to the scary nature of the air quality. Typically, I just start on antibiotics the minute my jet touches down, knowing that the expose will send my sinuses into acute infection - like clockwork. Frankly, it's why I turned down a full-time job offer last year from a Chinese enterprise: it wasn't just the personal health cost I feared, but what it would do to my kids once they made it over. It's when highly-skilled and globally mobile workers - both outside and inside China - start basing job decisions on local pollution that the political tipping point gets reached, simply because the profound economic costs begin to make themselves readily known.

China will process its peaking pollution by massing state resources and power to make it happen, and the government will do this - to a great extent - to avoid the public's political wrath.  The same will happen with China's burgeoning cancer treatment industry. Both efforts will leave China far more resilient on the far side of this development "hump," and the world will likely benefit greatly from the nation's great push on both subjects - just like it did before when Western economic giants went through similar growing pains.

3:51PM

A Civilization's Resilience Is Measured By Its Ability To Adapt Its Values To Economic Modernization

THERE IS A PREVALENT BELIEF THAT WESTERN SOCIETIES ARE MORE SOCIALLY BRITTLE WHEN IT COMES TO ECONOMIC DEVELOPMENT, WHILE EASTERN SOCIETIES ARE MORE RESILIENT. This is often expressed in terms of Asian societies featuring stronger social bonds and more community emphasis on the collective versus the individual, while Westerners are depicted as being more selfish, self-centered, and thus more likely to sever social bonds when stressed. A key depiction of these difference between Western and Asian values is found in the East's claim that they value families more, to include both a prioritization of their children's needs and a genuine veneration of their elders. Westerners, due to modernization, are often viewed in the East as having abandoned those values, only to suffer the painful social consequences.

My argument here is not to defend the West, but to point out that modernization and economic development tends to make individualists of us all. When I was young, I heard the Asian values argument with regard to rising Japan. But what we've seen with Japan is that the divorce rate - a great measure of family stress - rose with economic development.  Today roughly one-in-three Japanese marriages end in divorce, which represents a quadrupling since the 1950s and a doubling since the 1970s.  Today's divorce rate in Japan sits at a very European level - not as bad as America's but quite a bit different from its idealized past.

After Japan rose and then tapered off, we in the West heard the same arguments for China as it rose: the Chinese value their children more than Westerners, venerate their elders more than Westerners, and divorce less than Westerners.  Such Asian values would serve China well and mark its ascent as being different - and better - than the Western powers that rose before it.

Except we're seeing the same-old, same-old transformation of society in China that we've previously witnessed in Japan and, before that, in the West.

From a recent Economist article:

Divorce rates are rising quickly across China. This is a remarkable transformation in a society where for centuries marriage was universal and mostly permanent (though convention permitted men to take concubines). Under Communist rule, traditional values have retained a strong influence over family relationships: during much of the Mao era, divorce was very unusual. It became more common in the 1980s, but a marriage law adopted in 1994 still required a reference from an employer or community leader. Not until 2003 were restrictions removed.

Then came marketization and globalization:

In the past 35 years, the biggest internal migration experienced by any country in human history has been tearing families apart. Traditional values have been giving way to more liberal ones. Women are becoming better educated, and more aware of their marital rights (they now initiate over half of all divorce cases). Greater affluence has made it easier for many people to contemplate living alone—no longer is there such an incentive to stay married in order to pool resources.

Sound familiar?

As long as both sides agree on terms, China is now among the easiest and cheapest places in the world to get a divorce. In many Western countries, including Britain, couples must separate for a period before dissolving a marriage; China has no such constraints. In 2014, the latest year for which such data exist, about 3.6m couples split up—more than double the number a decade earlier (they received a red certificate, pictured, to prove it). The divorce rate—the number of cases per thousand people—also doubled in that period. It now stands at 2.7, well above the rate in most of Europe and approaching that of America, the most divorce-prone Western country (see chart). Chongqing’s rate, 4.4, is higher than America’s.

But the big change dynamic is simply heightened individual freedom of action, as in, go more places, meet more people, do more things, live different ways ...

Married people previously had limited opportunities to meet members of the opposite sex in social situations, according to research by Li Xiaomin of Henan University. Peng Xiaobo, a divorce lawyer in Chongqing, reckons 60-70% of his clients have had affairs.

Naturally, this development worries the government:

Many commentators in the official media talk of separation as a sign of moral failure; they fret that it signifies the decline of marriage, and of family as a social unit—a threat, as they see it, to social stability and even a cause of crime. The spread of “Western values” is often blamed.

Bingo!  "They did it to us!"

But marriage is not losing its lustre. In most countries, rising divorce rates coincide with more births out of wedlock and a fall in marriage rates. China bucks both these trends. Remarriage is common too. The Chinese have not fallen out of love with marriage—only with each other.

Give them time ...

And then factor in the stress of a rapidly aging population. China is "aging" three-times faster than US right now, its median age rising 3 years for every year America's rises through mid-century.

