TM, ®, Copyright © 2005 Piero Scaruffi All rights reserved.
- (november 2008)
The rest of the world is paying a higher price.
When the USA mortgage crisis began, it seemed to be an internal USA problem,
and most of the world actually looked amused that finally the USA had to
pay for the party.
The initial reaction from Europe was simply a critique of the USA capitalistic
system. The French president in person unleashed a stinging haringue against
unbridled capitalism. For a couple of days, European newspapers indulged in
describing how the USA empire was collapsing. Then the usual truth emerged:
when the USA catches a cold, Europe catches bronchitis. Imagine what happens
when the USA catches pneumonia. Not only did more banks fail in Europe than
in the USA, not only did the euro collapse to the dollar, not only did Europe
enter a deeper recession, but an entire country (Iceland) went bankrupt.
After all, the Property price gap is higher in several Europea countries than in the USA.
On october 10 the Dow Jones index ended up the worst month in 80 years
by actually losing less than any other major stock market: -39% for the year.
Other stock markets lost similar percentages or higher ones, but none lost
less.
For Asia this is worse than 1997.
Stock markets are being annihilated from Mumbai to Dubai.
Japan had the biggest one-day drop since the 1987 market crash (on October 8).
Real estate is collapsing faster in their countries than in the USA.
The Chinese economy is slowing down and may enter its first recession,
an event that would be scary on a global scale because the young nationalistic
Chinese people have become convinced that only evil foreign interference can
stop them from ruling the world.
(See The new Chinese nationalism).
The Australian dollar fell to a five-year low to the US dollar.
At the end of this crisis the world may be back to 1946: the USA richer than
the rest of the world, everybody else starving, Russia ruling over Eastern
Europe and Central Asia, communism resurgent in developing countries,
and Japan destroyed not by a nuclear bomb but by the yen.
When political analysts discuss the "bubbles" of the last two decades, they
forget to mention the biggest one: the global economy. The truth might be
sobering: that it was yet another bubble artificially created by the USA,
and that it may burst and take us back to the old world order.
TM, ®, Copyright © 2008 Piero Scaruffi All rights reserved.
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- (october 2008)
Is this the end of the USA empire?
European newspapers abound with apocalyptic descriptions of how this financial
crisis will terminate the USA domination of the world. Those analyses have
become less enthusiastic after Europe realized that it's economy is in bigger
trouble than the USA economy. The first banks to "fail" were European, and
a whole country (Iceland) almost collapsed. Asian commentators have been
more careful, because they tend to be more aware of how much their wealth
depends on the USA economy. In the USA there have been different tones,
ranging from Fukuyama predicting the end of the USA (he is the same who
predicted the end of history, just before Al Qaeda, Afghanistan, Iraq, Georgia
and now this financial crisis) to economists simply calling for fixes to the
system.
One has to put things in perspective. How serious is this crisis?
Over the last century and a half, the USA went through: one of the bloodiest
civil wars in history (1861), a depression (1893), a flue epidemics that killed
500,000 people (1918), two world wars, a great depression that wiped out 90% of the value of the stock market (1929),
two lost wars (Korea and Vietnam),
the assassination of a president (Kennedy) and the resignation of another one
(Nixon), an oil crisis with hyper-inflation (1973),
an expensive Cold War (by far the largest arms race in history),
a Gulf War (1991).
the dot-com bubble, the September 11 terrorist attacks, two Islamic wars
(Afghanistan and Iraq).
To the people living today, the pace and gravity of the crises seems to
have increased dramatically over the last decade, but it has not.
Neither war is as bad as the Vietnam war that killed ten times more USA soldiers and lasted more than a decade (not to mention the world wars).
Neither recession of the last decade has been as bad as the one of the 1970s
(not to mention the Great Depression).
What has changed, admittedly, is that the rest of the world has gotten
smarter. In the old days the European powers were busy slaughtering each
other, Russia and then China adopted an awful economic system, the Ottoman
Empire was collapsing, and the rest of the world was one huge colony of
the European powers. Today most of the world has learned too well from the
success of the USA model, and they all copied it. The USA is no longer
the only country to use that model. It has lost the key advantage that
propelled it to the forefront.
Therefore the financial crisis per se, no matter how serious, would be unlikely
to seriously undermine the power of the USA as much as the adoption of the
USA model by old rivals of the USA has been undermining it and will keep
undermining it.
In fact, the financial crisis per se is also hurting all the countries that have
adopted the USA model, which includes all of the USA's rivals.
TM, ®, Copyright © 2008 Piero Scaruffi All rights reserved.
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- (october 2008)
The bankruptcy of modern economics.
Millions of USA citizens (and, soon, billions of world citizens) are
desperately looking for guidance in this financial crisis, that, we are told,
will soon turn into an economic crisis of apocalyptic proportions.
The trouble is that the specialists themselves don't know what will happen
next, because, as they often reminded us, we now live in a different world,
never experienced before.
Economists had been boasting for decades that great depressions of the kind
that happened in the 1930s were no longer possible, mainly because so many
financial tools had been created precisely to prevent them.
We were given the illusion of economic stability. The world was still subject
to booms and recessions, also called the "business cycle", but only on a mild
scale.
It was indeed a whole new system. And it did make the great depression highly
unlikely to repeat itself. Unfortunately every new system has a catch: we
have never seen it fail, and we don't know what the consequences would be of
a failure. The financial world assumed that the new system was perfect because
it could not fail the way the old one used to fail. Alas, that logic was
flawed. If a competent plumber fixes a leak in a pipe, it doesn't mean that
no pipes will ever leak again, but the good news is that the plumber knows
how to fix that kind of pipes. If, instead, the plumber replaces all the
familiar pipes with a new improved kind that solve a known problem of the old
pipes, the old problem will never occur again, but a new, unknown problem
may occur, which will actually be harder to solve because the plumber has
no experience fixing the new kind of pipes.
