zenpundit.com

To Fabius Maximus for being crossposted at RGE Monitor. A snippet:

Causes of this crisis

These financial shocks are byproducts of deeper trends, in my opinion.  The world has begun a process of regime change, as the foundations of the post-WWII geopolitical order decay.  Here are some of the major trends forging a new world.  Each of these has played a role in bringing us to this point; some will play an even bigger role forcing events during the next few years.

(a)  The transition from a bipolar (or unipolar) world to a multi-polar world.

(b)  Entering the transition period to peak oil, as global oil production peaked (not necessarily the peak) in 2005.  Since then biofuels have provided most of the growth in liquid fuel consumption.  Rapid GDP growth (almost 5%) required high prices to match ex ante demand with flattish liquid fuel production.

(c)  The replacement of the US dollar as the reserve currency (by what we do not yet know), after 30 years of foreign borrowing – 30 years of increasing current account deficits.

(d)  The exhaustion from overuse of monetary and fiscal policy.  Persistently too-low interest rates yielding serial investment bubbles.  The long decline to near zero of the marginal elasticity of GDP with respect to debt.

(e)  Structural weakness:  Funding long-term businesses with “hot” (aka liquid) capital, from the disintermediation of household savings.  Money shifted from vehicles where institutions bear the risk (insurance, annuities, CD’s, etc) to direct participation (owning stocks and bonds either directly or through mutual funds).   See this post for an explanation.

(f)  The Thomas Kuhn-type paradigm crisis in Keynesian economics, by which the world economies have been steered for fifty years.  The aggregate debt level of an economy is not a significant variable; attempts to integrate into orthodox theory by radical Keynesians (e.g., Hyman Minsky) were unsuccessful.  Sometime after 2000 we reached and broke though the edge of the “operating envelope” of Keynesian theory.  We ran like Wile E. Coyote off the cliff and beyond – a few exhilarating years – and now we fall.

Read the rest here. 

From small wars to global economies.

Addendum:

Vimothy is correct – FM informs me that RGE Monitor has covered 45 of his posts, in particular:

Financial crisis – what’s happening? how will this end?

Peak Oil and Energy

Thought German might fit the Wagnerian mood of the markets today in a brief post discussing the economy. A few links on related tangents that I found intriguing, and then a brief comment:

John Robb –  A Real Nuclear Option in Finance

John relishes being not only out front but the edge thinker. He’s right that derivatives have to be addressed though I’m not qualified to comment as to “how”. I haven’t the faintest idea and the sums that derivative markets leverage vastly exceed our planetary GDP ( that’s right, not the economy of United States, the GDP  of planet Earth)  In particular, I wonder how you monkey with one class of derivatives without spooking the traders in other derivative instruments into stampeding us over a cliff in ten minutes. OTOH, Robert Paterson, who unlike me really does understand derivatives and the nuances of trading, agreed with Robb, who offered:

One solution: Nuke entire parts of the system. In short, destroy the system’s network connectivity. For example, credit default swaps ensure that failure will spread through internetworked contracts. Nuke CDS derivatives ($60 trillion or so) by making them illegal. Destroy parts of the network in order to save the remainder — firewalls and firebreaks.

Fabius Maximus –  No coins, no COIN

FM sees the economic crisis forcing huge changes in American foreign policy, defense structure, military doctrine and acquisitions:

In most of these money is no object in the pursuit of security (or other goals, often quite chimerical).  That is an exceptional way of thinking.  More so when one considers how our current account deficit has steadily increased since 1971 (when we went off the gold standard) – and the even more rapid increase in the foreign debts that finances the annual deficit.

That era will close soon, and the United States will return to earth.  Like everyone else, we will have to consider what foreign adventures we can afford before starting them – weighing their costs and benefits – and stop wars whose costs spiral out of control.  This will force a military revolution more profound than any since WWII, when we entered the “money is no object” era for weapons and foreign wars.  

….Not that the annual budget wars were not fought fiercely, but they will be conducted differently once budgets start their rapid and long-term decline.  Like any organization thrust into radically changed environment, restructuring – drastic changes in structure and doctrine – will be needed.

Maritime, air, and land – our approach to all will change.  Maintaining full-scale forces against purely theoretical future threats will become impossible.  Seeking dominance in every theater will become unrealistic.  Prioritization will become imperative.

FM also offers up  A solution to our financial crisis . Right now, China, the leader in global dollar reserves is in a position where our crash is their crash and their crash may be the end of the PRC as we know it. Good time to strike a deal.

Tom at HG’s World cites Niall Ferguson in Ferguson’s greatest area of expertise, as an economic historian:

The End of Prosperity, or A Better Future?

Historian and author, Niall Ferguson penned this article in Time magazine, about the question that is on everyone’s mind if not their lips. “Are we headed into a second Great Depression?”He begins: “Congress’s initial rejection of the Bush Administration’s $700 billion bailout plan calls to mind an unhappy precedent. Back in 1930, the Senate passed the Smoot-Hawley Tariff Act, which raised duties on some 20,000 imported goods. Historians define this as one of the critical steps that led to the Great Depression – a tipping point when the world realized that partisan self-interest had trumped global leadership on Capitol Hill.”He explains what happened to tip the scales.“The U.S. – not to mention Western Europe – is in the grip of a downward spiral that financial experts call deleveraging. Having accumulated debts beyond what’s sustainable, households and financial institutions are being forced to reduce them. The pressure to do so results from a decline in the price of the assets they bought with the money they borrowed. It’s a vicious feedback loop. When families and banks tip into bankruptcy, more assets get dumped on the market, driving prices down further and necessitating more deleveraging. This process now has so much momentum that even $700 billion in taxpayers’ money may not suffice to stop it.”