Yan Yunxiang of the University of California, Los Angeles, says “parent-driven divorce” is becoming more common. As a result of China’s one-child-per-couple policy (recently changed to a two-child one), many people have no siblings to share the burden of looking after parents and grandparents. Thus couples often find themselves living with, or being watched over by, several—often contending—elders. Mr Yan says the older ones’ interference fuels conjugal conflict. Sometimes parents urge their children to divorce their partners as a way to deal with rifts.

Naturally, that will be a very stressful development for Chinese society going forward.

Last, depressing similarity is that women suffer worse from divorce than men:

Women are more likely to be the ones who suffer financially when this happens. Rising divorce rates reflect the spread of more tolerant, permissive values towards women, but legislation tends to favour men in divorce settlements.

None of this is to pick on China, just to note that economic change drives social and political change, and when the former is fast enough and profound enough, the latter become quite brittle.

One positive upshot of all this socio-economic tumult: after "exporting" their "surplus" female babies for so many years (full disclosure - my fourth child is adopted from China), the international adoption flow out of China has slowed dramatically, meaning that Chinese society's age-old bias against adoption due to "strong" family values/biases against non-relatives is finally dissipating. Some of this is due to women putting off marriage and pregnancy to pursue more education and career opportunities and then finding it harder to conceive, and, most certainly, the lifting the of the one-child policy should radically decrease babies being put up for adoption. Plus, as the reality of single kids having to care for aging parents kicks in, those future parents have come to realize that, contrary to the age-old rural bias for males as farm workers, a modern, urbanized, and aging society and its members tend to value females more because those daughters are far more likely to care for them in their old age.

The irony here is that these changes are all so Marxian: economic and technological change begetting profound social and - eventually in China - political transformations. Marx was right on that transformational power; he just dramatically underestimated the capacity of empowered individuals - and their responsive governments - to adapt themselves to these changes in a constant, co-evolutionary fashion.

Marx simply dismissed that sort of social and political resilience.

3:44PM

A World In Which China’s Economic Resilience Seems As Important To The World As America’s

AP photo, used in WAPO citationIT MAY SEEM AN OBVIOUS - ALMOST TRITE - OBSERVATION AT THIS POINT IN HISTORY, BUT YOU WOULDN'T KNOW IT FROM THE WAY WASHINGTON, THE PENTAGON, AND OUR CURRENT SLATE OF PRESIDENTIAL CANDIDATES SPEAK ABOUT CHINA.  That fundamental disconnect is somewhat scary to, as well as dangerous for, the rest of the world. And no, I don't note that as some subtle plea for better and less contentious relations with China, because it will always take two to tango. I do, however, note it as a continuing negative trend when it comes to these two nations' co-management of global economic stability.

A couple of Reuters' pieces today remind us of just how important China has become to global markets and their expectations.  First, any new economic forecast figures from China are momentous enough to shift IMF calculations for future global economic growth:

The International Monetary Fund cut its global growth forecasts for the third time in less than a year on Tuesday, as new figures from Beijing showed that the Chinese economy grew at its slowest rate in a quarter of a century in 2015.

To back its forecasts, the IMF cited a sharp slowdown in China trade and weak commodity prices that are hammering Brazil and other emerging markets.

The Fund forecast that the world economy would grow at 3.4 percent in 2016 and 3.6 percent in 2017, both years down 0.2 percentage point from the previous estimates made last October. It said policymakers should consider ways to bolster short-term demand. [emphasis mine]

Unsurprisingly, the Reuters pieces notes that "concerns about Beijing's grip on economic policy have shot to the top of global investors' risk list for 2016 after falls in its stock markets and the yuan stoked worries that the economy may be rapidly deteriorating."  So, it's not just a matter of China's economic health but what Beijing intends to do about it.  Frankly, until very recently in history, the only countries that registers at that level of impact has been the United States, Japan, and the EU as a collective.  But come back with me to review the stimulus spending that unfolded in response to the global financial distress of 2008-09, and the numbers there previewed just how central China had become:

  • US - 800 billion USD
  • China - 600 billion USD
  • EU - 220 billion USD
  • Japan - 150 billion USD.

In other words, when push came to shove and big economies needed to pony up the money to shore up global economic demand, China outperformed the EU and Japan put together by making an effort bested only by the US.

This is why, per the second Reuters citation, just as many eyes are on Beijing as Washington right now:

Global equity markets on Tuesday snapped back from a rout at the start of the year after data showing weak economic growth in China prompted speculation Beijing would boost stimulus efforts, but a renewed drop in U.S. oil prices raised a cautionary flag.

China's rise from being a detached corner of the global economy - just four decades ago - to its status as second-most important pillar is akin to America's stunning, turn-of-the-20th-century rise to global prominence following our Civil War. And yes, the US of that era scared a lot of the world with its ambition, arrogance, and self-centeredness - just like China does today.