That's what we have now. The new pipes have a problem that no plumber is
familiar with. The specialists themselves have no experience fixing this
kind of problem.
Worse: this is a kind of pipes that was not invented on purpose, but just
sort of emerged out of economic chaos. Nobody designed it. Nobody predicted
it. It just happened.
The 1990s were the age of the Internet boom. The boost in productivity and
the sheer amount of change introduced by the Internet created an economic
boom that lasted throughout the Clinton years.
Because of bad luck or bad judgement (or both), that boom ended precisely
when George W Bush got elected president. Bush and the Republican Party
were desperate to recreate the good economy of the past decade.
George W Bush and the Federal Reserve under Alan Greenspan then engineered a second boom to replace
the one that was rapidly fading out: they engineered a housing boom.
If the Internet boom had required 20 years of technological developments,
the housing boom only required that Greenspan made money very cheap to
borrow and that government encouraged lenders to lend it. This created a giant
chain that transferred billions of dollars from the government to the
home buyer without really making sure that the home buyer had the means to
pay back. As long as the number of home buyers kept increasing, the values
of their homes kept increasing too, and therefore it did not matter much
whether they had assets and income to cover their debts.
This praxis created a giant network of mortgages that in turn led to
an explosion of financial products. There was so much money involved that
the temptation to speculate was irresistible for the financial institutions.
The amazing premise of this whole pyramid was that house values would
continue to go up forever.
When that premise collapsed, the whole pyramid started tumbling down.
The trouble is that, during this whole time, the financial experts were still
convinced that the new economy was inherently stable and a great depression
was not possible anymore. Neither Greenspan nor his successor Ben Bernanke
nor Bush's various secretaries of the Treasury warned of the danger. Not even
the experts in the various financial institutions saw it coming, so much so
that a few of those institutions eventually collapsed.
Therefore the current crisis is not what economists used to study.
There is no textbook on how to solve it.
There is no textbook that explains the consequences.
This is not the standard recession of a business cycle. In fact, the "real"
economy has been going on relatively unhurt while the bubble was bursting.
After all, for every family that cannot afford the home they bought
there is a family who has been waiting for years for prices to fall
so they could afford to buy the very same home. The new buyers are even
more likely to be financially stable. The business cycle could go on,
except that the new economy has come to contain a "hidden" economy
that is entirely based on speculating on those mortgages that are now
failing. When this economy goes into a recession, it doesn't directly
affect the real economy, but it affects the banks that the real economy
needs for its everyday operations.
If the problem were only a problem of declining demand of goods (the classic
cause of a recession),
the government could stimulate demand (tax cuts, higher spending, lower
interest rates). But this crisis has nothing to do with demand. The lower
demand of goods will be a consequence, not a cause, of the crisis.
Worse: the modern economy has been created on the principle that financial
markets should operate freely. Therefore nobody has invested a minute of
thinking into the problem of stabilizing financial markets.
Since this chain was started by the government lending money on the cheap,
it is not surprising that at the end the problem rolled all the way back
to the government, which is now asked to bail out the secondary "victims"
of the housing boom (the banks) if not the primary victims (the families
who are defaulting on their mortgage).
The scariest aspect of this crisis is not the immediate consequences on
the real economy (such as unemployment) but what it means for the great
invention of the 1990s: stability. Does it mean we entered a new period
of instability, until someone figures out how to replace this kind of
pipes with a new kind?
There is a bright side, though. The worst time of this bubble was the summer
of 2007 when the Dow Jones reached 14,000 and everybody forgot that we were
living in a bubble. That's when you get hurt: not when you know that you
are falling, but when you don't know that you are about to fall.
The worst will be over when everybody will be fully aware that we are falling,
and we are rapidly getting there.
Second good news: there are no bubbles left. There was an Internet bubble.
It burst. There was a dollar bubble. It burst. There was a housing bubble.
It burst. Now we got rid of all the bubbles. It can't get any worse, it
can only get better.
(There was another bubble in the rest of the world: see below).
However, pessimists will point out that
house prices are much higher than four years ago, and, in any case,
way above affordability level (which decreases in a recession).
Third good news (if you believe in free markets): there is more than one
trillion dollars of cash out there (in the USA alone), real cash. It may not flow right now, but
someone somewhere somehow will find a way to make it flow (and make lots
of money out of it). It is simply unthinkable that none of the 300 million of
people who live in the USA will come up with a good idea on how to make
that capital flow from the people that have it to the people who need it.
Fourth good news for the USA: the commodity bubble will burst. The commodity bubble is
not a USA bubble but is nonetheless one hell of a bubble that has been hurting
the USA consumer and producer.
It is an international bubble that mainly benefited the exporters of natural
resources (such as the oil producing countries).
Oil prices and the prices of all other commodities are likely to plunge as the
Western economies (that account for almost 70% of demand) enter a severe
recession. The beneficiaries are precisely the buyers of those commodities,
i.e. the countries that manufacture goods, starting with the USA.
(Oil and other commodities are still 100% above the prices of just two years ago,
but the trend is clearly towards a rapid reduction).
Fifth good news: unless the government makes some really stupid decisions,
interest rates are likely to go down.
A lot of home owners will be able
to refinance and save money. This alone will rescue many who were about
to default on their mortgage and will put more cash in the hands of the others.
