TM, ®, Copyright © 2005 Piero Scaruffi All rights reserved.
- (November 2005)
The End of Idealism
The West (and most of the world) has lived two centuries of idealism, two
centuries in which people were willing to die for freedom. Before the USA
revolution, most people were forced to die for the king. Wars were wars among
kings, not among nations. And kings fought for territory not for ideals.
The USA revolution marked a departure from that
pattern: wars became wars of nations, and wars mostly fought for an "ideal".
This lasted throughout the French revolution, the various struggles for
independence (Italy, Greece) and unification (Germany). People died for
freedom in WW1 and especially WW2. People died for independence in the various
colonial wars. People died for freedom during the Cold War, either to fight
fascism or to fight communism. For two centuries people were willing to die
for freedom. The logic was that the ideal is worth death. For example,
Hitler killed relatively few people when he invaded: a lot more people were
killed when the USA, UK and USSR refused to accept the invasion. Americans,
British, French, Russians and so forth thought that the ideal was worth the
millions of casualties of WW2. Had they simply accepted Hitler's rule, very
few people would have died.
As I travel around the world, particularly in the Eurozone, in the Arab world
and in China, a new trend emerges that may signal the end of the age of
idealism. First of all, people don't want to die, no matter what. Europeans,
Arabs and Chinese accuse the USA of having caused the death of tens of
thousands of people, and they are not concerned at all about the alternative
(living under Saddam Hussein). These Europeans, Arabs and Chinese would
have probably acted very differently from their grandfathers who fought
against Hitler and Japan. They think that life is more important than freedom.
If freedom costs lives, then freedom is not worth it. This marks a dramatic
shift away from idealism.
People in the Eurozone, Arab world and China are also indifferent to the
prevention of war. It is very difficult to discuss the prevention of war
with them: it is a logic that most of them don't quite understand.
The Anglosaxon world learned something from WW2: that tragedies can be
prevented if one strikes before the enemy gets too dangerous. Hitler could
have been prevented, had the "allies" acted sooner instead of later.
Today, this logic is still current only in Anglosaxon countries and the
countries that have just emerged from dictatorship. It is not a logic
that the Eurozone, the Arab world or China justifies. There is very little
motivation in the Arab world to prevent Iran from acquiring a nuclear bomb
that could cause a catastrophic Middle Eastern conflict, and very little
motivation in China to prevent North Korea from acquiring a nuclear bomb that
could cause a catastrophic East Asian conflict. They would justify action
only if/after the catastrophe happened.
Thus the USA is viewed by many as the aggressor when it tries to disarm
dangerous dictatorships. In all three regions (Eurozone, Arab world and
China) the USA is considered the most dangerous country in the world.
This trend goes hand in hand with a decreasing appeal of democracy.
While most people would still prefer to live their own lives in a democratic
country than in a totalitarian country, fewer and fewer people are willing
to use force in order to create democracy somewhere else. Growing number of
people in the Eurozone, in the Arab world and in China would be much happier
if the USA ignored the tyrants of the world and business went on as usual.
Ironically, these people are very often the same people who 20 years ago
accused the USA of tolerating tyrants and doing business with them.
Today, their "idealism" has been replaced with a "pragmatism" that is worthy
of the most cynical statesmen of the past.
If one engages in the merits of democracy, people who live in democratic
countries can be extremely hypocritical, denying any of the merits of democracy
while refusing to personally relocated to a non-democratic country.
The problem is that only two events could recreate the age of idealism:
1. if dictators seize power in those countries; 2. if a nuclear war is
started by one of those dictators. As long as the USA keeps preventing
both events, consensus for preventing those events will keep decreasing:
it is hard to prove that millions would have died if millions do not die.
In the USA itself there is less and less consensus about "preemptive strikes":
if they do not attack us, why should we attack them? This, of course, translates
into "We will let them attack us", the very mistake made in 1941 (Pearl Harbour
attack) and 2001 (September 11 attacks). But history seems bound to repeat
itself.
