A Disordered World – Part 3: Pathways

Authored by Satyajit Das via Naked Capitalism,

Ordinary lives are lived out amidst global economic, social and political forces that they have no control over. Today, multiple far-reaching pressures are reshaping that setting.

This three-part piece examines the re-arrangement. This first part examined current great geopolitical divisions. This second part looked at key vulnerabilities. The final third part, studies possible trajectories.

The Ukraine conflict may shape the trajectories of a fractured world. In the short-term, anti-Russian sentiment has united the West. In the long-term, it is likely to accelerate its divisions and decline. Individual pathways within the Western bloc will differ because, in part, of disunions.

Divergent Trails

American policymakers continue to believe that the global economy revolves around the US. They routinely use economic weapons, such as sanctions, to threaten foreign access to American consumer and financial markets. The aim is to force other countries to adhere to its positions and isolate opponents. American military capabilities serve to underline its power.

The US self-serving strategy seeks to weaken Russia by implicitly sacrificing Ukraine and Europe. Given its high dependence on imported energy and sensitivity to fuel costs, Europe, especially Germany and Italy, risk a severe economic contraction, damage to its industrial base, reduction of living standards and a financial crisis.

Industrial leaders have warned of an existential threat from higher power prices, highlighting the ruinous consequences for employment, taxes and ability to repay borrowing. Environmentalists worry about recommissioning nuclear power plants and restarting dirty old coal fired power plants.

Precarious coalition governments in Germany and Italy may not survive internal disagreements on Ukraine and the concomitant economic cost. Announcing aid measures including a gas price cap and cancellation of a gas tax, German Chancellor Olaf Scholz insisted that prices must go down. It was wishful thinking related to plunging support of his government and party.

Hungarian Prime Minister Viktor Orban, de facto leader of The Visegrád political alliance of Central European countries, recently questioned the effectiveness of sanctions against Russia asking pointedly as to how long Brussels will continue with this course. Hungary alongside other European Union members were also highly critical of Germany’s domestic energy cost aid package which, in their view, would distort fair competition within the single market. Orban termed it “cannibalism” and a “bombshell” calling instead for a co-ordinated solution to help all Europeans, presumably paid for by the continent’s richer nations.

Concatenating events – the Euro debt crisis, Covid19 and now the energy crisis – pose a serious threat to fragile European unity. Predicated on preventing a new continental war, the Union has become a financial transfer system between wealthier and low-income countries. Divides are likely to grow over time as Germany’s financial position becomes compromised and its ability to buy off weaker European Union members weakens.

Europe’s need for a negotiated solution, if possible, will increase. Despite periodic mindless moralising, the German Chancellor, French President and Italian Prime Minister have sought, at least, to maintain communications with Russia unlike the Anglosphere.

Japan’s high exposure to energy prices and important trade relationship with China complicates support for the Western position. The tensions underlie difficulties with the US-led ‘Chip  4’ alliance with Japan, South Korea and Taiwan to secure access to semiconductors. The east Asian partners have cited trade and security concerns.

Australia and New Zealand’s commitment to the Western alliance depends on developments in relations with China.

Over 35 percent of Australian exports  go to China, greater than the combined total to Japan, South Korea, India, the US and UK.  Australian imports from China comprise approximately 20 percent of the total. China is normally Australia’s largest source of higher education international students (over 160,000 or 38 percent). China is also its second-largest inbound tourist market (around 1.4 million arrivals) and the largest by expenditure. Over 28 percent of New Zealand’s exports and 38 percent of imports are to or from China. It is its second-largest source of tourism and 47 percent of foreign students at New Zealand universities are from China.

The US could place specific sanctions on China, over support for Russia, non-compliance with existing sanctions or actions in relation to Taiwan. The flow-on effect of secondary sanctions – penalties on persons and organizations, not subject to the sanctioning country’s legal jurisdiction, entering into dealings prohibited under primary sanctions- would affect Australia and New Zealand. They would find it extremely difficult to maintain commercial relations with its major trading partner without broad exemptions which may not be forthcoming. The national income loss would be substantial.

The issue is not exclusively antipodean as Europe is highly dependent on Chinese trade. In 2021, China was the third largest destination for European Union goods exports (10 percent) and the largest source for European Union goods imports (22 percent).