(Of course, this is not an easy step, because the rate set by the Federal
Reserve has little to do with the rate the banks offer to borrowers, but
hopefully the retail rates will soon follow the rate of all rates).
Sixth good news for the USA: for what it's worth, the rest of the world is
suffering more than the USA. Europe was awash in dire predictions that
this crisis means the end of the "USA empire": they lasted only a few weeks,
until Europeans realize that they were much more vulnerable by a recession
because of their colossal "socialist" system. China and other emerging economies
at first exulted when they heard rumours of a USA crisis, as if they were about
to overtake the USA economy: their enthusiasm will turn into desperation when
they realize what it means for them that their largest customer is going out
of business. Oil-producing countries that were comfortably living off the
revenues of their oil exports will wake up to a world that does not know what
to do with their oil. Brazil, that was already beginning to dream of becoming
the new superpower of the Americas, will soon realize that, without its
lucrative exports of natural resources, it is just an underdeveloped country.
(Brazil's president initially commented "what crisis?" as if Brazil was
immune, only to wake up a few days later to a massive collapse of the
Brazilian stock market).
(Note of october 11: the Dow Jones ended up the worst month in 80 years
by actually losing less than any other major stock market: -39% for the year.
Other stock markets lost similar percentages or higher ones, but none lost
less).
The USA is actually likely to get out
of this USA-caused crisis stronger, because the rest of the world
will be affected more than it wants to admit now, and because at the end
of the process the rest of the world will be humbled. The world experienced
almost two decades of mostly relentless economic growth, and many countries
came to believe that they could take the credit, and that their economies were
decoupled from the economy of the USA.
They are in for a big and painful surprise.
However, whether they will admit it or not, the purveyors of modern capitalism
starting with the USA will very soon find themselves in a drastically
different world, one that is a lot more "socialist" than it used to be.
Government after government will step in to nationalize more and more of
the once free economy. The USA itself started the trend by de-facto
nationalizing the mortgage industry. It may have to nationalize banking in
general (after already agreeing to insure all bank accounts). And it may have
to raise taxes in order to support such a gigantic program of nationalization;
and use the taxes to nationalize even more industries, and to offer even more
social safety nets.
Next, the USA may have to help out large manufacturers when they threaten to
lay off thousands of people. By the end of this process, the USA may look
a lot more like Russia and China than like it used to be until 2008.
The USA was the biggest spender and debtor. It will have to pay the biggest
price. The biggest price of all is when you have to give up your own principles
and, ultimately, your own identity.
TM, ®, Copyright © 2008 Piero Scaruffi All rights reserved.
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- (july 2008)
How to cause climate change: fight it.
Contrary to what your liberal media tells you, there is no scientist on this
planet who thinks that "climage change" science is good science. It is mostly
really bad science that stems from public hysteria.
However, even the millions who are not convinced by the science are often
tempted to go along with the proposed remedies, because, one thinks, it can't
hurt if we stop messing with the Earth.
A good example of why it is a bad idea to act based on bad science is the
recent decision by the European Union to backtrack on its plan to adopt
biofuels (See these articles).
When the European Union was swept by the hysteria of climate change (a problem
that may or may not exist), they enacted laws to shift towards biofuels (without spending an equivalent amount of time in analyzing the scientific consequences
of that decision).
Within a few years the biofuel industry has created a real problem with rising
food prices that have killed, are killing and will kill thousands of poor
around the world.
To solve a problem that may not exist they caused a real problem
that may last a long time.
Ironically, the shift towards biofuels has also increased the chances
that "climate change" becomes a real problem, because the shift towards
biofuels has increased deforestation around the world. If not climate
change, it has certainly caused environmental change on a scale that
would not have happened otherwise.
Bottom line: bad science almost always causes more problems than it
promises to solve.
(See also Climate change and
The US reneges Kyoto: idiot or savant?).
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (april 2008)
The price of ethanol.
Ethanol is a renewable fuel primarily made from crops such as corn.
It has been presented by environmentalists and associations such as the
National Ethanol Vehicle Coalition
and the American Coalition for Ethanol
as the panacea to the rising costs of gasoline (mainly on nationalistic
grounds: ethanol is produced in the USA, whereas oil is mostly imported).
Ethanol is a bad idea for many reasons
(See this article).
Ethanol is in fact one of the reasons that gasoline prices are increasing so
dramatically in the USA.
But there is a much stronger reason to oppose ethanol: it is starving the
world.
The world has lived the age of cheap food for several decades following the
agricultural revolution of the 1960s. Famines have become rare, and most
people in the world can afford to buy enough food with a small percentage
of their income. The Econmist estimated that food prices fell considerably
between 1974 and 1005, one of the few items to become considerably cheaper
around the world. But this is changing rapidly as ethanol sucks more and more
of the available crops. The result has been rising food prices everywhere
in the world. Rich society like the USA and Europe hardly notice the difference
in food prices, but poor societies in Africa and Latin America are now spending
more than 50% of their budget just for feeding themselves.
The price of corn is likely to continue rising, making food producers richer,
but also making food consumers poorer. See for example
this article
and this article.
Now the Economist estimates that food prices increased 75% between 2005 and
2007.
The mathematics is scary: an SUV's fuel tank filled with ethanol is using as
much corn as it would take to feed a person in Africa for a year.
Biofuels kill.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (april 2008)
NATO and Russia.
Does NATO still make sense in a world without the Soviet Union? Is NATO still
actual in a world in which Europe is no longer the theater of world wars?
Is NATO still relevant in a world in which the Atlantic Ocean matters less than
the Pacific Ocean?
