Debt and the economic slowdown in the West.

With the imminent default of the Greek government, where the debt to GDP ratio is 140% and unsustainable,  this blog returns to the economic difficulties the World is currently experiencing, and their political ramifications. Many states in the developed world, including the United Kingdom, are having their prospects for growth extinguished by the burden of their debt. We have, in short, large economies that have become over indebted. As of the 24th September, the national debt of the United States had reached about $14.8 trillion (see http://www.usdebtclock.org/), with families in the US in debt to the tune of $16 trillion. More worrying for the long term prospects of the United States is its trade deficit to China, currently running at approximately $336 billion.

Many Western powers are in for a hiding to nothing in the coming years. The combination of  liberal capitalism and democracy has turned sour. In order to maintain support for their respective programs -specifically in more left-leaning welfare state Europe - many Governments, until the financial mess, had been in a bidding war for votes using public finances. Unfortunately, given the crisis in the Banking sector and subsequent recession, Governments, highlighted by Greece, Portugal and Ireland,  have found themselves in financial difficulties. The central problem comes down to the fact that in a market economy banks and government are inextricably linked. The banks fund government through bond purchases. In return, Governments keep the coggs of the economy churning by paying interest on their bonds and keeping banks' investment arms in the black and creating money. As a result of the 2008 banking crisis, tax revenues have been falling and spending has been rising. Governments have had to borrow more and more from already financially struggling banks. At the moment, the equilbrium between funds raised through government taxation and borrowing has been dangerously distorted. Government spending simply cannot grow economies fast enough to justify extra borrowing at current extortionate rates, hence the difficulties.

Adding to the difficulties is the dynamic of the Eurozone in a recession. The role of the European Central Bank is to set a single interest rate - and, therefore, run monetary policy - for the entire Eurozone. The economies of the Eurozone, however, are fundamentally different. The countries of Northern Europe - including France and Germany- are generally more fiscally stable and need higher interest rates to combat inflation. Inversely, the countries of Southern Europe - including Greece - are finding it difficult to make ends meet and, therefore, need lower interest rates. Trying to set a single interest rate for the entire Eurozone, therefore, is almost impossible. Without closer fiscal union between the members of the single currency it cannot work. The fiscal union needed to solve the problem, however, is very politically unpopular.

The world economy is not in balance. We have the BRIC countries exporting to developed nations and producing such vast trade surpluses that they are actually destabalising the market system. Wages have become so much higher in developed nations when compared to emerging markets that the developed nations simply cannot compete and export. The emerging markets need developed nations to continue buying their products and, therefore, it is mutually beneficial for all states in the world to find a more stable system of trading where countries do not produce such dramatic surpluses and deficits. Only if developed nations get their finances in order whilst achieving a more balanced trading approach with emerging markets will worldwide growth start again in ernest. With the economic backdrop I have described in these paragraphs, it is no wonder that Greece is now going to be forced into default. The system is clogged with debt and it is causing a global slowdown in the West, with the potential to effect developing nations. In the coming years, it is going to take some daring feats of political willpower to sort out the debt mess and get growth. Borrowing and more debt on its own simply will not work and only perpetuate the economic hardship. Solving the debt difficulties of developed nations is going to take some innovative and very bold political leadership and will inevitable cause much anger to put countries back on the path to prosperity.            

   


       

The Arab-Israeli conflict and the Treaty of Westphalia

In the coming week, Mahmoud Abbas is planning to use his speech at the United Nations in New York to call for a vote on Palestine becoming a member. Membership of the United Nations, by default, would create a state of Palestine. The United States, led by a President under pressure and with an election just over a year away, is vowing to veto the application in the security council. However, despite the position of the United States, the upcoming vote has brought the conflict between the state of Israel and the Palestinian authorities back into focus once again. It is a conflict which has been ongoing since the creation of the state of Israel in 1948, and inflamed further by the Six Day War in 1967. The Six Day War expanded the territory held by the state of Israel when it captured the Gaza strip and the Sinai Peninsula from Egypt, the West Bank (including East Jerusalem) from Jordan and the Golan Heights from Syria.