There are, instead, three very good reasons for forcing democracy all over the
world. Democratic regimes have a much harder time causing trouble for three
reasons. First of all, presidents and prime ministers are not for life, and
therefore cannot contemplate lifelong campaigns of conquest. Usually, they
barely have time to accomplish some very limited domestic and foreign
programs. They are much busier thinking of the next election than planning an
invasion of the world. Second, public opinion is consistently criticizing
them (especially where the media are more independent). Whatever a prime
minister or a president does, there will be millions of his subjects who
will criticize them (in sharp contrast with dictators, who enjoy personality
cult). In a democracy, there is no domestic or foreign program that is not
attacked by the opposition. This makes it very difficult to do anything
too "extreme". The more extreme one's views, the bigger the uproar of the
opposition. Third, the "regime" changes all the time, as different parties
seize power with different agendas. In fact, the only way for a party to
seize power is to offer an agenda that is different from the agenda of
the ruling party. By definition, both domestic and foreign policies change
between one "regime" and the next one. This, viewed over the long term,
leads to inconsistent policies (very visible, for example, in the case of
USA foreign policies) but at the same time it makes it virtually impossible
for a power to have a "consistently" aggressive policy.
The combined effect of these three attributes of democracy is to
make it impossible for any democratic country to start a war of conquest.
Democratic regimes are lucky if they can launch one or two military campaigns
in a decade, and only after they have proven to their people that those
campaigns are truly necessary. And, as the Iraqi campaign proves, they better
make it very short, or public opinion will soon turn against it.
This is what happens in every democracy: it is very hard for the regime to
create and maintain support for a war. A democratic system is inherently
biased towards peace.
TM, ®, Copyright © 2005 Piero Scaruffi All rights reserved.
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- (November 2005)
The difference between Latin America and the Far East.
At the recent APEC meeting (the meeting of the nations of the Pacific Rim, notably USA, China, Russia, Japan, Taiwan, Thailand, Vietnam, Australia, South Korea, Canada, Indonesia and Chile) the members declared they favor free trade.
All the leaders basically adopted the view of the USA, which is widely seen
as the main reason why the region is doing so well.
There were very few street demonstrations against the meeting (just a few
hundred people).
This contrasts sharply with the previous meeting of regional leaders, the
Summit of the Americas. That was a complete failure. Hugo Chavez insulted
just about anybody who disagreed with him (thus resurrecting the good old
Latin stereotype, best examplified by Mussolini) and accused the USA of being
the cause of all evils in Latin America.
He was joined by the leaders of Argentina and Brazil in opposing free trade.
There were thousands of ferocious street demonstrations against the meeting,
mostly directed at the USA.
There was even an alternative event to the official one, which Chavez was
happy to address and was attended even by soccer star Maradona.
And polls show that the majority of Latin Americans oppose the USA's vision
of a free trade zone stretching from Alaska to Argentina.
Latin Americans have long been passed by Asians in just about every social,
cultural, technological, scientific and business statistic.
Asia used to starve, Latin
America is still starving. Latin Americans seem to blame it mostly on the USA,
but the truth is that the countries that followed the example of the USA
(Japan, Taiwan, South Korea, western Europe and even Chile) are getting richer
and richer and more democratic, while Latin American countries, that never fully endorsed the USA model, remain mostly poor and unstable.
It is also hard to see the logic behind many of Latin America's populist
attitudes. Latin Americans are quick to accuse the USA of exploiting their
resources and of causing environmental damages, but noone seems to protest
when China does the exact same thing. China has proposed building a huge
dam in Brazil (the second largest in the world) that would mostly benefit
China itself (certainly not the Indios who live there). See
this article. If the USA had made such a proposal, there would be
millions of Brazilians, Argentinians and Bolivians protesting in the
streets, and Chavez would double his anti-USA rhetoric.
It sounds like Latin Americans are willing to compromise their economies
for the sake of being anti-USA, not rational.
The net result of these two meetings is simple: the Far East will grow even
faster, while Latin America will grow even slower.
See Latin America's lost cause.
- (November 2005)
The new western order
At the beginning of the new millennium, the USA, still recovering from a
controversial elections won by a candidate (George W Bush)
who did not win the most votes, was entering a recession, the worst of the last few decades.
Britain was enjoying an economic boom virtually unprecedented since the end of
World War II under the guidance of a young prime minister, Tony Blair.