At the 2008 NATO meeting, George W Bush is calling for NATO to expand further
eastwards into the former Soviet zone by incorporating Ukraine and Georgia,
that both used to be members of the Soviet Union (after having already
incorporated most of the Eastern European countries that used to be satellites
of the Soviet Union).
Russia has vehemently opposed the idea, claiming that this constitutes a threat
to its borders. Its argument (and the argument of all those who oppose NATO's
expansion) is that the Cold War with the Soviet Union is over, and the USA
should not be so obsessed anymore with an organization that was created to
counter the Soviet Union.
This argument assumes that the Russian empire collapsed in 1991 and does not
constitute a threat anymore. However, the facts are not so clear.
First of all, Russia still has the second largest arsenal of nuclear weapons
in the world. Secondly, Russia still is the single largest country in the
world. Thirdly, its economy is booming and an argument could be made that
Russia has never been so prosperous in its entire history. Finally, Russia
owns oil and gas reserves that it can use to blackmail all of its neighbors
and even Western Europe. One can hardly see from this picture how Russia's
empire can be considered finished. Sure: the constant threat of the Soviet
Union is gone. But that can be better understood as a change in strategy
(in fact, it was a change in ideology). The USA too could change ideology,
shifting, for example, from free trade to protectionism: that wouldn't mean
that it is less of a superpower.
Therefore the Russian empire is still very much alive and kicking.
History teaches that whenever a power shrinks, another one takes over, and
not necessarily a better one.
When there is no dominating power, warfare is endemic.
NATO might be there just to avoid both scenarios.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (march 2008)
The world is a dangerous place.
We probably live in the age of greatest peace and prosperity in the history
of the world. The world powers are not at war against each other for the
first time ever. There hasn't been a conflict in Western Europe in 60 years
and it appears unlikely there will be one any time soon: compare with the
previous 1,500 years of continuous warfare, culminating with two world wars.
There are no wars between USA, Russia, mainland China, Japan and India.
There are no wars in the Far East.
There are no major wars in Latin America, other than a relatively small civil
war in Colombia.
Most wars in Africa are dying down. In fact, there isn't any major conflict
left south of Somalia.
The vast majority of wars are taking place in the Islamic world, from
Afghanistan to Chad, and the vast majority of war casualties are to be found
in a relatively small region of the Middle East, from Iraq to Sudan.
Outside of this region, the world is unusually at peace.
Compare with just 15/20 years ago when millions of people were dying in wars
across Africa (Sudan, Rwanda, Angola, Burundi, Ethiopia), the Middle East
(Palestina, Iraq, Iran, Armenia, Azerbaijan, Georgia),
Central Asia (Chechnya, Tajikstan, Afghanistan) and Europe (former Yugoslavia).
Nonetheless the prospect for the future is not clear at all. There are so many
crises brewing over. Clockwise from Europe:
- Kosovo has declared independence from Serbia, a fact that has destabilized (yet again) the Balkans and created two gaps: one between the West (that recognized Kosovo's independence) and Russia (that did not) and one (probably more serious) between the West and the Serbs, besides opening the floodgates for any other minority that wants to declare independence.
- Dmitri Medvedev has been "elected" president of Russia, but Putin remains as prime minister
- Turkey staged a mini-invasion of Iraq to fight the Kurdish separatists.
- Lebanon has a very weak pro-Western government that is under seige by the pro-Syrian factions, and its pro-Western politicians are routinely blown up by Syrian agents
- Israel staged a mini-invasion of Gaza to fight rocket-throwing Palestinians
- Iraq is still a mess
- The United Nations has agreed on new sanctions against Iran, guilty of continuing in what increasingly appears to be a program to build a nuclear weapon. Now that the world's powers have joined together in isolating Iran, it is unpredictable how Iran will react.
- The Taliban are growing stronger in Afghanistan
- Pakistan is undergoing democratic regime change at the same time that suicide bombings have become as frequent as in Iraq
- Mainland China's is increasing every year its investment in star wars that cripple the USA's ability to win a future war in that region
- Nuclear talks with North Korea are progressing very slowly. The regime of North Korea is clearly not convinced that surrendering its nuclear weapons would make it safer.
- A major diplomatic crisis has erupted between Colombia and its neighbors Ecuador and Venezuela (that Colombia accuses of funding and sheltering FARC). This is the first time that there is convincing evidence that Hugo Chavez of Colombia has been using his oil revenues to destabilize the region militarily (not only verbally).
- Fidel Castro has retired from Cuba's president and been replaced by his brother Raul
- The crisis of Darfur has never been resolved and in the meantime another crisis might be ready to explode in southern Sudan (a Christian and animist region subject to the rule of the Muslims of the north)
- Ethiopia is still occupying part of Somalia to prevent Islamists from retaking power
- The USA has struck Al Qaeda operatives in a lawless region of Somalia
On the economic front:
- Oil prices have reached an all-time record, even adjusted for inflation
- The dollar has reached an all-time low against the main world currencies
- Collapsing stock markets
- Declining house prices
- The protectionist mood is on the rise in the USA
There are certainly good news. In a sense, the undemocratic regimes of
Russia and mainland China at least look very stable. The Islamic parties were
brutally defeated in elections in Pakistan, and there is evidence that
Islamic leaders are losing ground in Iraq.
However, the next president of the USA will have to deal with a "global village"
that is far more complex than the one that George W Bush inherited from Bill
Clinton.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (march 2008)
The modern fortune of the multi-ethnic multi-religious state.