Israel is located in a very hostile part of the world. It is a Jewish state surrounded by Islamic nations who do not believe it should be in existence. The situation between Israel and Palestine is made more fraught by Palestine's refusal to recognize the state of Israel. The religious dimension only adds to the confusion. Jerusalem is a focal point for the three major Abrahamic religions - Christianity, Islam and Judaism. For Jewish and Christian people, the city is a spiritual homeland with deep-rooted connections with their respective religions, and for Sunni Muslims it is traditionally considered to be a sacred place visited by prophets. The religious dynamic confuses the already various cultural differences.

The territorial dispute, therefore, is both cultural and religious. Geographical divisions along clear cut ethnic, cultural and linguistic boundaries are blurred in the Middle East. The region is not like Europe - with distinctive cultural and linguistic boundaries fitting the nation state theory. Like many areas of the former British Empire, the boundaries that were put in place at the time of independence have caused tensions: little consideration was given to ethnic and cultural distinctions in different regions. This is very clear in Israel,  a state that was artificially created after the Second World War. The Treaty of Westphalia system of independent sovereign states simply does not work in Israel and that area of the Middle East. The region is a melting pot of different cultures, religions and ethnic identities. The solution to the Middle East conflict of interests in Israel will not come in the form of a two state equals two distinct geographical areas solution. The geography of the region and the aforementioned  differences make it almost impossible.  Some form of solution whereby two states share the same geographical territory or overlap will need to be found. The founding of a state of Palestine and putting it on an equal footing with Israel will not solve the difficulties in the Middle East. Legitimizing the state will only fuel tensions and territorial feuds. The vote in the United Nations is not a solution and further bi-party negotiations will be needed to provide long term peace in the region.  

Osama Bin Laden and the global financial mess. Is there a link?

On the 2nd May 2011, and after one of the largest manhunts ever undertaken, America finally caught up with and killed the leader of Al Qaeda, Osama Bin Laden, in Abbottabad, Pakistan. After ten years of searching, they had found the man whose organisation was behind the attacks on America on September 11th 2001, which killed 2,977 people from over 90 countries. However, has the immense cost of the two wars in Afghanistan and Iraq, a result of the attacks on America, financially crippled both America and the west? Was the financial strain of the wars one of the causes of the financial crisis? Has Osama Bin Laden achieved what he set out to do and made America 'a shadow of itself', as he said in an interview with Robert Fisk of the Independent newspaper.     

Well, the War on Terror, a phrase coined by former President George W Bush in a joint session of Congress on the 20th September 2001 and launched on the 7th October, was always going to be difficult for the United States. In the first instance, the phraseology is confusing: a war on 'terror' sets almost limitless perimeters, and, crucially, does not specify a set objective: therefore, how do you know if you are winning? Added to this, Clausewitz always emphasised that defense is stronger than attack, and America went on the offensive into territory with people who were likely to be sympathetic to Al Qaeda's aims.           

The War against Islamic extremism and related terrorist groups has taken a massive toll, both in terms of human loss of life, and on finances. The current budget for defense and wars for the United States stands at $7bn, and is the third largest item of expenditure. The War in Iraq has cost about $802bn, and the War in Afghanistan has cost $455.4bn .Therefore, taking in a few other factors as well, the wars are expected to have cost the US treasury $1.27 trillion  by the end of the 2011 financial year.  They have massively inflated Government spending in the US: the budget for defense has more than doubled compared with before the attacks of September 2001. Therefore, they have led to extra borrowing, pushing the US into deficit: the United States went from surpluses under the Clinton administration to large deficits because of the wars.

The borrowing as a result of the two wars and the banking crisis edged US debt towards its constitutionally mandated limit of 14.3 tn. Fraught negotiations finally led to an agreement between President Obama and Republicans to raise the limit on the 1st August 2010, a day before the debt limit was to be breached, causing a US default and probable economic meltdown. Many countries in Nato that have been involved in Afghanistan and, in the case of Britain, Iraq as well, are now facing debt crisises exacerbated by their military involvement. China now holds $1.17 tn in US debt, and greater sway over world affairs, many Eurozone countries are struggling to make ends meet, and America is facing the prospect of decades of spending reductions to get back on a sustainable debt track. So, Osama Bin Laden may not have defeated America militarily, but, at least financially, he has delivered them a lasting debt legacy and a financial crisis. The conflict in Afghanistan sped up the decline of the USSR: could it now take its next victim?      