Outside of economics, there are concerns about the Disunited States of America, a deeply alienated mixture of honest hard-working people, a thoughtful and able if highly partisan intelligentsia, oppressed minorities and racist, misogynistic, conspiracy subscribing, religious fanatics. For outsiders, these internal divisions, bordering on an uncivil war between armed citizens, combined with abrupt policy shifts driven by never-ending electoral cycles complicates any alliance.

A simplistic Manichean foreign policy modelled on Superman’s pursuit for truth, justice and the American way is unhelpful. The persistent need to venture forth without thought to slay foreign demons -starting wars, staging coups or otherwise interfering in the internal affairs of other nations- is unsettling. US use of carpet bombing, napalm and chemical weapons in the Korean and Vietnam conflicts often against civilian populations or the supply of lethal weapons to American supported despots for use against their own citizens has not been forgotten.

The unexplained September 2022 destruction of pipelines for Russian gas added to concerns about America’s febrile approach. It was inexplicable why Russia would sabotage its own expensive infrastructure which historically generated up to 40 percent of Russian GDP. They could simply turn off supplies. Germany which is dependent on Nord Stream was also unlikely to have taken such action.

Cui Bono theorists suggested that America and Britain were responsible to prevent a recalcitrant Germany from breaking ranks with the Western alliance. The allegations gained traction when America’s Secretary of State pronounced the sabotage a great opportunity for US energy firms and a Polish politician deleted a tweet thanking the US. There were uncomfortable precedents including the false Gulf of Tonkin incident and incorrect WMD claims that was used to justify the Vietnam and Iraqi wars.

Policy positions are muddled. Recent positions on US support for Taiwan replace ‘strategic ambiguity’ with ‘strategic confusion’. Reacting to Chinese overtures, an US rush to engage with Pacific Islands attracted scepticism. Fiji’s attorney-general noted that US leaders saw the region as small dots from plane windows as they flew to meetings “where they spoke about us rather than with us”.

American willingness or ability to support allies, other than with financial assistance and low risk stand-off weaponry, is questionable. Outside of minor affairs like Panama and Granada, the US record in military combat is unimpressive. For Australians tied to the US and UK through the opaque 2021 AUKUS defence agreement, the possibility of being drawn into a military conflict with China and the prospect of the American cavalry not reporting for duty is a clear concern. The parallel to Great Britain’s abandonment of Australia during the World War 2 is striking.

Even US economic support is uncertain. Despite promises, America has, to date, been unable or unwilling to help meet European oil and gas needs. This is due to production constraints and prioritisation of domestic supply and low homeland prices. It flagging economic power also reduces its ability to provide assistance, especially with pressing domestic funding needs.

Playwright Harold Pinter’s acceptance speech for the 2005 Noble Prize for Literature set out a widely held view of US foreign policy: “The crimes of the United States have been systematic, constant, vicious, remorseless, but very few people have actually talked about them. You have to hand it to America. It has exercised a quite clinical manipulation of power worldwide while masquerading as a force for universal good. It’s a brilliant, even witty, highly successful act of hypnosis.”

More recently, the demonised President of the Russian Federation Vladimir Putin provided an updated analysis: “Europe is about to throw its achievements in building up its manufacturing capability, the quality of life of its people and socioeconomic stability into the sanctions furnace, depleting its potential, as directed by Washington for the sake of the infamous Euro-Atlantic unity. In fact, this amounts to sacrifices in the name of preserving the dominance of the United States in global affairs….The competitive ability of European companies is in decline, for the European Union officials themselves are essentially cutting them off from affordable commodities and energy, as well as trade markets. It will come as no surprise if eventually the niches currently occupied by European businesses, both on the continent and on the global market in general, will be taken over by their American patrons who know no boundaries or hesitation when it comes to pursuing their interests and achieving their goals.”

These concerns are strong in emerging countries. There is additional anger at duplicitous policies. After having spent decades championing free trade and capital movement and forcing the Washington Consensus on other countries (most recently on Sri Lanka and Argentina), the West are busily implementing the very programs they derided – trade and capital restrictions, price caps or controls, subsidies, nationalisation and replacing market forces with state diktats.

Suspicion of the rhetoric, disinformation and propaganda which masks America’s true objective of preserving its hegemony is widespread. To paraphrase Oscar Wilde, the US has no enemies but is intensely disliked by friends.