There used to be multi-ethnic empires, such as the Ottoman empire and
the Austrian empire. They mostly succumbed to the national states of Britain
and France. Then the Soviet Union and the USA became the world's superpowers,
and both were multi-ethnic empires. Today is not clear in which direction
the pendulum is swinging.
Most of the Western democratic capitalist world
(USA, Britain, France, Germany, Singapore, etc)
values a multi-ethnic multi-religious society.
The Islamic world, instead, has been progressively moving towards a purely
Islamic society. This is a process that has accelerated over the last
decades. Initially it was simply due to the end of colonization, that
sent many non-Arabs back to Europe. It then became an endemic exodus
due to the domestic policies of countries that mostly became anti-Western
dictatorships. In the case of Pakistan it was a form of ethnic cleansing,
that reduced the Hindu population to virtually zero (while in India the
population of Muslims has remained about the same, 13% of the total).
500,000 Jews were expelled from the Arab world after 1948. Christians
departed from every Arab country, looking for friendlier and safer places.
The Taliban expelled or exterminated non-Muslims from Afghanistan.
Whether it was mandated or not, the net result of this process has been
an ethnic and religious cleansing that has left most Islamic countries with a
population that is 99% Muslim.
Viceversa, the West has become less and less Christian and has absorbed
all sorts of ethnic groups.
Russia has not absorbed any new immigrants, but it is still a multi-ethnic
federation because of its historical heritage.
Therefore the Christian world in general has become much less Christian than
it used to be.
The notable exception to the Western rule has been Japan (not a Christian
country), that has remained largely a purely Japanese society.
The notable exception to the Islamic rule are the oil superpowers of the
Arabian peninsula whose economies depend on millions of foreign workers.
These workers, though, are not being assimilated. They live in a sort of
apartheid system in which they have no civil rights.
Saudi Arabia has passed laws to limit how long an immigrant can remain:
the purpose is to avoid the kind of multi-ethnic (and, worse, multi-religious)
society that the West favors.
China prides itself as being multi-ethnic, but the truth is that it has
used force to annex unwilling ethnic groups (as opposed to the USA, that has
attracted immigrants). The "Han-ization" of Tibet, Turkestan, etc hardly
qualifies as the equivalent of a melting pot.
Among non-Christian countries, it is India that best embodies the spirit of
a multi-ethnic and multi-religious society. All major world religions are
represented in India. India is home to dozens of linguistic groups.
While it has not experienced any recent influx of immigrants, its society
is relatively open to foreigners.
It is still premature to decide which model is going to win, but it appears
that only the Islamic world and Japan have a bias "against" a multi-ethnic
and multi-religious society.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (february 2008)
The two undemocratic superpowers.
While the USA is busy selecting its next president via the longest, most
expensive electoral campaign in history, Russia and China are significantly
distancing themselves from the whole principles of free, democratic elections.
In Russia a system that amounts to Vladimir Putin's personal autocracy has
jailed, expelled or murdered many significant members of the opposition,
from capitalists to journalists.
(See also this article).
In a country in which almost nobody cares for
the law, Mikhail Kasyanov has been disqualified from running in the forthcoming
presidential election. (The reason that was given is simply laughable: invalid
signatures on his nominating petition.) This decision follows similar
ridiculously overzealous decisions during the parliamentary elections that
de facto removed all other major parties from running. On the other hand,
Putin and his allies are allowed to cut all sorts of corners with virtually
no scrutiny. No question that Putin's regime is a lot friendlier to the people
than the old Soviet Union (in which he was trained as a KGB operative). But
his every move is meant to undermine democracy, not to foster it. Russia is
less democratic today than it was when he became president.
At the same time the regime of mainland China is wasting no time in arresting
political dissidents. It has also blocked 2,500 foreign websites, from Wikipedia
to my own www.thymos.com, guilty of having pictures of Tibet (both used to be
visible in mainland China two years ago). If the independent Russian press is
being muzzled all the time, an independent press in mainland China does not
exist at all, which means that we probably don't know the real extent of the
crackdown on dissidents.
The funny thing is that the USA, that demonized communism when it ruled in
the Soviet Union and in mainland China (even calling the Soviet Union an
"empire of evil"), is quite tolerant of both Russian and Chinese antidemocratic
campaigns. There is no talk of sanctions. Relationships between the USA and
Russia as well as between the USA and mainland China are at an all-time high.
There has never been so much trade between these countries. There has never
been so little military confrontation since the end of World War II.
The USA once boycotted the Olympic Games held in Moskow, but there is no talk
of boycotting the Olympic Games that will be held in Beijing this year.
On the other hand, Russia and China are still as critical of the USA as they
used to be under their respective communist dictators. True: their critiques
are not ideological in nature, as they used to be. It is not the bourgeoisie
and the capitalists that they target as fundamental enemies of the communist
state. But their attacks are no less broad and profound, depicting the USA
as "the" imperialist power that is pretty much the cause of all problems in
the world.
Last but not least, both Russia and mainland China are encouraging (if not
openly protecting and supporting) rogue regimes that are openly opposed to
the USA, from Iran to Venezuela to Sudan.
The only reason that the USA has not been hurt too much by their international
stands is that both Russia and China are still limited in the amount of
military help that they can provide to enemies of the USA.
They are both rapidly rearming, though.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (february 2008)
Demographics are destiny.
"Demographics are destiny" is an expression coined by Henry Herrmann, chief
executive of Waddell & Reed. It is generally understood to mean that population
growth is beneficial for the long-term economic outlook of a country. Countries
such as Japan and Italy, whose population is stagnating if not decreasing,
are doomed. Countries such as South Korea or Brazil, whose population is
growing, will continuously add new consumers (and tax-payers) to the economy.
