Monday, December 4, 2023

International power plays

The US Federal Reserve

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Countries often seem to behave like children in a schoolyard. Some will be loners, others want to be part of a gang. There is of course usually an obstreperous one who may often be the bully, and then the shy ones who are happy being ignored if only to make sure they are not picked on by the bully. Some will have obvious talents whether in sports, languages or more academic interests, but most just want to get along with growing up and developing into a more successful nation for the benefit of its citizens.

You will have to forgive me for stretching this metaphor but as we are all trying to work our way through a myriad of issues, so it seems that our fellow nations seem to be adopting the characterization of the playground. Currently, we can see a number of countries playing out their characters in the UN General Assembly.

Sadly, Russia seems to have slipped back into its old behavior as a bully. Democracy hardly had a chance to grow roots in the Russian Empire when a form of very limited parliamentary government, known as the State Duma, was born in 1905. It remained a sickly child until the 1917 Revolution and the fall of the reformist Alexander Kerensky government.

Today we have seen a return of highly centralized totalitarianism that is not dissimilar to that of Russia’s Communist era. It is certainly far closer to the times of Stalin than anything the Russian people experienced during the four centuries of tsarism. The question, though, is this: will the Putin regime go the same way as their Soviet predecessors? The Soviet Union fell because the late Mikhail Gorbachev realized that they could not afford to carry on with former US President Ronald Reagan’s arms race. If the Soviets were great chess players, then the Americans played a better poker hand. Reagan called their bluff and in doing so exposed the corrupt and inefficient Soviet system as a house of cards.

Meanwhile, the Chinese have been gaining a reputation as a nation with continuing strength and success. However, for many years we have been questioning the veracity of their growth claims. We are only now starting to see just how much of a charade the Chinese gambit has been. The smooth and apparently unstoppable growth of the Chinese economy has been a source of wonder and impressed many with their apparent economic “generosity” and the so-called new “Silk Road”.

The glow, however, is beginning to fade on this miracle as the yawning debts of the property bubbles come to light. Growth has halved, inflation has risen and the economy is starting to suffer and it all may lead to what all totalitarian regimes fear – social and civilian unrest.

The United States will always want the newest, fastest and best of everything, but even here there is a growing realization that everlasting growth will be an increasingly difficult goal to attain. Yet again, it has been American innovations (and a good number from the UK) with the likes of Amazon and Elon Musk making them the flash boys in the playground. After all, they haven’t just got the latest space toys, they even have their own rockets.

Ever since the banking crisis of 2008, the global economy has been saved by the actions of the US, who pumped the economy with quantitative easing (pushing more money into the system) in a trick to rival the emperor’s new clothes. The result was that the economy recovered – but only to be knocked back again by the pandemic. Although the worst (we hope) may have passed, the economy seems to be faltering as inflation has swept around the globe and interest rates have started to rise. However, the central bankers are afraid – they want to raise rates to try to halt the pain of inflation, but not too quickly so as to endanger a rather insipid recovery. 

There is another group that seems to be a gang of its own but also wants to spend hours shouting about it and even one of them has decided to leave. The EU seems leaderless, impotent and utterly lacking any clear direction. It appears to weakly react to issues rather than take control of a situation. Its fledgling currency, the euro, still exists on life support,  but without some major fundamental reforms is still likely to fail in due course. The EU still has much to do to reshape itself. Losing its largest geopolitical and economic member, the UK, was a serious failure for Brussels.

With much of the continent still tied to Russian gas, the idea of binding Russia into a more prosperous and growing EU has been replaced by the realization that Europe has been tied to the wims of the local school bully and is fighting to get clear of more years of economic blackmail.

The United Kingdom is having to fight to retain its leadership as an international center. The country lost its most vital strength over the last several decades, namelt its soft power through its judicious use of the monarchy. With Queen Elizabeth II’s death, and a new king, this bastion of strength and stability will come into question.

The main threat to Europe over the next few months will be the handling of the War in Ukraine and the West’s economic sanctions on the Russian Federation. Despite the blathering of its leaders, the Russian economy is in a dreadful position and cannot afford a long-term war of attrition. One is reminded of this when taking into consideration that Russia’s GDP is about half that of the UK.

We should take some comfort from the fact that the global economy has been through a banking crisis, an appalling pandemic and now a blast of inflation. Despite this torrid list, there is some light at the end of this darkening tunnel. Inflation will ease.

As next year’s spring arrives, the world may look a lot more encouraging than at the moment, with the children playing games rather than fighting on the playground.

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