By LEAP/E2020 | 30 March 2010
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A reminder that this phase can only be a precursor to a sustained reorganisation of the international system if, between now and the middle of this decade, the consequences of the collapse of the world order inherited from the second world war and the fall of the Iron Curtain fully come home to roost. In particular, this development requires a complete recasting of the international monetary system based on an international currency, replacing the current system founded on the US Dollar, the value of which would be based on a basket of the major world currencies weighted according to the respective size of their economies.
At the same time last year we took a full page in the Financial Times on the eve of the G20 summit in London, pointing out that the ideal "window of opportunity" to effect such a radical change would be between spring and summer 2009, failing which the world would be involved in the phase of global geopolitical dislocation at the end of 2009[1].
The "Ring of Fire" of sovereign debt— Graphic presentation of the ratio of states' debt and public deficits (% of GDP)— Source: Reuters Ecowin, 02/2010.
The failure of the 2009 Copenhagen summit, which brought almost two decades of international cooperation and influence on the subject matter, due to increasing US and Chinese conflict and western lack of agreement on the actual topics[2] is, therefore, a relevant sign confirming our researchers' anticipations. Due to increasing tensions (zones and subject matters) international relationships become worse, whilst the ability of the United States to play their role as manager[3], or just only as "boss" of those under their umbrella, fades away a little more with each passing month[4]. At the end of 2010's first quarter we can highlight:
• constant worsening of Sino-US relations (Taiwan, Tibet, Iran, Dollar-Yuan parity[5], declining purchases of US Treasury Bonds, numerous commercial disputes,…)
• increasing transatlantic dissent (Afghanistan[6], NATO[7], contracts for US Air Force in-flight refueling tankers[8], climate control, the Greek crisis,…)
• Washington's decision-making[9] paralysis
• Middle Eastern[10] instability without respite and the intensification of potential Israeli-Palestinian and Israeli-Iranian crises
• increasingly good reasons for having regional blocs (Asia, Latin America[11], and Europe in particular)
• increased monetary[12] and financial[13] volatility in the world
• increasing sovereign risk worries
• the growing criticism of the role of US banks linked to regulation targeting a regionalisation of financial markets[14]
New York Stock Exchange profitability (in %) from 1825 to 2008— Sources: Value Square Asset Management / Yale School of Management, 2009.
At the same time, without any economic recovery in sight[15], social conflict is increasing in Europe, whilst in the United States the social fabric is, purely and simply, coming apart at the seams[16]. If the first event is more visible than the second it is, however, the second which is the more important. Control of the tools of the international media by the United States enables the social consequences of this destruction of US public and social services on the back of the increasing poverty of the country's middle classes[17] to be covered up.
This concealment is made even easier compared to Europe, that the US social fabric has been vaporised[18]: weak trade unions, unions very limited by sector, and without general social claims— social claims being historically identified as an "anti-American[19]" attitude… Still, on both sides of the Atlantic (and in Japan) public (public transport, police, the fire service) and social (health, education, retirement) services are in the process of being dismantled, when they are not purely and simply closed; demonstrations[20], sometimes violent, are increasing in Europe, whilst acts of domestic terrorism or political extremism[21] are on the increase in the United States.
In China, increasing control of the Internet and the media is, above all, a reliable indicator of increased nervousness of Chinese leaders over the state of their popularity. Demonstrations over unemployment and poverty are on the increase, contradicting the optimistic speeches of the Chinese leaders on the state of the economy. In Africa, the frequency of coups d'état has increased since last year. In Latin America, notwithstanding somewhat positive macro-economic numbers, social discontent feeds the risks of radical political change, just as Chile saw.
OECD Nominal[22] Spending History (as a % of previous year's GDP)— Source: MacroMarketMusings / David Beckworth, 11/2009.
All these trends are in the course of rapidly creating an "explosive socio-political cocktail" which leads directly to strife between component parts of the same geopolitical entity (conflict between federal states/the United States itself, tensions between European Union and member states, Russian republics and the Federation, Chinese provinces and central government), between ethnic groups (an almost universal increase in anti-immigrant sentiment) and a falling back on nationalism, both national and regional[23], to channel these destructive tensions. All this takes place on the back of [increasing] middle class poverty in the United States, Japan and Europe (in the United Kingdom, and in European and Asiatic[24] countries in particular, where households and local authorities are the most heavily in debt).
In this context, LEAP/E2020 believes that the phase of world geopolitical dislocation will take place in to five successive steps, laid out in this GEAB issue. That is to say:
0. Beginning of the phase of global geopolitical dislocation
1. Step 1: Monetary disputes and financial shocks
2. Step 2: Trade disputes
3. Step 3: State crises
4. Step 4: Socio-political crises
5. Step 5: Strategic crises
In addition, in this GEAB issue, our team discloses the eight countries which seem to it to be in more danger than Greece on the matter of sovereign debt; whilst also giving its analysis of how the post-crisis financial economy will work out compared to the real one. Then LEAP/E2020 gives its monthly suggestions (currencies, shares,….) including a number of criteria to more reliably interpret data in the particular context of this world geopolitical dislocation phase.