However, Herrmann should take a trip to parts of the world that are still
experiencing the population boom, notably in the Islamic world. Whatever
the growth rate of the economy of an Islamic country, it is terribly difficult
to create jobs and social services for a booming population.
Both the oil superpowers of the decade, Saudi Arabia and Iran, still have to
cope with chronic unemployment and poverty. Countries such as Egypt and
Pakistan, that don't even have oil, are plunging into bleaker and bleaker
poverty.
On the other hand, Russia is the one country whose population is seriously
declining, but average Russians are much richer than they used to be at any
time in the last 50 (if not 100) years, with no serious end in sight to the
increase in standard of living.
"Demographics are destiny" also in the opposite sense than the one Herrmann
intended: the booming population of the Islamic world is, in a sense, the
mother of all problems, whereas the declining population of Russia
is hardly a cause for concern in an economy that does not depend heavily on
consumption and tax revenues the way the welfare states of Western Europe and
Japan do.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (february 2008)
The revival of the city state: Dubai and Singapore.
Two small cities like Singapore and Dubai have become world economic powers.
Their sovereign funds invest in literally all continents.
Both cities share a political and economic model.
They are run by "enlightened"
dictatorships that value discipline and order.
Their economy is highly capitalistic and focused on finance.
It relies largely on a population of immigrants that mostly arrived in recent
times.
Both are huge ports in booming parts of the world.
The differences are significant, though. While Singapore is, de facto, a smaller
version of the USA, with the Chinese playing the role of the WASPs (White
Anglosaxon Protestants), Dubai is a very different beast altogether, only
superficially similar to Singapore.
To start with, there is virtually no
construction activity is Singapore's financial district, whereas Dubai's
financial district is the grandest construction project in the history of the
world.
The Gulf countries of the Middle East rank among the fastest growing global financial markets.
Driven by soaring oil revenues, these countries have collectively exported more than half a trillion dollars over 2002-06, mostly into the USA.
Economists agree that their strategies have rarely been driven by profit: mostly they have been driven by the ego.
The capital available for investment was over $1.5 trillion at the end of 2006, and still growing rapidly. If you think that the economy of mainland China is growing rapidly, think again: the GDP of the United Arab Emirates increased by 23.4% in 2006 (and the non-oil sector now accounts for 62.7% of the total GDP), with the trade surplus jumping 31.8%. Unlike mainland China, where the average person is still extremely poor, the Gulf countries boast a soaring GDP per capita (Qatar and Kuwait having one of the highest in the world, $63,000 in 2007). The Qatar Investment Authority, the Kuwait Investment Authority,
the Government of Abu Dhabi and the Government of Dubai are among the big buyers of the 2000s.
The Qatar Investment Authority has acquired a 20% stake in the London Stock Exchange.
The Abu Dhabi Investment Authority has acquired a 4.9% stake in Citigroup, the largest USA bank, for $7.5 billion.
Saudi Arabia has announced the join the race for buying Western assets with its intention to create the largest "sovereign wealth fund" in the region.
An increasing number of family-owned companies are also beginning to join the foreign-asset rush.
Total foreign asset holdings by the Gulf countries stood at $1.6 trillions at the end of 2006, i.e. a staggering 225% of GDP.
USA equities represented 55% of the region's total investment offshore, while Europe attracted about 18% and Asia about 10%.
Notably, Middle Eastern countries only invested 10% of their wealth to develop their own region. (The UAE leads the pack, having invested 713 billion dollars in Gulf projects, twice as much as Saudi Arabia).
The Gulf's share of global merger and acquisitions increased to 44% in 2007 and therefore for the first time surpassed the Americas, whose share dropped to 39%.
The Gulf states account for nearly half of the world's sovereign wealth fund assets: they control about $1.7 trillion, as much as all of the hedge funds in the world.
Dubai in 2008 is the largest construction project in the world. There is virtually no part of Dubai that does not have massive skyscraper in the making. Areas such as the Marina and Business Bay have dozens (if not hundreds of them).
The scale of the development is simply breathtaking. It almost feels like Dubai gave a billion dollars to anyone who came up with a reasonable project to build a skyscraper somewhere within the city borders. The financial district is mostly aligned with Zayed Rd and resembles the Strip in
Vegas rather than Manhattan. Most of the eye-catching buildings lie between the Fairmont Hotel and Dubis Dubai along Zayed Rd.
Giant shopping malls are also sprouting up everywhere.
All the builings are brand new or still in construction.
It is claimed that one fourth of the world's cranes are in Dubai.
The layout of the city is far from optimal. Zayed Rd literally splits the city in two because there is only one bridge crossing it and no footbridge at all. To cross the road you need a car because the nearest crossing can be kilometers away from where you are. Ramps to enter and exit Zayed Rd are erratic and rarely intuitive. It is rarely clear which exit one should take to a building that is clearly visible from the road. It is rarely easy to make a U-turn if you mistake a mistake. For this and other reasons, traffic
congestions are colossal.
An elevated train is being built that should reduce the amount of traffic.
Luxury is visible everywhere. Dubai already built a "palm" of buildings in the ocean and is building two more. Its hotels in the Marina rank among the most expensive in the world.
It is building the tallest skyscraper in the world
(it has already surpassed the tallest one and it is not completed yet) and the largest mall in the world. Hydropolis is an underwater luxury hotel than can be reached only by diving (eventually it will have a reception on land and a train to connect to the rooms).
It is building an artificial archipelago of islands that will form a picture of the continents of the world.
This costs huge amounts of money but Dubai has plenty (all the investment authorities combined manage about $1.6 trillions). Dubai has the highest electricity consumption per capita in the world.