But we lucked out and picked up a mentor in the British, who, over time, had no choice but to encourage our rise as central to their own continued prosperity, security, and even national survival. The truth is, with all the world has on its plate right now with climate change, terrorism, technological leaps, and so on, the US is as likely to become as entirely co-dependent on China's national resilience in the 21st century as the British once became on US resilience in the 20th century.

Do I see any such recognition among our political and military leaders on this score?  No I do not.  And that worries me.

Do I see it across this country?  It depends on your age, as in, the older you are, the more you tend to fear China.  You also tend to fear China more if you are located in the interior and east of the US versus the Pacific-minded US West.

But I do see a different mindset among the Millennials, which, by all polling, appear to view China more as an ally in co-managing this world than an antagonist. And, based on my time in China, I spot enough of the same among China's youth to suggest that this co-dependent relationship will ultimate work out just fine.

What worries me most is getting from now to then.

The US spent decades after WWII working to spread and sustain an international liberal trade order that we now dub "globalization."  We were enormously successful in this endeavor, triggering the greatest reduction in global poverty and the greatest upsurge in global development that the world has ever seen.  But, in doing so, we created a host of economic "challengers" whom we must eventually come to accept as co-enablers of our own national resilience, as well as the resilience of the planet.

The hardest part for Americans seems to be this supposition that, if a foreign civilization joins this global trade order (as China has) and becomes highly capitalistic (as China has), it must rather rapidly become highly American as well (raucously pluralistic in politics).  However, to our continuing bafflement, almost half a century after Nixon went to China, the Chinese are still Chinese.

I know, right?  How dare they!

And that seems to upset a great deal of Americans to no end - but particularly older Americans, many of whom now seem to see, in China, a monster of our/globalization's making - a Frankenstein who cannot possibly be tamed (much less told what to do).

As suggested earlier, I expect generational change in both countries to solve this trust-divide that currently keeps the world's two greatest economies (and militaries) from realizing the full extent of their co-dependencies.  For now, it's important enough for players - and citizens - on both sides to realize just how much we collectively rely on one another's national capacities for resilience in face of common threats and challenges, AND to remember just how different this relationship is from the one we once endured with the Soviet Union - an empire that was bound to our national survival in terms of its nuclear weaponry but not to our economic resilience to any appreciable degree.

And that is what makes China entirely different.

10:37AM

YouTubes of 2015 Washington DC speech

Video segments of September 2015 briefing to an international military audience in the Washington DC area.

 

 

Part 1: Introductions and US grand strategy

 

 Part 2: America's looming energy self-sufficiency

 

Part 3: Climate Change and its impact on food & water

 

Part 4: The aging of great powers

 

Past 5: Millennials & Latinization of U.S.

 

Part 6: Evolution of US Military under Obama

 

Part 7: Dangers of a "splendid little war" with China

 

Part 8: Middle East without a Leviathan

 

Part 9: Answers to audience questions

12:17PM

(RESILIENT BLOG) China’s RMB To Become IMF Reserve Currency, Crowding Out Aging Europe and Japan

YESTERDAY THE INTERNATIONAL MONETARY FUND (IMF) ANNOUNCED that China's renminbi would become its fifth designated reserve currency, joining the US dollar, EU euro, British pound, and Japanese yen.  The move comes in response to a several-year campaign by Beijing to have its currency thus credentialized.  For now, central banks around the world hold only about 1% of their reserves in RMB, but Beijing has created an outsized latent reserve currency presence (another 5%)  by concluding numerous significant currency swap deals with major trading partners.  The latter scheme was apparently enough for the IMF to finally move on China's strong desire.

READ THE ENTIRE POST AT:

 

2:27PM

Time' Battleland: National Security - Hunting Down Bad Guys: China vs. the U.S.

A pair of ostensibly unrelated New York Times‘ stories recently jumped out at me.

Understand, the paper itself made no attempt to link the two.

What struck me was just how calmly the Times reported 3,000 (!) targeted assassinations by the Obama Administration since 2009, after rather breathlessly noting - just days before – China’s “hard-nosed display of the government’s political and economic clout across Laos, Myanmar and Thailand.”

Read the entire post at Time's Battleland blog.

7:44AM

The inevitable counter-reaction to China's aggressive behavior in Asia

The easiest call of the last half-century:  push Japan around enough and you'll get an end to its constitutionally-mandated pacifism.

Unlike Germany, which self-flagelated to the point of altering its social persona, Japan did no such thing.  It simply buried the past, which it can now dig up with enough incentives from Beijing, which seems to have counted on the notion that it could push Tokyo around indefinitely.

No, this doesn't change my attitude on the "pivot" or AirSea Battle.  In both cases, it proves how unnecessary they are as over-the-top reactions (yes, I understand the "show of force" part; I just worry that such things tend to be forgotten fairly quickly inside the Pentagon and thus today's feint equals tomorrow's "unshakeable national security interest").