For British statesman Lord Palmerston, countries had no eternal allies or perpetual enemies just permanent interests.  Europe, Japan and perhaps Australia and New Zealand may drift away from the alliance. Already, protests have taken place in several European countries against continued support of Kyiv and its effects on the cost of living. Ultimately, the cost of energy and food shortages accompanied by declining living standards will have to be weighed against taking sides in another military and economic war between great powers.

The evolving stance on Ukraine may be an indication of the long-term path.

The Special Relationship

The most durable support for the US (the current global empire) comes from the UK (the previous holder of that position). The British empire ended over six decades ago and its position as a great power has been declining for a century, since its penurious victory in World War 1. The UK’s special relationship with the US is little more than sponging off the latter’s economic and military strength to prop up pretensions of British global influence. For the US, the UK is an useful messenger as evidenced by Prime Minister Boris Johnson’s obedient deliveries of missives to Ukraine.

The UK provides an useful road map for decline. Since the 1970s when it needed IMF intervention, the British economy has been propped by a combination of North Sea oil, membership of the European Union and flight capital. Common market membership provided cheap labour (mainly from the East and South Europe) and trade opportunities especially in financial services (which generates around 10 percent of British economic output). Monetary inflows of frequently dubious origins from Russia, the Middle East, China and other less salubrious jurisdictions underpinned prosperity. It funded the South-East property markets, the National Health System, cultural and educational establishments as well as ‘cool Britannia’.

Today, North Sea oil production and energy security are in decline. Brexit means worker shortages, loss of trade and a reduced role for London as the centre for Euro financial markets. Idle promises of sovereignty and new trade opportunities may flounder on the fact that Europe is hard to replace and Britain does not actually produce much anymore.

The UK, tacitly retreating from Brexit promise, sought to boost immigration. It sought to remain attractive to the non-Russian, non-Chinese newly minted rich from the emerging world – a no-questions-asked tax haven on the Thames. But the UK may no longer be a secure place for placing wealth or for potential investees personally due to the risk of sanctions and asset confiscations or freezes if geo-political winds change direction.

Even the special relationship may be weakened if the UK decides to abandon the Northern Ireland protocols, an action opposed by the US.

The UK’s vulnerabilities were on show in October 2022. The UK government under new Conservative leader Liz Truss announced tax cuts and substantial subsidies, funded by public borrowing, to ameliorate rising energy and food prices. While it pleased conservative ideologues, the fiscally incontinent and economically vacuous plan unleashed a predictable crisis of confidence amongst those being asked to finance it.

Investors savagely sold the pound and UK government bonds. They demanded a “moron risk premium” (a term attributed to TS Lombard’s Dario Perkins) on government borrowings and sought a restoration of “abacus economics” (Prime Minister Liz Truss’ derogatory reference to fiscal orthodoxy).

The Pound plunged to record lows and interest rates on UK government debt rose sharply. There were witty asides about King Charles’s currency being devalued even before his face was stamped on UK legal tender. Conservative parliamentarians and opinion-istas spoke darkly about a foreign conspiracy against the UK and its decision to leave the European Union.

The Bank of England intervened to prop up the currency and lower rates (a volte-face from its stance of higher rates and tightening liquidity) to counter what the UK government stoically defended as “a little turbulence”. It was a confused case of mixing ‘uppers’ and ‘downers’.

The UK’s strategy -dubbed Kami-Kwasi (a riff on UK Finance Minister Kwasi Kwarteng, whose tenure lasted a mere 38 days)- highlighted a Western weakness -the lack of currency reserves to intervene in foreign exchange markets. Other than the US ($716 billion), most of the West did not see the need for reserves as first world nations with internationally accepted, freely traded and, in some cases, reserve currencies.

Based on World Bank data, the UK’s reserves, as at end 2021, were $194 billion. This compared to China ($3,427 billion), Japan ($1,405 billion), India ($638 billion), Russia ($632 billion) and Saudi Arabia ($474 billion). The actual amount available as at August 2022 might be lower at around $108 billion. In addition, the funds that could be deployed were limited by not easily deployed holdings of gold ($17 billion) and the IMF’s special drawing rights ($39 billion). Nevertheless the Bank of England, with stiff upper lip, expended treasure to try to undo the actions of a government intent on self-harm.