The other western country in a similar situation was Australia, under the
guidance of John Howard.
On the other hand, Japan (ruled by newly appointed Junichiro Koizumi),
Germany (ruled by socialist chancellor Gerhard Schroeder)
and France (ruled by veteran politician Jacques Chirac) were stuck in a
stagnation that didn't quite discriminate between good and bad world economy:
their economies had been lousy even during the boom of the 1990s.
Then came september 11 and all hell broke loose. Eventually, the USA, Britain
and Australia embarked in a war against terrorism that mutated into a war for
democracy in the Middle East. Japan's new leader decided to shift gear both
in foreign and domestic policy: he joined the USA in Iraq and he emulated the
Anglosaxon economies at home, as much as Japan's lobbies allowed him to.
On the other hand, France and Germany resisted both the Anglosaxons' foreign
policy and the Anglosaxon economic model.
Within four years of the fateful september 11 terrorist attacks, a new western
order is emerging, and, like it or not, it is clearly an Anglosaxon triumph.
Howard, Blair, Koizumi and Bush have been reelected.
Schroeder has been defeated and few doubt that Chirac would also be defeated
if he went to the polls. European integration driven by the "German-French
engine" has been defeated in two referendums.
Voters are rewarding the Anglosaxon model. They may reluctanctly do so
(many still oppose the Iraqi mess) but they did.
The facts speak for themselves: Anglosaxon economies are doing quite well,
while the regimes that moved away from the Anglosaxon model (Chirac's France,
Schroeder's Germany and pre-Koizumi Japan) failed miserably.
In a sense, it is not the people who have spoken: it is history that has spoken.
TM, ®, Copyright © 2005 Piero Scaruffi All rights reserved.
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- (September 2005)
The impossible economy
The world economy is defying all economic theories. As the entire world is
adopting the USA model, we have entered a new age in which, basically, there
is only one huge world economy. There are no real precedents for this situation.
Here are some of the oddities of the new world:
- First of all, the world economy is enjoying one of its ages of greater and faster growth, about 4% a year. Except for the eurozone and a few third-world countries, growth is evenly spread in all continents, from Sub-Saharan Africa to Latin America to the USA to the Far East to the Middle East. Economic growth is largely due to trade, that is, again, living its golden age: never in history has so much been traded by so many countries.
- The USA (which accounts for about one third of the world's GDP) is running a trade deficit of about 6% of GDP. The rest of the world is running a trade surplus of about 2% of its GDP. De facto, the world economy is now a two-region economy: the USA and the rest of the world. The USA imports goods from the rest of the world, and the rest of the world invests the profits in the USA.
(The USA's current-account deficit accounts for about 75% of the combined
current-account surpluses of all the world surplus countries including Japan,
Germany, China, OPEC countries, etc).
- When Britain was the world's superpower (before World War I), its was also the world's biggest creditor. There is no precedent in history for the world's superpower being the biggest creditor in the world (and pretty much the only one, if one does not count small economies such as New Zealand and Spain).
- The goods that the USA imports (raw materials and finished goods) are different in nature from most of the goods that the USA produces (services). The latter are difficult to export ("non-tradeables"). Thus, no matter what currencies do, it will be difficult for the USA to balance its trade deficit.
- In the meantime, foreign countries are adapting to the situation by becoming better and better exporters, i.e. by becoming more and more reliant on exports. From Germany to tiny African countries, almost every country in the world is focusing on how to increase exports to the USA. This also will make it more difficult to balance world trade.
- This situation requires two players willing to play complementary roles: the USA must be willing to keep importing goods, and the rest of the world must be
willing to keep investing the profits in the USA. If one of the two blinks, the
world economy will collapse.
- One way to see this situation is to say that the USA saves less than it invests, while the rest of the world saves more than it invests. Each of the two
sides of the equation contributes to the overall balance. The USA spends too much because of a boom in new forms of financing and old forms of tax deductions that encourage people to borrow and spend (USA households save about 1% of their disposable income, compared with 10% in western Europe).
