Total Recall

Matthias: Mr. Hauser, What is it you want?

Doug Quaid: I want to help you.

Matthias: That is not the only reason you are here.

Doug Quaid: I want to remember.

Matthias: Why?

Doug Quaid: So I can be myself, be who I was.

Matthias: It is each man's quest to find out who he truly is, but the answer to that lies in the present, not in the past. As it is for all of us.

Doug Quaid: But the past tells us who we've become.

Matthias: The past is a construct of the mind. It blinds us. It fools us into believing it. But the heart wants to live in the present. Look there. You'll find your answer.

The present tries to forget the past. The past even if washed by the sands of time serves a reminder every now and then.

When Napoleon armies marched across Europe winning many wars despite adverse numbers his confidence in his destiny magnified. He was then the Emperor of Europe from the Atlantic to Poland (Austria in alliance), the largest Empire ever carved in Europe. Having won peace with Russia (however brittle) and the English beyond his reach, he tried the disastrous occupation of Spain across the Pyrenees and lost many men in the Spanish guerilla war before giving up. Lacking the naval force he tried enforcing a continental blockade on the English. When the Russians reneged from the blockade he took the largest force ever assembled to attack the Russian marching across all of Europe. The Russians did not give battle and when Napoleon occupied Moscow, they burnt it down. Over half a million men lost their lives. As Napoleon’s star dipped, old enemies rose to fight again. And, in the Battle of Waterloo, 1815 he lost it all. Creating an empire is one thing, managing it can be quite another.

Bismarck in the same way created Germany out of what were many principalities on the western and southern side of Prussia, maneuvering militarily and diplomatically the Austrians, French and the Russians as he did this. However, once this had happened, he was aware of the power of united German nation and sought to diplomatically assuage the fears of other powers on the continent.

In February 1888, during a Bulgarian crisis, Bismarck addressed the Reichstag on the dangers of a European war. He warned of the imminent possibility that Germany will have to fight on two fronts; he spoke of the desire for peace; then he set forth the Balkan case for war and demonstrated its futility: "Bulgaria, that little country between the Danube and the Balkans, is far from being an object of adequate importance ... for which to plunge Europe from Moscow to the Pyrenees, and from the North Sea to Palermo, into a war whose issue no man can foresee. At the end of the conflict we should scarcely know why we had fought."   

He left a marker for the future leaders of Europe. Ironically, World War I started with Austro-Hungarian Empire attacking Serbia (in the Balkans) leading from one conflagration to another and Germans were fighting the French and the Russians (two-front war). A leading historian of the era, William L. Langer sums up Bismark's two decades as Chancellor: “Whatever else may be said of the intricate alliance system evolved by the German Chancellor, it must be admitted that it worked and that it tided Europe over a period of several critical years without a rupture.... there was, as Bismarck himself said, a premium upon the maintenance of peace.”

We now see another nation rise to change the balance of power in Asia – China. As China changes the status quo, it is changing the behavior of all its neighbors – the bordering countries of its newly propounding maritime boundary (the nine dash line) like Philippines, Vietnam, Malaysia, Singapore; Australia; India; South Korea; and most importantly that of United States and Japan. Japan has as a consequence started reversing the limits it bound its military in post-World War II. This is like all the nations of Europe were aligned against Napoleon. One is already seeing some impact on military spending in the region, SIPRI reported, "Vietnam also continued its rapid rise in military spending, with an increase of 9.6% in 2014, reaching $4.3 billion. Since 2005 Vietnam’s spending has risen by 128%, reflecting tensions with China over territorial disputes in the South China Sea. However, Indonesia decreased its spending by 10% in 2014—a reversal of recent trends, which may prove to be only temporary, given Indonesia’s ambitious military modernization plans. Although military spending in Asia and Oceania remains on an upward trend—with all states in the region except Fiji, Japan and Laos increasing their spending since 2005—the growth rate for most states has been substantially lower since 2009, when the effects of the global financial crisis began to  be felt. For example, while China’s military expenditure doubled in real terms between 2004–2009, it increased by only 48% between 2009–14. Japan, meanwhile, approved a record budget for 2015.” China, however, has the benefit of geography, an ocean frontage of 9,000 miles in the temperate zone, which the other Eurasian power Russia never had, making it both a land power with access to the resources of central Asia and a capability to build sea power.

The Chinese have during the last 30 years tried to transition to proactive engagement with the international system and from a taker to a maker of international order. The ability to maintain the current trajectory of change is significantly dependent on it economic growth. As Kaplan points out, “Two debates are under way over China. The first, about Beijing’s aggression in the South and East China seas, is between naval strategists and diplomats who know little about economics. The second, about the fragility of the Chinese economy, is between economists who know little about naval strategy and diplomacy.” But depending on the trajectory one could see internal strife with Tibetans or the Uighurs or increasing friction at sea inspired by nationalism or a managed transition where US power gives way to Chinese in the South China Sea. The number of annual protests in China has grown steadily since the early 1990s, from approximately 8700 “mass group incidents” in 1993 to over 87,000 in 2005. In 2006, the Chinese Academy of Social Sciences estimated the number of annual mass incidents to exceed 90,000, and Chinese sociology professor Sun Liping estimated 180,000 incidents in 2010. These incidents are a marker of the break in social contract with its people as income divide widens, job security reduces or the environment degrades and this is what could seriously tear down internal political consensus of a single party rule. The downturn in the Chinese economy is already causing global pain; an implosion would seriously damage global economic stability and internal security. For my views on the Chinese economy please refer to http://poleconomyindia.blogspot.in/2015/08/china-everything-overdone.html.