Political pandemonium ensued. The plan to abolish the 45 percent bracket for highest-earning taxpayers was dropped when the government realised that the proposal would not pass in parliament because of opposition from members of the government itself. Literally hours before, the Prime Minister and Chancellor had repeatedly insisted that they would not change course. Spun as listening to the people, it was both shambolic and pointless as it did not alter the essential economic direction.

Ultimately, forced to back down on the entire package of tax cuts and large parts of her program, Truss resigned after the shortest prime ministership in British history. In little more than 4 months, the UK had cycled through four chancellors, three home secretaries, two prime ministers and two monarchs. Larry, the Prime Ministerial residence’s cat, had seen off no less than 4 incumbents and enjoyed support from many Britons to take over the running of the country.

The conservative party duly elected a new leader – former Chancellor Rishi Sunak. He promised a dullness dividend after the hysteric entertainment of Truss.

Ex-Prime Minister Boris Johnson, forced out by his own party only months ago, rushed back from a Caribbean holiday in a later aborted attempt to return to power. Johnson was under investigation for misleading parliament and, if found guilty, faced suspension or a by-election. The Bojo 2.0 campaign was founded on the assertion that he had learned from past mistakes. His acolytes, concerned only about their candidate’s assumed election winning credentials and personal re-election prospects, were untroubled by Johnson’s lack of leadership and scandal ridden reign. Other ruling Conservatives opposed the return of Johnson and threatened mass resignations. The fact that Johnson could be a serious contender beggared belief.

The chaos illustrated how a supposedly advanced economy could rapidly find itself near collapse through a mixture of ideological blindness, policy errors and insensitivity to its predicament. It showed how markets can destroy fantasies. Multiple co-morbidities and minimal resistance to shocks can rapidly unravel seemingly prosperous and stable polities.

Precedents

Britain provides a guide to America’s fate. There are similar economic susceptibilities -high debt, decayed infrastructure, and hollowed out industries. They are both deeply unequal societies, where the less well-off rank badly and a small group of the rich fare particularly well over-stating average incomes. Government and institutions are barely functional.

American strengths may not hold over the longer term. Food self-sufficiency is susceptible to climate change induced extreme weather. Energy independence is reliant on shale oil and gas production. Estimated US oil proven reserves that can be economically recovered is around 69 billion barrels enough for less than 10 years based on daily consumption of 20 million barrels barring further discoveries or new technologies. In contrast, Saudi Arabia, other Middle-East producers, Canada and Venezuela have reserves totalling more than 1,270 billion barrels.

The US may revert to an energy importer once the shale oil boom has run its course. This would make it vulnerable to oil-producers, especially Saudi Arabia which needs high oil prices in the short run to engineer its post-fossil fuel future. Under a young absolutist ruler who is willing to take sides in US domestic politics, the Kingdom, which is building ties with Russia and China, increasingly rejects America’s premiere position in the existing world order. The reformation of Middle East alliances reflects the fact that major energy exporters no longer regard the US as a reliable guarantor of security.

In October 2022, OPEC, in which the Kingdom is a pivotal player, cut output despite US pressure to maintain or even increase production to assist in keep fuel prices and inflation down. America’s furious response threatened possible bans on exports of petroleum products, which would damage Europe but not oil producers. Congress thundered about NOPEC legislation designed to break-up the cartel and exert US military leverage on Gulf oil exporters. The US policy responses reflected a persistent tendency to double down on what has not worked.

In The Rise and Fall of the Great Powers published in 1987, Paul Kennedy argued that great power ascendancy and decline correlates to available resources and economic durability. America’s military overreach and military spending – greater than China, India, Russia, United Kingdom, Saudi Arabia, Germany, France, Japan, and South Korea combined – is unsustainable.

America and the UK revel in the past. The UK, as the Queen’s death evidences, love expensive, meaningless pageantry and nostalgia. MAGA/MAGAA too is a fantasy of a return to a simpler, more prosperous and hopeful time. They fail to acknowledge the complex present global context.

In the election of Donald Trump and Boris Johnson, America and Great Britain were affirming their respective national narcissistic disorders. In anointing these individuals, voters embraced entitlement, media magic and most of all celebrity rather than dignity, decency or purpose. In choosing such leaders, once powerful nations abandoned all semblance of seriousness.