When in 2008 USA president George W Bush visited Dubai recently, the sheik shut down all the roads leading to the center for security reasons. This cost Dubai $100 million.
Plans for the future are even more ambitious than anything Dubai has done so far.
For example, Dubailand is a colossal amusement park under development: 279 million square meters (twice the size of Disneyworld) for $814 million, containing 45 mega projects. One of them is City of Arabia ($1.96 billion, 1.86 million square meters), a dinosaur theme park, designed for 35,000 residents. Another one is Falcon City of Wonders, a 405 thousand square meter theme park containing life-size replicas of seven wonders of the world (the Great Pyramid in Giza, the Hanging Gardens of Babylon, the Lighthouse at Alexandria, the Taj Mahal, the Leaning Tower of Pisa, the Eiffel Tower and the Great Wall of China).
When it's completed, the Marina will boast 124 apartment towers and space for 150,000 people.
Dubai is neatly divided in three social classes. At the top are the native Arabs, who basically don't need to work. They are about 20% of the population.
Their benefits are fantastic. A law requires every company in the emirate to hire a percentage of them, regardless of whether they are qualified for the job or not. Some companies simply write them off as an expense and don't even try to make them work. Government jobs are strictly reserved to this class of citizens. Their salaries and benefits are generous even by Scandinavian standards. Government employees recently received a 75% salary increase, without
even have to go on strike. The problem is that the native Dubai inhabitants have no motivation to get an education and to compete worldwide on skills and innovation.
Then there are the highly-educated and experienced Europeans and USA citizens who run most of the business.
They are mostly transient, spending one or two years in
the emirate just to make a lot of money. They mostly work long hours and most weekends. The areas in which they live around the financial district have virtually no social life, no sense of community. Dubai has plenty of very nice European-style shops and coffee shops and restaurants that in theory cater to this crowd but there are always empty.
Finally there are the masses of laborers, who are the modern equivalent of ancient slaves. Tens of thousands are employed in the construction industry. They come from poor countries in Asia, North Africa, Eastern Europe. These tend to stay longer and many of them
plan to spend their entire life in Dubai. They run everything from small shops to taxis. Their communities are the only places where people walk around in the evening and congregate during weekends.
Therefore the paradox of Dubai is that the only real city life is to be found among the third-class citizens who are treated like slaves.
Most of Dubai looks like a ghost town except for districts such as Bur Dubai (the main quarter for immigrants). The cost of living is dramatically different.
The shopping malls are among the most expensive in the world. Rent in these areas compares with London's or Tokyo's.
The hotels have rooms for $600 a night. And they are often full.
On the other hand, the souks of Bur Dubai (that are mainly inhabited by people of the Indian subcontinent and the Philippines) are extremely cheap, comparing with the cost of living in India.
The people who live and shop here are the very people who work in the "ghost town" of the high-rise buildings and giant shopping malls.
One of the most shocking views of Dubai is the long line of buses that transport the workers into the city before dawn. It is a surreal view, like the city being invaded by hords of barbarians in the dark.
There is also a fourth class of ghost residents who own real estate but they are nowhere to be seen. Dubai has built and successful sold thousands of apartments. Many were sold to rich foreign families and speculators.
Finally there are the tourists. They are the richest tourists in the world. And there are thousands all the time. The Jumeira Beach Hotel's
all-you-can-eat buffet, that costs a hefty $70 per person, is always crowded. One night at the Burj Al Arab costs $1,000.
At the end of the day, though, Dubai and the whole United Arab Emirates remain an Islamic state. There is only one tiny hindu temple in Bur Dubai. All other religious buildings are mosques.
Citizenship is reserved to the native Arabs. Compared with Singapore, that has no religious or ethnic bias and offers a fast track to citizenship (see this page).
Dubai is a fake melting pot. It is importing people from all over the world, but only as temporary workers, not immigrants. Unlike the USA or the other successful city-state of Singapore, Dubai is not a nation of immigrants, nor does it want to be. Like all Arab countries, it is very jealous of its Arab and Islamic identity, that would be corrupted by immigrants.
In the end this also makes it less desirable for foreigners to live. Even if it were possible to become citizens of Dubai, not many foreigners would want to live here forever, and raise their families here. Very few people in the world (even among Muslims) are dying to send their children to schools that teach the Quran. Very few Christians, Hindus, Buddhists are willing to relocate to a place where they, de facto, will have to abandon their faith. Very few people of any faith would relocate to a place where early in the morning a loudspeaker wakes you up screaming that god is great.
The successful societies of immigrants such as the USA allow immigrants to retain their traditions, and in return those immigrants are willing to "melt". The United Arab Emirates require people to abandon their traditions, which results in a much lower willingness to melt.
Thus Dubai may be inherently incapable of creating the middle class that would constitute the "heart" of the city. As it is in 2008, it is easier to see a future in the poor neighborhoods of the foreign laborers than in the futuristic downtown built by the venture capitalists.
Religious dogmas also hamper education. Notable missing from the landscape of the Arabian world (even the large shopping malls) are bookstores. It is very difficult to buy a book, and virtually impossible to buy any book that is not about religion (except at airports). The Emirates are building larger and larger universities, but the educational base is just missing. These are people who grow up knowing virtually zero of the contemporary debates. The most ignorant person in the USA knows a lot more than the average resident of Dubai on just about any scientific and historic matter. One wonders what kind of society can be created by a state that does not have books. The decline of Islamic civilization started when the West adopted the printing press and Islam didn't. The West went on to translate and print more and more books, literally millions every year. To this day the Islamic world discourages the translation of foreign books (according to a report by an Arab cultural foundation, more books are translated into Spanish in any given year than they have been translated into Arabic in the whole Arab world in one thousand years).