The US enabled Asia's peaceful rise by playing Leviathan and thus obviating anyone's need to "arms race" with anyone else inside the region.  The result being, for the first time in history, India, China, Korea and Japan all "risen" without any wars.  

Beijing seems to have seen some historic advantage in this situation, which now disappears - inevitably.  Thus, now is NOT the time for the US to "pour it on" but to play the honest-broker all the more.

11:12AM

The tricky thing about Kim Jong Eun

Good WAPO piece about the ratcheting up of brinksmanship by NorKo, which has gotten so aggressive as of late that SouKo pols are discussing the nuclear option - as in, get some.

I was asked this last week in a speech in Nebraska (Lincoln), and my reply was, KJE has shown a distinct willingness to open things up internally, which is a very hopeful sign.  But, as with anybody in his position, he needs to show a lot of external aggression to: 1) prove himself as the new leader and 2) show his internal reforms won't result in any loss of international "stature."

The problem is, of course, that the external aggression becomes self-fulfilling, which is why the hardliners always demand it as a form of reform-snuffing activity.  

We don't know yet whether KJE has any real ambition to become a Deng-like transformative figure (China's dream).  We can only go off the evidence to date. And that evidence says, playing with reforms but also playing with aggression.

It's easy to go overboard in either direction, but the instinct of an authoritarian state/leader is always to err on the side of external aggression, which is why totalitarian regimes of this nature are almost impossible to reform from within.

The good upside?

It gets Korea back on the front burner and gives a rest from the growing China-v-everyone dynamic.  Plus it opens up the chance for cooperation with China on a shared burden.

But for now, it's the same old, same old with no clear path ahead.

12:01AM

What China wants, China gets - at a cost to the planet

One of the ways in which China starts getting blamed for all things globalization is the direct impact its consumers can have on global markets - sending them soaring and crashing in a historical heartbeat.

I've talked about China's incredible hunger for various nuts in the past, and how that demand has fundamentally reshaped ag markets in the US.

This NYT story discusses how fishermen off the coast of Mexico are ignoring governmental attempts to preserve an overfished area for sea cucumbers.  Out-of-area guys are slipping into zones being vigilantly guarded by locals and pulling out hauls right under their noses.  This creates a "wild west" atmosphere were towns square off against towns over their precious slices of the pie and every stranger is treated like a would-be criminal.

Until China emerged in its middle-class glory, they wasn't much of a demand, as sea cucumbers aren't really eaten by Mexicans.  But now the demand is such that one guy poaching can claim $700 a day in profit.

So this section of Mexico's coastline is in uproar . . . because Chinese like their sea cucumbers.

There will come a time - soon enough, when virtually everyone in the world who isn't Chinese will be living some version of this story.

A while back, America played that role, and while everyone wanted to please that American consumer, the dynamic created a lot of antipathy too.

And that is what's coming toward China at high speed.

12:35PM

Iraq at ten years

Cartoon found here (in an FT op-ed that fits this post nicely - if orthogonally).

Read through a variety of the tenth-year anniversary reviews, and I thought Thomas Friedman's was the best - despite the weird title (Democrats, Dragons or Drones?).

His basic notion that it takes the next generation to create and shape the subsequent reality is correct.  Friedman pegs it at "9 months and 21 years to develop."

Fair enough. But the question (as he also notes) hinges on that generation's journey.  Done well, it works.  Done badly enough and a vicious spiral ensues.  In truth, the jury remains out on that score.

We won the war - no doubt, and then took a pass on the postwar.  If we hadn't, then questions of "why?" fade away.  In the post-9/11 mood, America possessed the desire to reshape the region and Saddam was the obvious target. Direct causality was not the issue, although Dick Cheney tried to sell that.  Nor was direct threat, referring to the late and frantic oversell of the WMD to Congress.  The purpose - all along - was structural retribution: as in, you reshaped our world, now we reshape yours.  Americans are just deeply uncomfortable admitting that, so we needed a clear and present storyline to drive our revenge-flick dynamics.

The resulting strategic "pre-emption" was oddly symmetrical in ambition but certainly not in cost (and why should it be so between a superpower and a non-state actor?).

So when we take that pass on the aftermath of the war, and basically pretend that what comes next doesn't really matter, we abort the entire regional restructuring ambition (which, if you remember, was on a nice roll for 2-3 years there) and we allow ourselves to be swallowed up (in terms of strategic effort and attention) by an insurgency that was completely foreseeable and completely manageable - if we had bothered to embrace that inevitability.

But instead of embracing it, we did what we always do and called the postwar another war.  And wars yield a singular answer in US military history - called, more firepower.  And then we found that made things worse (go figure).

And then the White House, chastened finally by the 2006 midterms, relabeled the conflict and rebranded the mission - and then we succeeded again.  

But by then the public narrative had already been cast (Bush lied, too many deaths, too much cost).

So ultimately the Bush administration pays the legacy cost for its mistakes, which mostly had to do with stubbornness.  They had their narrative of a successful war and stuck to it - until it hurt so bad that they had to change.