Despite its wealth and power, the likelihood is that the US will join the UK as a failed first-world state, a Somali with nukes. Historian Arnold Toynbee may have been correct in concluding that most civilizations commit suicide.

Succession

While the declining influence of the West, especially the US, is evident, it is unlikely that another nation or grouping can fill the vacuum in the short term. China, Russia and India are all Potemkin structures, with serious weaknesses.

China has massive overcapacity funded by debt which cannot be paid back of serviced. The dominant state-owned enterprises have low productivity and generate inadequate returns. The Chinese economy is in the early stages of a lengthy period of adjustment as its growth slows and its vulnerable $5 trillion property market and related debt are addressed.

Russia’s commodity fossil fuel export driven economic outlook is indeterminate in the face of long-term sanctions and decarbonisation. India’s economy is as always a heady cocktail of capability, protectionism, cronyism and oligarchies generously spiced with general societal chaos, delusions, mutinies as well as religious and social bigotry. The land of the license Raj remains self-harming and vain glorious.

The challengers’ limited capabilities for projecting military strength (most recent hegemons were naval powers) restrict the scope currently for full-fledged empire and global domination. Chinese, Russian and Indian imperial ambitions are confined to security and contiguous historical territorial claims. Another factor is historical differences and internecine rivalry – China gains if the Ukraine conflict weakens Russia to eliminate a potential contender; India benefits if US economic sanctions diminish the Middle Kingdom.

The governability and internal cohesion of putative powers is overstated. When congratulated by President Richard Nixon on his achievements, Chairman Mao Zedong reputedly replied that he had only been able to change a few places in the vicinity of Beijing. Even today, despite the advantages of a centralised top-down system, Chinese policymakers complain about the difficulty of implementing state policies beyond Zhongnanhai (the leadership enclave in the Chinese capital). Unstable leadership cults, absence of clear lines of succession or power transition, centralised power structures, and lack of effective institutions or structures worsens the problems.

In any case, survival and warding of collective disaster -climate change, resource scarcity-  may now be everyone’s primary focus. Talk of a Chinese or Russian world order is premature.

Wasteland

But a critical point is approaching. Economic growth is stagnating. Resource scarcity, climate problems and associated inflationary pressures are rising. High debt levels may prove difficult to sustain. The financial system is fragile. Global political, business and cultural elites are increasingly detached from the concerns of ordinary people. Geo-political tensions are high and the American-dominated unipolar world is under threat from within and without. The repeated shocks and loss of naïve confidence – political (911 and its aftermath), economic (successive crises), political (Brexit, Trump, rising populist authoritarianism) – are beginning to unravel existing structures.

But large systems do not fail quickly. British power has been falling for a century. The 1991 demise of the USSR can be traced back to Stalin’s commitment to unwinnable competition with an economically superior US at the end of World War 2.

While there are few clear markers, the internal contradictions of the existing order make instability likely. At the edge of chaos, the exact shape of any transformation is unpredictable. Poet TS Eliot wrote of history’s “cunning passages”, “contrived corridors” and “supple confusions”. The outcomes may be positive or negative. A violent conflagration is not unimaginable. Winston Churchill believed that the “story of the human race is war”. Peace was a short interlude between murderous strife and mayhem. Writing in AD120, Tacitus even questioned the calm: “Where they make a wasteland, they call it peace”.

The world may be on the verge of a period, like the Dark Ages (approximately 500 to 1500 AD) after the fall of the Roman Empire, where stasis or drift rule. During such times, multiple centres fight for influence and recurrent conflict, both within and between countries, is common. Stronger countries push aside or predate upon weaker countries. Most survive at different levels of subsistence as Cuba, Haiti, Venezuela, North Korea or Congo do today.

Famine, disease, declining living standards and feudal arrangements are features of these periods. Aristocracy and oligarchy thrive. Social and economic mobility become limited. These are also times of great superstition. Contemporary worship of technology and human invincibility resembles such a belief system. The past also reminds us that such periods release mankind’s violent and heinous impulses.

In his 1930 Prison Notebooks, Anton Gramsci elliptically anticipated the dystopian present: “the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.”