“I am somewhat exhausted; I wonder how a battery feels when it pours
electricity into a non-conductor?”
― Arthur Conan Doyle, The Adventure of the Dying Detective
Post World War 1, when there was
significant exhaustion from battle across the world; in 1921-1922 the
Washington Naval Conference was held. The
conference leveraged upon the popular global mood for disarmament. However, the
real objective was to limit Japanese power – limit naval expansion in western
pacific and acknowledge the ability of all global powers to trade with China. A
ten-year agreement fixed the ratio of battleships at 5:5:3 - 525,000 tons for
the USA, 525,000 tons for Britain, and 315,000 tons for Japan. Smaller limits
with a ratio of 1.7 applied to France and Italy. However, given the limitation
of tonnage it ensured that the Americans despite an overwhelming economic lead
in having economic size more than twice that of Britain (Annexure) could be
strong in one ocean or weak in two (Atlantic or Pacific). While this limitation
prevented a major outbreak for the next 15 years, it laid the foundation for
Japanese naval expansion prior to the 2nd world war and the
inability of allied forces to potentially preempt the war due to balancing
force availability i.e. strong force to land in Europe post German belligerence
or threaten supplies of the Axis countries. The shortage of balance of power in
the global theatre had laid the grounds for World War II.
Post World War II, US and USSR covered
most of the world under their influence, thereby checking regional aspirations.
The superpowers fought at the edges of the world in Vietnam, in Middle-East or
in Afghanistan but never in the core area of their interest, the European
peninsula. This balance of power ensured almost 5 decades of peace. When the Soviet
Union collapsed under the burden of arms race and the collapse in oil prices
(its principal export), the world was left with one overwhelming super power. But
no wars followed given this imbalance because Americans given their endowed
lands and the security of the two oceans have not coveted foreign land but
influence across the globe and that they did enforce. But then came 9/11 and
the great financial crises of 2008.
It unraveled many underlying
glossed over pressures across the globe and created new ones.
First, the attack on Afghanistan
and Iraq by US created a vacuum which the Americans were in no position to fill.
This vacuum in Afghanistan was slowly filled by competing interests like Pakistan
(backing the Taliban) again, Iran, India, Russia and China (in concert with
Pakistan). It reverted essentially to a pre-Taliban and post-Soviet period
where surrounding states jockeyed for interest. A destabilized Afghanistan in
turn destabilized Pakistan with multiple terrorist groupings waging internal
and cross-border warfare while its intelligence agency found it increasingly
difficult to manage the shifting loyalties and synergies these groups derived
from the ecosystem. An as serious one got created in Iraq as Iran and the Kurds
moved in. As this spasm pulsed it enveloped neighboring Syria as Alawites (a branch
of Shia Islam), Sunnis and Kurds backed by their respective regional brothers
surged to claim leadership. In this midst emerged the Wahhabi-strain of the
Islamic State. But the more longer term chasm, is the one playing out across
the Middle-East (Iraq, Syria, Bahrain, Yemen, Egypt, Lebanon and more) is the
chasm between Iran and Saudi Arabia battling for their interests. As this
battle plays out Turkey is feeling the pressure from a potential creation of
Kurdish state across Iraq, Syria and its own territory and from Russian actions
on the ground in Syria to protect the Assad regime. It’s a quagmire that involves
the four regional powers of Israel (fighting to stay away from the situation),
Saudi Arabia, Iran and Turkey, and ultimately Iran and Turkey. This happens at
a time when oil prices are causing serious stress to the budgets of this exporting
region.
Second, the global financial
crisis exposed the imbalance in the European Union. The Germans are an
efficient export engine but the export engine needs buyers and rest of Europe
buys ~60% of its exports. The Germans continued to lend to Southern European
banks even post the 2008 crises to ensure availability of buyers. With slowdown
in Asia and massive unemployment across Southern Europe, any export decline (currently
at mid-40% to GDP) will trigger a recession in German growth (which is barely
keeping its head above water at 0.3% - 0.4%). While this is the situation with
the largest economy of Europe, Italy the 3rd largest economy in
Europe is officially reporting NPL’s at 17% and unemployment rate in
excess of 11% or more than twice Germany’s. It is this dichotomy that is
currently wound in a single currency. As German growth recesses, its ability to
sacrifice for the benefit of the Eurozone will be under stress, leave alone the
impossibility of an Italian bail-out. The recent immigration crisis has only
helped increase support to right wing and euro-skeptic parties across the
continent. An experiment to hold together a continent in Eurozone rising from
the burden of two world wars is likely to fragment as national interests reign supreme.
Third, in North Asia the global
financial crises sparked two different trajectories in two different countries.
Japan, the hegemon of Asia in the two world wars, which had peaked economically
in 1989 and has been largely mired in deflation and no-growth since then, threatened
by a rising China has become a process of re-arming itself. And to revive its
economy to pay for this, started an economic experiment where its central bank
owns almost 60% of the government bond market and has ensured a 40% decline in
its currency. China which had been growing rapidly till 2008 crises suddenly
realized that the global markets for its goods had evaporated. In 2008, China
exported 32% of GDP which fell to 24% and 26% for 2009 and 2010 respectively.
This resulted in massive 4x Chinese expansion of credit to stimulate internal
markets through infrastructure and real estate construction. Now limits to debt
fueled growth has been reached. As one key element of the social contract
(economic growth and employment) creates pressures on the Chinese leadership,
President Xi is consolidating power through his anti-corruption campaign to
limit fissures. This will lead China to be more nationalistic and aggressive
internationally.
Fourth, when crude was under $40 for
most of the second half of the 1980s, Soviet Russia collapsed. Oil was and is the
largest contributor of hard currency. Oil is almost 2/3rd of its
export and 30% of its GDP. When the price of this commodity falls to current
lows, the ability of the Russians to fund its internal budget and in turn
internal regional control becomes strained. Given the internal strains and the
conflict in Ukraine and Syria, Putin will seek to play in a manner that suggests
great strength in face of underlying weakness. It has successfully done so
successfully in Syria by ensuring the survival of the Assad regime. One could
see potential incremental moves in Ukraine in the coming future.
Finally, the Americans have
stabilized their economy post the 2008 crises but tired after the
Middle-Eastern wars have retired to their safety behind the two oceans. But by
2019, barring a recession, as per current trajectory their entire revenue will
be consumed by interest, defense and entitlements. This will create the next of
pressures on the Federal Reserve for easing and the new President and Congress to
act to alter this course.
Simply put, there is great destabilization
of the Eurasian landmass that predict the next cycle of great change. There is
a deep inability in the participants exhausted by the course of events and the
only superpower in the world has withdrawn tired of the wars and unable to
manage this tumultuous change.
“Because of the power shortage and lack of replacement parts there was
only one elevator running in the Empire State Building, and this one went only
as high as the twenty-fifth floor. After that you walked.”
― Harry Harrison, Make Room! Make Room!
Annexure
|
Share of Global GDP
|
1913
|
1950
|
1973
|
2001
|
|
US
|
18.9
|
27.3
|
22.1
|
21.4
|
|
Britain
|
8.2
|
6.5
|
4.2
|
3.2
|
|
Germany
|
8.7
|
5.0
|
5.9
|
4.1
|
|
France
|
5.3
|
4.1
|
4.3
|
3.4
|
|
Japan
|
2.6
|
3.0
|
7.8
|
7.1
|
|
China
|
8.8
|
4.5
|
4.6
|
12.3
|