Some general thoughts on Socialism and Marxism

Europe and the western world are continuing to be plagued by banking difficulties and debt. This is added to by a growing possibility of another winter of discontent by the British trade union movement. With this backdrop, it seems high time to give some thoughts on left wing politics. So where better to start  then by musing about the fundamental concepts of left wing politics: Communism, Socialism and Marxism. In fact it may be easier to boil down these three concepts into one which encapsulates them all: Socialism. The reason is that the term Socialism, and by extension the concept of the Socialist, have become increasingly confused and generalised since the time of Karl Marx. There has been the USSR, Union of Soviet Socialist Republics, the Nazi party, which is an abbreviation for the National Socialist Worker's Party (Nationalsozialistische Deutsche Arbeiterpartei in Deutsch)  and various 'democratic Socialist'  parties.  Each of these entities have used the term 'Socialist' in some form or another, but with widely differing concepts of what it is to be a Socialist.

Consequently, it is possible to say that Socialism, Marxism and Communism are all but interchangeable as conceptual ideas. At their fundamental cores, they all believe that it is possible to artificially create a society of people who are all equal in wealth and means. They believe that free trade is oppressive and creates a system of proletariat and bourgeois. They believe the bourgeois (wealthy business owners) and petite Bourgeoisie (small business owners) are deliberately attempting to force down the wages of the proletariat (the working classes). Socialists and Marxists, to varying degrees, believe that free enterprise can be tamed or even destroyed and with it class difference. Revolution is encouraged by some Marxists in order to create a 'dictatorship of the proletariat' followed by a disintegration of the state. The withering away of the state has never, however, been witnessed in reality, with perhaps the exception of Somalia, although this country does, at least in an official capacity, have a government - even if it does only control Mogadishu, the capital.

However, it seems that this whole argument goes against the fundamentals of nature. The world operates according to the law of 'survival of the fittest', more commonly known as Darwin's theory of natural selection. Regardless of how much we try to persuade ourselves that we do not, we are always looking after our own vested interests and those of our family before those of anyone else. It is innate and built into the way we are and act.

The other founding assertion by Marxists is that a system of 'from each according to his ability, to each according to his need' should be the founding economic principal of a state, and that the concept should spread to all countries. This concept is based on the idea that 'capital is reckless of the health or length of life of the labourer, unless under compulsion from society'. This last idea coincidently seems to be a reason often sited by those in favour of a strong trade union presence within an economy. However, it seems this interpretation is flawed: after all, what is the point of a business without customers having the ability to purchase the goods that are produced? Far from being in the interest of companies to reduce wages and maximise profits, it is in their interest to keep wages buoyant if, perhaps, for no other reason than that it causes a multiplier effect and means they can sell more products.

Hardline Marxist and Socialist economics suggests the abolision of the state and money and public ownership of the factors of production should be the desired political economic aims. Marxist economists are, therefore, effectively only proposing an elaborate form of subsistence bartering: one sheep for two cows etc: this is the only conceivable way of abolishing a market economy. Money is a store of labour, as pointed out by Adam Smith in the Wealth of Nations. However, by exchanging manufacteured goods instead of receiving a wage you bypass an employers ability to make a profit from their endeavour. Therefore the reality is that there has never been a truly Marxist government. So far, every country that has attempted to create a Communist system of government, with perhaps the exception of North Korea,  has been found wanting and had to resort to at least some kind of Capitalist model in order to appropriate goods in a market economy. Almost 200 years after Karl Marx's birth in 1818, the high hopes of many of the pioneers of the Socialist and Marxist ideology seem to fallen short of their aspirations. Many have come to the realisation that a politcal economy model that rejects market intervention completely has not been found. There will always be discussions about the best politcal economic model: whilst every system, Capitalism, Socialism and Marxism, has its merits, for the time being at least it would seem that Capitalism is the least bad option.      

Is Alex Salmond a chicken voting for Christmas?