So what are we left with?

In structural terms, I like what the Middle East has become.  The inevitabilities are being processed and Iran is more isolated than ever.  And thanks to larger structural changes in the global economy, the area is coming under new superpower management - inexorably.  None of it is nice, but it was never going to be anything but painful and violent.  The Arab world has an enormous amount of catching up to do WRT globalization, and it will be awful in execution (and with Africa leaping ahead on many fronts, the Middle East and North Africa - or large portions of it - risk becoming globalization's long-term basket case).

If the US had handed off the region still encased in its many dictatorships, China would have a much easier time over the next two decades.  Now, it faces challenges that are likely to alter its own political structure significantly - just like it did to the US.  Some naturally see the "defeat of American empire" in the region, but since empire was never America's goal, that judgment is meaningless.

All that matters is the relative evolutions of the three superpowers of the 21st century:  China, India and America.

America did, per my original Esquire piece, take strategic ownership of the Middle East in a big way.  That ambition was both debilitating and liberating:  we took our shot (badly) and now we're done "owning" things there (besides Iran's nukes).  In that way, Iraq processed our inevitable post-9/11 over-reaching response (we are a democracy) and hurried us along the exhaustion-collapse-rock bottom-recovery-resurrection dynamic that was always slated for us in the post-Cold War world (our inability to handle the success of the "end of history" - aka, the globalization of our economic connectivity model).  We had gotten used to running things, and we weren't going to stop until something made us stop - an unpleasant journey but a necesssary one.

Now, in grand structural terms, the race among my C-I-A trio is well underway.  The Obama administration, needing a switch-over target, sells its Asian pivot.  This is not a good answer, as I have noted frequently - but rather a red herring.  The real struggle in Asia doesn't involve us except in an off-shore balancing role.

Instead, the real struggles of the future involve the very same frontier integration I've been talking about for a decade now.  On that score, we are looking fine enough in our ongoing restructuring of our portfolio, while China's grows frighteningly larger relative to its ability to deliver and manage regions distant from its shores. India is just begining to recognize what responsibilities lie ahead.

You'll say that China will do it differently, but the structure of the system will force the same responses: China cannot afford to lose its growing overseas dependencies (much greater than any borne by the US), and so the responses will be mounted.  And when they don't go well (whoever gets it right - right off the bat?), change will double back upon China - to its general benefit (along with the world's).

Iraq was always a means to an end (when in history has great power war ever been anything else?).  During the real-time execution, it seems like everything - as does every war throughout history.  But half a century later?  It looks very different.  It's a stepping stone for superpowers:  some step up and some step down, some step away and some step in.  None of it is exactly what it appears to be in the light of present-day reporting.  Per Zhou Enlai's take on the French Revolution, we will be witnessing the downstream consequences across the century.

8:50AM

The pollution trigger in China

I love that building.  Locals in Beijing have dubbed it the "squatting man" or some such (you get the idea), indicating that the Chinese sense of humor is as fine as anybody else's.

But patience wears thin on the subject of pollution, which is stunning to behold in China - as in, take my allergy issues in Indiana and times it by 10 in terms of the resulting agony.

Here we see the same fundamental failure of authoritarian rule that we saw in the Soviet Union:  when the state has unbridled power, it trashes the environment.  The Soviets took that sin to amazing depths, but the Chinese are rapidly closing in on those horrific standards.

And yes, democracy is the answer - the only answer.  We bitch about the BANANAs and NIMBYs (look 'em up) in the US, but frankly, these cranks do God's work day-in and day-out - along with our legal system.  Give me one Erin Brockovitch over a million Maos (or even a hundred Dengs) and we will all live in a much better world.

The strongest grass-roots democratization dynamics inside China involve the environment.  Some of the best progressive elements within the US during our similar out-of-control developmental age (late 19th century) were likewise focused (and again, TR leads the way politically).  It's the easiest and most direct trigger to the whole "I'm mad as hell and I'm not going to take it anymore" dynamic that fuels democratization.  You simply push people too far with your incompetence and indifference.

Yes, the new generation of CCP leaders seems far more aware of the issue - Li  Keqiang especially.  But as the NYT front-pager today points out, that lofty talk doesn't surmount the bureaucratic infighting within the single-party state.  Here is where the lack of an out-of-power party is crucial.  No one can sweep in with an electoral mandate to clean things up - hence, nothing significant gets accomplished.  

The great dynamic of America's Progressive Era was that parties won big and ruled big, whether they were Dems or Republicans.  That's how stuff (new rules) got done and things improved dramatically.

That's also what we lack today with the evenly-and-deeply-divided Boomer-centric electorate - hence our deep need for reforms as well.  But at least we have the system in place for when the electorate gets fed-up enought to force action.

China lacks this, and it's getting to be a huge hindrance to its further progress as a nation.