The rest of the world
invests too little for a number of reasons: the Far-Eastern countries are still
traumatized by the latest financial crisis, the eurozone and Japanese economies are stagnating, the oil exporting countries are tyrannies, etc. Whatever the reason, they are all investing too little in
their own economies (even, ironically, poor countries who desperately need investment). This leaves a huge amount of money that can be invested in the USA.
- Capital flows primarily from poor countries to rich countries (namely, the USA). These are also the countries that provide, directly or indirectly, most of the cheap labor for the rich countries.
- There has also been a shift in the identity of savers and investors. Traditionally, households were saving more than investing and companies were investing more than saving. But the trend is reversing, as households tend to become net debtors and companies tend to become net savers. It appears that companies have learned the lesson of the 1990s, whereas households are living in denial.
(This is true also outside the USA: the debt of Japanese households has grown to 136% of their income, higher than in the USA).
- The rest of the world invests its profits in the USA because the USA economy is the most competitive in the world. Just like companies compete to sell their products, countries de facto compete to attract capital. The USA has consistently remained the best place to invest money, even in the face of a declining dollar. It still boasts one of the highest productivity growth rates in the world. For example, despite the euro's strength, only a small percentage of the world's surplus ends up being invested in Europe (which in fact runs a modest saving surplus of its own): the world does not perceive the stagnating eurozone has a good investment.
- The flow of capital into the USA has allowed interest rates to remain
very low. This has allow USA citizens to borrow money and purchase houses.
This has caused a housing bubble (USA citizens now hold about 14 trillion
dollars in real estate). The housing bubble, in turn, has created
fictitious wealth. The main asset of USA households is now their house, whose
value has increased dramatically over the last few years. Thus enriched, USA households
have been able to, and have been willing to, borrow even more money to spend
on goods. Those are the goods that create the trade deficit and finance the
economy of the rest of the world. The rest of the world makes money and invests
that money back in the USA. That keeps the cycle going on.
The world has a vested interest in keeping this cycle running smoothly.
Basically the rest of the world is financing consumer spending in the USA
(Martin Wolf sarcastically called it "the biggest aid programme in history").
The side effect in the USA is a growing dependency on services related to housing, from construction to lending, which accounted for 40% of all new jobs during the Bush presidency.
- Long-term interest rates are so low also because U.S. corporations are failing one after the other (first the airlines, then the world's largest automotive supplier, Delphi, and soon General Motors and Ford). They cannot pass on to consumers their rising costs, because of cheap foreign competition. Thus they can only go bankrupt. This is de facto a recession, even if numbers show the GDP growing: it is the "old" economy that is mired in a recession, while a new economy is taking over (the economy of companies such as Google). Right now long-term interest rates reflect the status of the old economy.
- Given the trade deficit, the USA dollar should keep depreciating against world currencies. This would normally cause inflation (a 10% fall in the dollar should cause a 3% increase in inflation), but the flow of cheap goods has so far offset any inflationary pressure. Should inflation increase, the USA would have to increase interest rates, which would cause a collapse of the housing market, which would cripple the spending power of USA citizens, which would cause damage to the economy of the rest of the world.
The world has a vested interest in keeping this cycle alive too. Foreign countries have also been buying USA dollars to keep it from falling: this has increased their reserves of USA dollars, and also their exposure to the USA dollar. There is widespread belief that today's level of globalization makes high inflation virtually impossible: the world economy is a self-adjusting system.
- Foreigners have to purchase more than $2 billion worth of U.S. denominated assets each day to keep the dollar from falling further. The amazing thing is that they are doing it.
- The world's foreign exchange holdings (IME, 2004): 66% are in dollars, 25% in euros, 4% in yen, 3% in pound
li>The rest of the world now owns huge amounts of dollars. As the dollar slowly depreciate, these countries are stuck with their dollars: selling dollars would only accelerate the dollar's depreciation, and thus their losses. A decline in the USA dollar hurts the rest of the world. (It also hurts them because it reduces their competitiveness and thus their exports). Historically, a sharp decline in the dollar has always coincided with recessions around the world. (But, historically, the USA dollar has been slowly declining for decades against the major currencies, such as the mark and the yen).