It is not that the American Empire rose in complete harmony with world. Thomas Jefferson, in the 1790s, awaited the fall of the Spanish Empire "until our population can be sufficiently advanced to gain it from them piece by piece." In the late 19th century, foreign territories such as Hawaii and Latin America were sought after by the United States. Roosevelt supported the Panamanians to revolt against Columbia and in turn they granted US control of the Panama Canal Zone. The Teller Amendment and the Platt Amendment were used in unison to grant the United States the right to intervene in those territories if that particular government was deemed unfit to rule itself. The American government held the power to both criticize and occupy these nations if they were deemed to be unstable. But two things that were important through all of this - consistent growth in economic might (barring the great depression) and World War II which literally tore down the European empires and with it the old world order.

The Chinese may like to be like the Americans but are behaving like Napoleon when they ought to manage like Bismarck.

What made headlines?

“To read a newspaper is to refrain from reading something worthwhile. The first discipline of education must be to refuse resolutely to feed the mind with canned chatter.”

Liquidity unwind

Estimates suggest through various phases of QE starting January 2009 ~$500bn came into Asia ex-China, ~$40bn was lost during the 2013 taper fit the markets threw and ~$30bn has been lost in the last 3 months. The markets lost small sums compared to the noise factor in the press. But what this suggests is the level of potential unwinding that is possible if interest divergence were to be become stark. Already the reduction in dollar reserves across countries from Saudi Arabia, Russia or China is causing a quantitative tightening.   

In India, credit growth is getting constrained at the one end by the low levels of inflation - WPI was -4.1% in July and GDP deflator Apr-June was 1.8% and the other by very high bad loans – NPA and restructured assets have reached ~11%. Second, the choking of the capital expenditure in infrastructure or heavy industry in the last 4-5 years has created not only the bad loan issue but also ensured that equity capital in stuck in the these projects and potentially wiped out as a consequence of cost and time over-runs or now due to steep commodity declines. The third is from 2009 onwards physical savings continuously exceeded financial savings (historically physical was around 50%-55%) to the extent that in the last couple of years become almost 2x. This savings went predominantly into real estate which is now facing decline in value and transactions, consequently wealth effect and liquidity are both gone. Fourth, the focus on reducing black money in the economy by the government and the Supreme Court is beginning to bite. The recent decline in equity market valuations surely add to this but on the debt side we have lost only 1% of what we did in 2013. 

Inconvenience of election promises

Narendra Modi is a master of rhetoric and this was principal amongst other aspects that laid the foundation of his victory. The Indian constitution recognizes the Parliament as the highest decision-making body with the Prime Minister at its helm but does not in the same breadth take away the powers or allow the Parliament to override the state governments or the courts or the upper house which has representation of the states at the center. It is designed as a check to protect the basic character of the nation from violent majoritarian-ism. No leader would get elected if he points out his constraints to the electorate and no leader unless he steps in the chair understands these constraints fully anyway. Thus, the aspirational high before elections is designed to fail.

Having said this, the regionalism of India represented by many regional political parties, of which I have written many times, ensures a permanent divergence of views. And in this specific case the presence of overwhelming majority center, has forced regional parties to collaborate to protect their turfs while they live to fight each other another day. A declining Congress has limited stake in constructive behavior, as its victory is more likely to come from the BJP’s mistakes.  

Having said this, politics is the art of working with 'material at hand' and turning promises to reality. "In order to govern, the question is not to follow out a more or less valid theory but to build with whatever materials are at hand. The inevitable must be accepted and turned to advantage." - Napoleon Bonaparte

When it rains

If the twin crises of economic malaise and Ukraine were not enough for Europe, it has stepped onto the new crises brought by fighting and political instability across its southern arc from Syria to Libya. The migration of millions of people to Europe has sparked fear and guilt. Sweden has received the highest number of application (more than 8 / 1000 population), UK the least (under 1 / 1000 population). While Germany at almost 3 per 1,000, is receiving 68% of the EU refugees. In context the levels are the highest ever since the cold war – for example Germany has received ~2x the applications it did at the peak of the Yugoslav war which were the highest till date. The sharing of this burden is causing friction within the European Union and the fear of accepting large Muslim population from the war torn countries is also sparking demographic tensions at a time when Europe is facing a decline in its dominant Christian population.

Europe prior to WW II had hegemony over North Africa and this was the source of cheap labor. When they lost their empire, they had no choice but to allow controlled migration to ensure availability of labor. But they never assimilated this population which can be seen in the ghettoization of Muslims even cities which claim to be multicultural like Paris. This non-acceptance has its roots in the wars fought with Islam for over 1,000 years. This is was a period where Christian Europe had great evangelical zeal to kill and convert its enemies, be it Islam or different strains of Christianity. While Europe sapped its zeal to allow peace within Christianity, slivers of Islam maintain that zeal and continuously espouse that they speak for the rest of Islam. European nation states are about shared history, language and common values, the migrated Muslims share none of these.

Europe will turn again to welcome immigration in the next 2 decades as its population decline deepens but this would come out of need rather than the current burden of conscience.

Indrani Mukherjea…?

Incompatibility accentuated by decline in money flow leads to breaking of marital vows resulting in current mess. All the worlds’ problems seem to be in one microcosm and I am sure we can find more. Well hasn’t the media got it all…