9:32AM

American withdrawal: this time it is different

 

Eliot Cohen sounding very scared in the WSJ:

The arguments against far-flung American strategic commitments take many forms. So-called foreign policy realists, particularly in the academic world, believe that the competing interests of states tend automatically toward balance and require no statesmanlike action by the U.S. To them, the old language of force in international politics has become as obsolete as that of the "code duello," which regulated individual honor fights through the early 19th century. We hear that international institutions and agreements can replace national strength. It is also said—covertly but significantly—that the U.S. is too dumb and inept to play the role of security guarantor.

Perhaps the clever political scientists, complacent humanists, Spenglerian declinists, right and left neo-isolationists, and simple doubters that the U.S. can do anything right are correct. Perhaps the president should concentrate on nation-building at home while pressing abroad only for climate-change agreements, nuclear disarmament and an unfettered right to pick off bad guys (including Americans) as he sees fit.

But if history is any guide, foreign policy as a political-science field experiment or what-me-worryism will yield some ugly results. Syria is a harbinger of things to come. In that case, the dislocation, torture and death have first afflicted the locals. But it will not end there, as incidents on Syria's borders and rumors of the movement of chemical weapons suggest.

A world in which the U.S. abnegates its leadership will be a world of unrestricted self-help in which China sets the rules of politics and trade in Asia, mayhem and chaos is the order of the day in the Middle East, and timidity and appeasement paralyze the free European states. A world, in short, where the strong do what they will, the weak suffer what they must, and those with an option hurry up and get nuclear weapons.

Not a pleasant thought.

But the point I would make is, this time history isn't a guide.

During WWII, the US made the conscious decision to seek to remake the world in its rule-set image, and it succeeded beyond its wildest dreams in the phenomenon we now label globalization.  That process was most definitely undergirded by a US security guarantee, which we generally provided to a wonderful degree with definite lapses in execution and - almost as importantly - explanation.

Now we live in a different world thanks to that world-reshaping effort. Plenty of European powers had their shot at this brass ring, and those eras all ended in large scale warfare and decimation of both conquered and conquering.

But notice how the world now enjoys more wealth-creation and order and peace than ever before in history. This is no coincidence.  People will claim all sorts of meaningless variables (like the UN - a true laugher if ever there was one), but the reality remains:  the US showed up, took charge, and we got this world.

But the success we experienced in this amazing venture (the greatest gift any power has ever given this planet and humanity) means we enter new territory.  So no, history isn't any guide.  What we do now in some measure of withdrawal is highly unlikely to unleash the tide of misery that Cohen predicts.  We've simply incentivized too much of humanity in preserving this global system, meaning it is self-maintaining on many levels (easy to join and hard to upset, as they say).  

So why do experts like Cohen keep putting it in such Manichean terms?

We got used to thinking of ourselves as the savior of the world, but that's a been there, done that dynamic now. We came, we saw, we rearranged the rules.  Now the system does just fine on its own - for the most part.  

Yes, put the world economy in extreme crisis like 2008 and Obama's role suddenly looms incredibly large. Honestly, I think he deserved the Nobel for that - simply doing his best to defeat the widespread expectation that the worst global economic crisis since the Great Depression would result in massive instability and warfare - none of which appeared (proving the realists antiquated yet again).

So what do we do now?

We learn to manage the world with the risers - plain and simple.  They have the money and the need and the fear and the willingess to kill to protect their interests.  In normal terms, those attributes = a genuine ally versus the free-loaders.

The two key players going forward are China and India.  America needs to work that trilateral-global-order-in-the-making.  Everything else is ancillary - remembering my recent admonitions that positive co-evolution on progressivism is the way to go on the transatlantic relationship.

But our experts and leaders still have light years to travel on such understanding.  We still imagine it's our way or the WORLD OF CHAOS!  This fear-mongering is, of course, rather silly.

But this is the state of strategic debate in the US.

8:13AM

China: The hunger = the hate

On a walk last night and I was thinking about what I know about the future that I feel supremely confident about, and the answer that popped into my head is China's coming difficulties.  Not that I wish it any harm - anything but.  It's just that the hubris and the nationalism and the hunger for all things - all completely natural in a rise of this caliber - are combining to create antipathy abroad and extreme anxiousness at home.  The tough times that follow will force China into a scary and dangerous democratization. It happens to the best; it happens to the rest.  There is no Chinese "alternative."

Neat pair of NYT stories to illustrate.

First one (above) is about an Asian art exhibit.  The paper version had the title that caught my eye:

East is East; West is Omnivorous

Exhibit covers the time period of Europe's early global expansion and the apocalyptic views it generated among the conquered in Asia.

The only thing I thought when I saw the title was, now the worm has turned.  Now the West is West and the East is omnivorous.  And that hunger for all things creates the growing hatred of China.

This has a been a prediction of mine since New Map:  China becomes the face of globalization and thus the target of anti-globalization anger in all forms.  I've been saying this in Beijing for almost a decade, and I don't get many takers.  "We are different," I am told. 