- The world's main currency is the USA dollar (65% of the world's foreign-exchange reserves are in dollars). Thus the USA has the advantage that all its foreign liabilities are denominated in its own currency, which the USA can devalue at will: when the USA dollar depreciate, the USA gets richer because its debt shrinks. A decline in the USA dollar benefits the USA. (It also benefits the USA because it helps USA companies export more goods).
- The tendency to keep the dollar from falling has de-facto created a greater
dollar economy, that includes not only the USA but all the countries that peg
their currency to the USA dollar. This greater dollar economy (that extends from China to Malaysia) accounts for about 50% of the world's GDP.
- The greater dollar economy is obtained by printing money. Foreign countries buy USA dollars to keep their currency from rising, and pay their USA dollars with local money that they print for that purpose. This is creating huge liquidity, which accounts for all the asset-price bubbles in the world, particularly in the USA.
- These series of entangled cycles are fueling a world economic boom. This boom translates into higher demand for raw materials, from oil to metals, which is causing higher prices for everything from oil to copper. High prices due to growing demand are supposed to be good news (as opposed to high prices due to lower supply, which are really bad news), but eventually this increase in prices would show up in the price of finished goods if labor costs were not so low in most of the world. Basically, a virtually unlimited amount of really cheap labor is offsetting the increase in material costs: for example, as more oil is used by China, more cheap goods are produced by China to offset the effects of higher oil prices. Yet another self-sustaining cycle.
- The cycle is also sustained at the other end. While previous spikes in oil prices simply resulted in higher costs, this time the oil-producing countries are investing most of their profits (about 70% of them, as opposed to 20% in the 1970s). Thus skyrocketing oil prices are also generating global investments, which in turn offset the negative effects of higher energy and transportation costs.
- This whole paradigm is based on the assumption that the rest of the world relies on the USA market. The paradigm would change dramatically if countries around the world began consuming as much as USA citizens do. Then those countries could sell their goods to their own citizens, and invest their money within their own countries, thus starting a cycle of their own, and forget about the USA.
Prospects differ among different regions of the world. The eurozone is burdened by ageing populations, high labor costs and not-so-free economies. The Far East is simply recoiling from the crisis of ten years ago. Many countries do not have the efficiency of the USA (and Scandinavia) and thus scare away investors. Oil exporters are run by regimes that seem more interested in keeping their money in places where they cannot be taken away from them. Etc.
- Lower interest rates fueled consumption in the USA, but not in the rest of the world. Thus low rates are not the only factor. Confidence in the economy is more important.
- If sentiment in other countries reverses, and foreigners start consuming and borrowing as much as USA citizens, there will be competition for capital (instead of a de-facto monopoly of the USA over the world's funds). Countries will compete for capital the same way that companies compete for customers, and the winners will be able to use the capital to improve their competitiveness and thus attract even more capital and thus become even more competitive (just like successful companies that can use their cash to invest in new technologies that make them ever more competitive). The future of politics might be a brutal form of competition among countries for capital.
- Since now the whole world has embraced the capitalist model, no country is interested in causing a world recession. Thus each country is trying to maintain the status quo. It is very unlikely that any country other than the USA will try to dramatically alter the overall equation.
The notable exception is the USA, where many analysts are opposed to let the trade deficit keep growing indefinitely and many politicians favor protectionist measures to stifle imports. But does the USA really have any interest in reversing the situation, i.e. in having foreign countries invest their savings into their own economies (which would make them more competitive) instead of investing those savings into the USA economy (which makes it more competitive)? Why should the USA reverse a situation in which the rest of the world basically funds a program to make the USA economy ever more competitive?
- There are no precedents for judging the effect of the ageing population of western Europe and Japan. The highest share of pensioners is in Italy, followed by Sweden, Japan and other western European countries. China will soon join the ranks of the countries with a rapidly ageing population.
- The ageing societies of Western Europe and Japan face an escalating national deficit because of their social safety nets. Italy's debt ratio is more than 120%, France's is 73%, Germany's is 70%, and they are all growing.
- The end of the Cold War has created a world economy but no world government.
The biggest integrated economy of all times is run by a number of independent entities that do not coordinate their moves.
TM, ®, Copyright © 2005 Piero Scaruffi All rights reserved.
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