The Dubai model looks like a contradiction because it is ultimately monocultural
(Islamic) in the age of the multi-ethnic multi-religious societies.
Whether they like to admit it or not,
the Dubai model is anchored to an ancient view of Arab society: both the
Umayyads and the Abbasids relied on a majority of Greek, Jewish and Persian
subjects to run their empires. But back then the Arabs had a simple way to
maintain their empire: war. They conquered the "dhimmi" who worked for them.
In a free world the new empires have to attract people with other means.
A place where every study of the Quran is considered an insult to Islam
is not exactly in line with the modern world's view of the future.
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (february 2008)
How the West was bought.
The Gulf countries of the Middle East have become one of the fastest growing
global financial markets.
Driven by soaring oil revenues, these countries have collectively exported
more than half a trillion dollars over 2002-06, mostly into the USA.
Economists agree that their strategies have rarely been driven by profit: mostly
they have been driven by the ego.
The capital available for investment was over $1.5 trillion at the end of
2006, and still growing rapidly.
If you think that the economy of mainland China is growing rapidly, think again:
the GDP of the United Arab Emirates increased by 23.4% in 2006
(and the non-oil sector now accounts for 62.7% of the total GDP), with the
trade surplus jumping 31.8%. Unlike mainland China, where the average person is
still extremely poor, the Gulf countries boast a soaring GDP per capita (Qatar
and Kuwait having one of the highest in the world, $63,000 in 2007).
The Qatar Investment Authority, the Kuwait Investment Authority,
the Government of Abu Dhabi and the Government of Dubai are among the big buyers
of the 2000s.
The Qatar Investment Authority has acquired a 20% stake in the London Stock Exchange.
The Abu Dhabi Investment Authority has acquired a 4.9% stake in Citigroup, the largest USA bank, for $7.5 billion.
Saudi Arabia has announced the join the race for buying Western assents with
its intention to create the largest "sovereign wealth fund" in the region.
An increasing number of family-owned companies are also beginning to join the
foreign-asset rush.
Total foreign asset holdings by the Gulf countries stood at $1.6 trillions at
the end of 2006, i.e. a staggering 225% of GDP.
USA equities represented 55% of the region's total investment offshore, while
Europe attracted about 18% and Asia about 10%.
Notably, Middle Eastern countries only invested 10% of their wealth to develop
their own region. (The UAE leads the pack, having invested 713 billion dollars in Gulf projects, twice as much as Saudi Arabia).
The Gulf's share of global merger and acquisitions increased to 44% in 2007 and therefore for the first time surpassed the Americas, whose share dropped to 39%.
The Gulf states account for nearly half of the world's sovereign wealth fund assets: they control about $1.7 trillion, as much as all of the hedge funds in
the world.
The financial power of the USA and of Western Europe is becoming
less and less obvious. What is obvious is that this trend will continue, thus
increasing the amount of Western assets that the Gulf countries acquire.
The Western world has simple choices:
- Become a colony of the oil producing countries. This is what is happening.
- Get rid of oil. This almost certainly implies a huge increase in nuclear energy, the only source of energy that can rival fossil fuels.
- Invade the oil producing countries and steal their oil.
- Return to a medieval economy that does not rely so much on energy.
The decision that is being made now will have a huge impact on the future of
the West. (Not making a decision, which has become the West's favorite strategy,
is equivalent to making decision number 1).
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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- (february 2008)
The global village and the new slaves.
This might be a global village, but civilizations are still built on slave labor, like they used to for thousands of years.
The USA outsources business to India, where labor is ten times cheaper than in the USA. The Gulf states import millions of cheap laborers from the Indian subcontinent. China uses its own cheap labor.
These are three different models of global capitalism, but each relies in its
own way on "slave" labor.
There are roughly three kinds of players:
capitalists (whether wealthy families or corporations or governments),
financial and I.T. workers,
construction workers.
The USA outsources I.T. work and discourages immigration. It does not need
construction workers.
The Gulf states do not outsource anything. They encourage immigration of
construction workers (from poor Islamic countries of Asia and North Africa)
as well as immigration of educated I.T. and financial workers from the West.
The construction workers tend to stay for life. The Westerners tend to stay
only one or two years.
China neither encourages immigration nor outsources work, as it has an internal
source of both cheap labor and I.T. specialists.
The effect of the USA model on the Indian subcontinent is to create demand for
education (both I.T. and finance) and to promote the creation of local entreprenuers and a middle class.
The effect of the Gulf model on the Indian subcontinent is to create emigration
and a flow of cash back home.
One wonders which of the three kinds of capitalism is more sustainable in the
long term. Can the Gulf states import an unlimited number of workers? Will those
workers eventually demand civil rights, citizenship, a share of the wealth?
Can China really bootstrap a first-tier economy by itself?
Can the USA keep exporting jobs forever?
The answer may lie in what these economies create. The Gulf states are basically
creating only two things: a lot of construction back at home, and a lot of
investment abroad. The construction at home ultimately serves to manage the
investments abroad.
China is creating a manufacturing empire, which includes infrestructure
construction of the Gulf sort but also (mainly) factories and agriculture.
The USA is creating a distributed, opportunity-based economic empire that
ranges from agriculture to heavy industry to information technology to finance.
(Russia is de facto a variation on the Chinese model, and Western Europe is de
facto a variation on the USA model).
TM, ®, Copyright © 2007 Piero Scaruffi All rights reserved.
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