— — -—
Notes:
[1] Joseph Stiglitz and Simon Johnson commentary now is nothing other than a statement that they consider that the crisis was a missed opportunity to reform the world financial system and will rapidly lead to further pain and suffering. Source: USAToday, 03/12/2010
[2] Americans and Europeans have diametrically opposite positions thereon and Barack Obama's accession to the US Presidency only made the European's public position more complicated (because they declared themselves to be "Obamaphiles" straight away) without changing the deal fundamentally.
[3] Even in the field of research, the United States is dropping back rapidly. In the world classification of the best research institutes there are only six American in the first fifteen, as against four European and two Chinese, and not one in the first three. Source: Scimago Institutions Rankings 2009, 03/2009
[4] As shown by Israel's attitude which now acts in a manner almost damaging to Washington. It is an important sign because no one is better positioned than closest allies to perceive the extent of an empire's weakness. Enemies or even new or distant allies don't have the same vision not having the same close contact with the powers-that-be, nor enough historical perspective to be able to decipher such a change. Thomas Friedman's New York Times editorial of the 03/14/2010 clearly illustrates US elite's disarray in the face of the increasingly off-hand attitude of their Israeli ally and, equally, the failure of the US administration to react firmly.
[5] The tension has risen considerably on this issue which has become a symbolic power play as much as an economic one for both Beijing and Washington. Source: China Daily, 03/14/2010; Washington Post, 03/14/2010
[6] The likely withdrawal of a large number of NATO troops from Afghanistan in 2011 has led Russia and India to develop a joint strategy, notably with Iran, in the event that the Taliban return to power! Source: Times of India, 03/12/2010
[7] Over and above the Dutch government's fall over the issue of Afghanistan, Germany is now coming round to the idea of incorporating Russia in NATO, a good old Russian idea, on the pretext that NATO is no longer relevant in its current format. Source: Spiegel, 03/08/2010
[8] Europeans are all very angry at Washington's de facto removal of the European bid for the large contract to replace the US Air Force's airborne refueling tankers. This decision almost certainly brings to an end the myth (in fashion in Europe) of a transatlantic arms market. Washington will not allow other companies other their own to win such large contracts. Europeans are, then, going to have to seriously consider supplying themselves from their own defence industry. Source: Financial Times, 09/03/2010
[9] Even the Los Angeles Times of 02/28/2010 echoed the concerns of the British historian http://en.wikipedia.org/wiki/Niall_Ferguson who considered that the "US Empire" could collapse from one day to the next, just like the USSR.
[10] And the fact that all the Arab world is now seriously affected by the world economic crisis will add to chronic regional instability. Source: Awid/Pnud, 02/19/2010.
[11] Venezuela arms itself with Chinese fighter planes, which would have been a science fiction scenario only five years ago. Source: YahooNews, 03/14/2010.
[12] As anticipated in previous GEAB issues, with the dissipating of the "Greek crisis", there would be a return to the reality of the major trends of the crisis and, indeed, over the last few days we are starting to see, once again, analyses which put a perspective on the United States' loss of its AAA debt rating, and the end of the Dollar's reserve currency status. Source: BusinessInsider/Standard & Poor's, 03/12/2010.
[13] The chart below shows the ever-increasing volatility characterising financial markets and which is, according to LEAP/E2020, an indication of major systemic risk. Looking at the New York Stock Exchange's profitability over more than 180 years, one can see that the years of the last decade (2000-2008 and, most probably, 2009) have produced the very best and very worst results. Order size on financial markets has fallen by 50% in five years, due to the effect of computer and "high frequency" trading, increasing their potential for volatility. Source: Financial Times, 02/21/2010.
[14] The recent warning by the Treasury Secretary, Timothy Geithner, over financial regulation of transatlantic derivative risks is only the latest indication of this development. Source: Financial Times, 03/10/2010.
[15] Sweden is the latest example, which believed it had come through the crisis only to find itself plunged into recession again when very poor numbers for the fourth quarter of 2009 were released. Source: SeekingAlpha, 03/02/2010.
[16] US unemployment is now around 20%, rising to 40-50% for the disadvantaged classes. To avoid having to face up to this reality the US authorities substantially distort the numbers of people in work and those seeking work. Steven Hansen's article published on SeekingAlpha on 02/21/2010 called "Which economic world are we in"? offers an interesting insight on this topic.
[17] An analysis, extreme certainly but very well documented, and quite relevant to this situation written by David DeGraw on Alternet on 02/15/2010.
[18] Source (including comments): MarketWatch, 02/25/2010
[19] It is the belief that a "Communist" is hiding inside every trade unionist and every demonstrator for social causes.
[20] Even in the United States where students demonstrated against increased enrolment fees, and where the population worries about the closing of half the public schools in Kansas City, whilst in New York, 62 fire crews will be made redundant. Sources: New York Times, 03/04/2010; USAToday, 03/12/2010; Fire Engineering, 03/11/2010.
[21] From Joe Stack to the Tea Parties, the US middle class has become more radical since the middle of 2009.
[22] Nominal spending is the total amount of spending in an economy not corrected for inflation. It is, in fact, the value of total demand. Note on this chart how the crisis marks a collapse in demand.
[23] The term "regional" is used in a geopolitical sense here of regional groups (EU, ASEAN…).
[24] In South Korea, household debt continues to worsen because of the crisis, whilst businesses accumulate cash reserves instead of investing, since they do not believe a recovery is at hand. Source: Korea Herald, 03/03/2010.
Mardi 16 Mars 2010
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Normxxx
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