With the rather spectacular success of Alex Salmond's Scottish National Party in the Holyrood elections of this year, 2011, the question of independence comes to the fore again. But, is an independent Scotland really in the interests of Alex Salmond? Scotland has a population of about 5 million people, or, expressed differently, about 8.5% of the British population. However, it spends 9.7% of total UK government expenditure, giving it a higher per head of population spending than other areas of the United Kingdom, including England. This addiction to the public purse in Scotland would pose some very harsh realities for any government of an independent Scotland.                                                                                                                                                    

The reality of the situation is that Scotland does not pay its way in the United Kingdom under the current system. As a result, Scotland receives a block grant from London of about £30 bn under the Barnet Formula.  In the accounting year 2004-2005, a breakdown of spending in Scotland shows that spending was £47.7 bn. Whilst it is difficult to get accurate regional figures for tax revenues, it was estimated that the net treasury tax revenues coming from Scotland over the same period were about 36.4bn: included in this figure, £1.28bn is petroleum revenue. This means that Scotland produces a yearly deficit of roughly £11bn.  That deficit is currently disguised in the UK-wide accounts. However, to join the Euro - presumably an aspiration of Mr Salmond should he achieve independence - a country requires a deficit of less than 3% of GDP: Germany has also insisted on a balanced budget approach. The current carnage in the Eurozone, and particularly with German anger at bailing out other Eurozone nations,  is likely to mean a country will have to strictly conform to this regulation in the future. The persistent deficit in Scotland would mean almost certain rejection if it applied to join the Euro - which may not even exist by the time Scotland achieves independence. The deficit, and the Copenhagen criteria which requires new countries in the European Union to join the Euro, may even rule Scotland unable to join the European Union. Even if Salmond's Scotland did convince fellow European states of its membership credentials, a glaring hypocrisy is that Salmond is proposing independence on the one hand and handing over sovereignty to the European Union on the other which would perhaps confuse his supporters.

So, what is Salmond's response? Well, the Calman's proposals. They suggest that income tax could be regulated in Scotland by Holyrood. The reason: quasi-fiscal independence is the first step towards full independence and an attempt to close this deficit. With quasi-fiscal independence will come a growing call for monetary independence. As has been made obvious with the Eurozone crisis, fiscal and monetary policy are inextricably linked.

This blog has attempted to prove that Salmond would be stupid to demand the one thing he desires most. By their nature, when in fiscal difficulties, small states will tend to lean to the right of centre. And the concluding point would have to be that the whole raison d'être of the SNP is independence. Why, in an independent Scotland, would you vote for an independence party (look only to Sinn Féin in the Republic of Ireland). The SNP would have no part to play in an independent Scotland. The SNP are the Scottish equivalent of a party like UKIP: if the UK were to leave the European Union, UKIP would disappear in the same manor as the SNP would in Scotland. They are both 'one trick pony' parties. It, therefore, seems blindingly obvious to me that Alex Salmond is a chicken voting for Christmas.  
            

The wars in Libya and Iraq and a lesson from history

So, with the Libyan conflict seemingly heading towards a resolution is it now time to compare the British endevour in North Africa to the Second Gulf War. The National Transitional Council (NTC) is now in control of most of the strategic cities: Sirte and Bani Walid are now the last remaining Gaddafi strongholds holding out in the vain hope that a miracle will change their fortunes. However, should Gadafi have been able to look at Iraq, his strategic position and history and realise that after 40 years in power the game was up?

It would be easy to conclude that the Second Gulf War and the Libyan war are both examples of invasions to impose western imperialism and are, consequently, doomed to failure? Well, it seems historic strategic theory of the likes of Clausewitz, would have it differently. Iraq and Libya are completely different militarily strategic engagements. The Second Gulf War was a war imposed from outside by the former President of the United States of America, George W. Bush and his companion former Prime Minister Tony Blair: in short, it was a war of agression. It was an attempt by an outside force to defeat another sovereign state by force. The situation was not provoked in any way by domestic violence caused by discontent within Iraq. The citizens of Iraq never desired their country to be forcefully invaded by a foreign force.