But they're not.  The hunger is unbelievable (China adds ANOTHER 300m to its US-sized middle class in the next 6-7 years) and the hate is real and growing.

See Shambaugh's excellent NYT op-ed on global attitudes toward the Chinese:  all downhill.

Meanwhile, the US is in its hibernation phase, and Obama is the perfect hibernation president.  I'm not bitching. We asked and he delivers.

But the regeneration proceeds.

China, however, tops out on all sorts of things - signalling tougher times ahead.  And this is not a system built for tough times.  You may think authoritarianism is, but it ain't.  No ability to "throw the bums out" = building hatred within the system (frustration that finds no relief).

Nothing I describe here happens tomorrow, and it's easy to dismiss.

But I know this with a certainty:  Right now China is perceived to be passing the US and we find that scary.  But between now and 2030 this all gets reversed in a big way, and that will be far more scary for both sides.  

This is why we cannot abide the fear mongers on both sides; they are too dangerous for the world's future.

The outreach must be pursued and eventual partnership revealed - not out of our fear for them but to modulate what will become China's great fears of all things during the difficult times ahead.

8:40AM

The long war: same as it ever was - same as it ever was

And you might find yourself in a beautiful dynamic (Arab Spring), with a beautiful ally (French) ...

And you may ask yourself, How did I get here?

The French did God's work in Mali:  cleared out the nutcases who went medieval on the north during their year of ruling dangerously.

But with the "clear" comes responsibility to "hold" (nay, even to "build") and now the locals naturally fear the return of the AQIM-affiliated types who imposed their version of 7th-century morality over the past year or so.

With France planning to start withdrawing its troops from Mali next month, Western and African officials are increasingly concerned that the African soldiers who will be relied on to continue the campaign against militants linked to Al Qaeda there do not have the training or equipment for the job.

The heaviest fighting so far, which has driven the militants out of the towns and cities of northeastern Mali, has been borne by French and Chadian forces, more or less alone. Those forces are now mostly conducting patrols in the north, while troops sent by Mali’s other regional allies, including Nigeria and Senegal, have been slow to arrive and have focused on peacekeeping rather than combat, prompting grumbles from Chad’s president, Idriss Déby Itno.

The outcome of the fighting in Mali carries major implications not only for France, but also for the Obama administration, which is worried that Al Qaeda in the Islamic Maghreb and other militant groups could retain a smaller but enduring haven in remote mountain redoubts in the Malian desert.

To help the French, the United States began flying unarmed surveillance drones over the region last month from a new base in Niger. And the administration has spent more than $550 million over the past four years to help train and equip West African armies to fight militants so that the Pentagon would not have to. But critics contend that the United States seems to have little to show for that effort. 

Turning Mali’s own fractured army into a cohesive and effective force would entail “a huge amount of work,” according to Brig. Gen. Francois Lecointre of France, who is leading the effort to retrain Mali’s Army. As if to underscore the point, a group of Malian troops briefly abandoned their posts recently and fired shots in the air to demand a deployment bonus.

Here in the southeastern corner of Mauritania, about 100 miles from the border with Mali, an exercise conducted this month by the United States military to train African armies to foil ambushes, raid militant hide-outs and win over local populations offered the administration more reasons for worry, as well as some encouraging signs.

The exercise offered a rare glimpse into the strengths and weaknesses of several of the African armies that are poised to help take over the mission in Mali. In a few weeks, the United Nations Security Council is expected to decide whether to authorize a peacekeeping force for Mali and how to compose it.

France, we are told, will leave behind a small unit of headhunters - counter-terror personnel.  And then there's always America's "limited regret" drones (the gun that's settling the Gap), but we all know that this is temporizing the situation (think back to Ignatius' latest lament on the lack of a SysAdmin-like force).  This is why I continue to rail (per my recent piece in Foreign Policy) against retreating to renewed fantasies of great power war as a means of denying the strategic reality still lying out there.

We can most definitely choose to low-ball our responses to such events; we just don't need to blame it on the Chinese, who are - oddly enough - most incentivized to likewise deal with such enduring instabilities.

9:39AM

Censorship of tweets/microblog posts in China

WAPO article on Rice U. study (richly detailed and seemingly very robust in data capture and analysis on how the Chinese gov deletes micro-blog posts).

First point article makes is that China's flow of tweets is several times that of Twitter, so we're talking massive amount.  It seems gov cuts about 12% of them.