The experience in Iraq is in starck contrast to the NATO operation in Libya spearheaded by Nicolas Sarkozy of France and the coalition in the UK. The United Nations Security Council resolution 1973 that led to the activities, specifically to a no-fly zone over Libya and measures to prevent civilian lose of life. Critically, the measures kept the permitted boundaries of  involvement limited to a defensive position. Both Iraq and Libya followed the truism that 'the political object is the goal, war is the means of reaching it'. However, in Libyan it was realised that 'defence is a stronger form of war: the one that makes the enemy's defeat more certain'.  

The Iraq conflict was based on the a supposed nuclear threat. It was a cynical attempt to enforce the 'paradoxical trinity' of warfare including violence, hatred and emnity in order to invade another soverign state. The Libyan war was an attempt to prevent a very real threat of crimes against humanity being commited by Colonel Muammar Gaddafi during a popular uprising. The intervention was because of a realisation that 'the fact remains that a national uprising cannot maintain itself where the atmosphere is too full of danger'.                                                              

Both the wars in Iraq and in Libya attempted to interpret the lessons of Clausewitz about war between states. However, the widely accepted failure of Iraq and the relative success of Libya shows that it is easy to misinterpret these lessons.The resulting swift capture of much of Libya by the NTC, aided by NATO fire power proves that 'the greater the strategic success, the greater the likelihood of a victorious engagement'. The NATO emphasis on its role in defending civilians while allowing the NTC to continue its campaign against Gaddafi's forces was an example of the correct application of Clausewitz's advice. He advised that 'the natural course in war is to begin defensively and end by attacking'. In Iraq, the US and UK begun by attacking whilst in Libya NATO airplanes took on a defensive position of protecting civilians which had the support of many of the citizens of the sovereign state concerned. The masterminds of the Libyan campaign had learn't the lessons of history.  
   

The European debt crisis: something will have to give.

Well, we have had the banking crisis and now we are having the resulting sovereign debt crisis.  States have bailed out reckless banks that lent to the sub-prime mortgage market - risky borrowers on low incomes -and now nation states in the 'western world' are in trouble themselves. And recently the issue has come to the fore in the Eurozone: part of the difficulty is that a common monetary policy has prevented weaker economies within the monetary union from 'deleveraging', reducing their debt exposure, themselves by promoting inflation- led growth. The Eurozone has hit the buffers. During the years of growth, countries like Greece, Ireland and Portugal were propelled forwards by the availability of cheap credit and unable to calm down their booming housing markets because they had given away their interest rate independence. On the contrary, export orientated nations, including Germany, were not acquiring large amounts of debt. However, all the economies in Europe were moving in the same direction so the eventual crisis was not foreseen.  

The latest crisis has arisen because countries, primarily in southern Europe have been financially hit by the banking crisis, on top of already large amounts of public debt. The subsequent rate of growth, if it can really be called that, has not been sufficient enough to pay for the interest payments on their debt. The difficulties in Greece, Ireland and Portugal are contrasted with the relatively better situation in Germany and France - where growth recovered quicker, and deficits were not as large. The European Economic zone has fractured: economies mainly in northern Europe now require higher interest rates to combat higher inflation whilst southern Europe requires lower interest rates.  

The worry over the debt credibility of some southern European countries has lead to higher interest rates being demanded by its creditors, putting even more stress on the monetary union. So can the common currency survive this most recent blow to its credibility? Well, the constant bailouts needed from Germany, Finland and France among others are proving politically divisive. They are also only a stopgap which has no democratic consent. They now threaten to hurt economically stable countries, with Berlusconi's Italy and Zapertero's Spain in the firing line: and the simple fact of the matter is that Merkel's Germany and Sarkozy's France cannot even contemplate a bailout of these countries. It seems that British Eurosceptics have been vindicated in pointing out that monetary union without fiscal and debt union is quite simply unfeasible. The founding difficultly is, as Bank of England Governor Mervyn King has eluded, that the imbalance between net-exporting nations, for example China, Germany, Saudi Arabia and Norway, and net-importing nations, like the UK, is a contributing factor to Europe and the world's current woes. It has caused a rather dramatic crack to appear in the global capitalist mechanism which needs to be addressed for any prospect of growth in Europe and the world as a whole. In conclusion, doing nothing is not an option: if radical change and fiscal consolidation does not occur something will have to give.