Here are the envisioned procedures:

  • Explicit filtering: a banned keyword triggers an automated system, which stops the message from posting and warns the user he has violated policy.
  • Implicit filtering: a banned keyword triggers an automated system, which delays the message until a censor can see it and tells the user there’s a server error in the meantime.
  • Camouflaged posts: a banned keyword triggers an automated system, which keeps the message from displaying publicly but shows the user it has posted.
  • Backwards repost search: either a human censor or an automated system discovers a problematic posts and deletes all versions of it (re-posts, etc.) across the network.
  • Backwards keyword search: a censor notices a problematic keyword and deletes a number of its instances across the network.
  • User monitoring: certain users who are censored frequently are flagged for closer scrutiny.
  • Account closures: censors shut down problematic accounts entirely. The study counted 300 such closures of 3,500 accounts in a one-month period.
  • Search filtering: a regularly updated list of terms cannot be searched.
  • Public timeline filtering: sensitive topics are edited out of the general Weibo “fire hose.”
  • While we may celebrate the technical achievement (most posts killed in less than 10 minutes), we must remember the tremendous effort required and the larger reality that banned conversations occur all the time.  All the government succeeds in doing is clamping down on public transmission.

    The topics show how defensive the government is - from the geostrategic to the completely mundane:

    Okay, so Syria trends one day and then gov corruption comes next, but then look at the rainstorms cluster, because that's just people bitching about how poorly the gov responded to the frickin' rain!  I mean, that is sad.

    What's sad about this effort is that the gov does seek to respond on some level to these issues, so it listens.  It just can't allow that listening or response process to be acknowledged - much less the initial bitching.

    You may spot strength in that, or some BS about the "Chinese way of governance" and so forth, but all that fades away as the Chinese people modernize their society and exhibit more and more competence in running their own daily lives, businesses, and the larger society itself.  

    By engaging in all this clamping down of speech, all the government does is signal that it's not to be held responsible for its failures, and that determination blocks the naturally positive expansion of nationalism in the direction of societal self-improvement, meaning the gov is making itself less stable and thus more brittle over time by refusing to respect its own people and their righteous complaints.

    In historical terms, this is spitting in the wind and wondering why there always seems to be saliva in one's eyes. The government is simply refusing to converse with a public that is becoming more self-deterministic - through economic success - with each passing day.

    Again, there is no singular Chinese/Asian path in this regard.  The same breakdown of the collective mindset that happened in the West happens in the East.  Modernization/industrialization is simply that powerful.

    11:02AM

    Kerry not a fan of Asian "pivot"? I smell a plot!

    WAPO story:  China is happy with John Kerry because it thinks he'll drop the 'pivot to Asia'

    Obviously, you can be a strategic thinker and disagree with the transparency of the Obama administration's containment strategy on China.  You can also believe there's just as much - or more - work to be done right now in the Middle East (Spring, Iran's nukes, Palestine, Syria).

    But this is a weird piece, because I don't think the Chinese are dumb enough to believe that Kerry can "drop" the pivot if he so chooses.

    But the positive Chinese press pours in, apparently.

    From the piece:

    Kerry himself sort of predicted this when he said of the pivot during his confirmation hearings, “You know, the Chinese take a look at that and say, what’s the United States doing? They trying to circle us? What’s going on?”

    The author Max Fisher's judgment is a bit simplistic:  if Kerry is just trying to make nice with China, then fine, but if he's serious and actually focuses on the Middle East, then China benefits!

    Sounds to me like WAPO is trying to "out" Kerry on China in this sophomoric piece.  People on that paper have too much time on their hands and too little non-inside-the-Beltway stuff to cover.  WAPO is truly a small-town newspaper.  Always has been, always will.

    9:18AM

    Let a million muckrakers bloom!

    Nice NYT story on Chinese blogger who "thrives as muckracker."  Odd choice of wording there.  Self-professed citizen journalist in early 40s is being tolerated for now, as his "freelance campaign against graft has earned him pop-star acclaim and send a chill through Chinese officialdom."

    Sounds like a fine line.  I mean, once you start going on the BBC with your stories, you take your life into your hands.

    One of his latest tricks is posting sex videos of high bureaucrats having at it with young prostitutes.  He also says things like, "I'm fighting a war.  Even if they beat me to death, I won't give up my sources or the videos."

    A local Beijing journalism academic says, "Here on Chinese soil, it's almost impossible for citizen journalists like him to survive long term."

    But if you want the self-regenerative progressivism to take hold, you have to tolerate these types.  Otherwise bad stuff continues to be swept under rugs.  Problem is, of course, showing the crimes of the single party leads to that single party's legitimacy being further diminished.

    The CCP in China has typically operated along the lines of, it's okay to unmask mid-level officials but not truly high ones (like the NYT did recently, triggering the Chinese hacking attacks).  But people know that, if mid-level types are routinely engaging in mischief, it's because the higher-ups tolerate it as lesser versions of their own evil.

    So the fine line continues.  The blogger recently got a flattering Xinhua treatment, and yet gov censors constantly remove his micro-blog pieces almost the minute they appear.

    Again, ultimately Beijing needs to allow this sort of positive self-renewal. It's a sign of the maturation of Chinese society in response to all the positive socio-economic churn.

    You either trust the people or you don't, and the CCP's problem is that, it most definitely does not trust its own people.

    No question where things are headed.  Anyone who thinks the future is less transparency and less public accountability is kidding themselves.