Like Tom of HG’s World, I’ve been a big fan of Ferguson and have numerous books of his on my shelf . That said, it’s very odd to me that he not mention another parallel with the Great Depression of a Federal Reserve in the hands of a relatively new Chairman after the long tenure of an outsized and much respected predecessor. Or the inability of the Fed to effectively coordinate with European counterparts ( several days after loudly bloviating about American weakness/incompetence by the German Finance Minister it appears that he might have better spent his time addressing German and EU economic fundamentals. Good Lord, even by politician standards, what an asshole!) which back then scrambled to ditch the gold standard like a poor relation carrying hepatitis.

The solution, if you can call it that, from my crude perspective would be to gather the Fed with other central banks, treasury and it’s G-8 finance ministry counterparts plus China and the biggest sovereign funds and agree on a few, very simple, lowest common denominator “brakes” or safety nets to backstop the system, plus a 2 year “hot money” flight tax to give a window of time to let the markets settle and work out clear minded reforms rather tha jerry-rigged insider looting binges posing as band-aids. That and driving what money/credit remains toward entrepreneurship and innovation rather than another burst of McMansion consumption by a demographic of dudes without any verifiable means of support.

This scheme won’t create any rainbows. It would be a tourniquet but better a tourniquet than an amputation.  If we come out with a recession on the scale of 1981-1982 we should consider ourselves to be fortunate. The Great Depression has begun to pass out of living memory but reviewing the mistakes of those years might be instructive.

Check out Fabius Maximus on the “books vs. internet” debate with an older set of posts The Internet makes us dumber: the Bakken euphoria, a case study and Euphoria about the Bakken Formation.

and

Selil Blog where Professor Sam has done some cyberwar theorizing “From Information operations to cyber warfare and a new terrain”

A part of a comment from Jay@Soob:

“This was likely compounded by the chronological assignment (that Mao was the first to conceptualize 4GW is an assertion that Ethan Allen might have something to swear and swing fists about)”

The frequent and casual association of Chairman Mao with 4GW is something that has always puzzled me as well ( though, if memory serves, William Lind was always careful to explain that 4GW isn’t simply guerilla warfare). I think it can be attributed to the likelihood that most people who are somewhat familiar with 4GW theory tend to think first of guerillas and Mao is regarded as a great innovator there. However, is there merit in placing Mao in the “4GW pantheon” (if there is such a thing)?

In the ” yes” column I’d offer the following observations:

Mao, whose actual positive leadership contribution to Communist victory in the civil war was primarily political and strategic rather than operational and tactical ( his military command decisions were often the cause of disaster, retreat and defeat for Communist armies) had a perfect genius – I think that word would be an accurate description here – for operating at the mental and moral levels of warfare.  Partly this was skillful playing of a weak hand on Mao’s part; the Communists were not a match on the battlefield for the better Nationalist divisions until the last year or so of the long civil war but Mao regularly outclassed Chiang Kai-shek in propaganda and diplomacy – turning military defeats at Chiang’s hands into moral victories and portraying Communist inaction in the face of Japanese invasion as revolutionary heroism. Yenan might have be a weird, totalitarian, nightmare fiefdom but Mao made certain that foreign journalists, emissaries and intelligence liasons reported fairy tales to the rest of the world.

In the “maybe” column:

Regardless of one’s opinion of Mao ZeDong, China’s civil war, running from the collapse of the Q’ing dynasty in 1911 to the proclamation of the People’s Republic in 1949, is a historical laboratory for 4GW and COIN theory.  The complexity of China in this era was akin to that of Lebanon’s worst years in the 1980’s but it lasted for decades. In a given province of China ( many of which were as large or larger than major European nations) then there might have been operating simultaneously: several warlord armies, Communist guerillas,  Nationalist armies, the Green Gang syndicate, White Russian mercenaries, Mongol Bannermen, rival Kuomintang factions, common bandit groups and military forces of European states, Japan and the United States. Disorder and ever-shifting alliances and fighting was the norm and Mao was the ultimate victor in this era.

In the “no ” column:

Mao ZeDong, whatever his contributions to the art of guerilla warfare, intended, quite firmly, to build a strong state in China, albeit a Communist one in his own image. He was never interested in carving out a sphere of influence or an autonomous zone in China except as a stepping stone to final victory. Moreover, the Red Army’s lack of conventional fighting ability for most of the civil war related to a lack of means, not motive on Mao’s part. When material was available, particularly after 1945, when Stalin turned over equipment from the defeated  Kwangtung army and began supplying a more generous amount of Soviet military aid to the Chinese Communists, Mao tried to shift to conventional warfare. When in power, he sent the PLA’s 5-6 crack divisions into the Korean War to face American troops in 2GW-style attrition warfare, not guerilla infiltrators behind MacArthur’s lines. 

Finally, Mao’s personal political philosophy of governance, taken from Marxism-Leninism and Qin dynasty Legalism, are about as radically hierarchical and alien to 4GW thinking as it is possible to be.

In sum, Mao is and should be regarded as a major figure in the  history of the 20th century and that century’s military history but he isn’t the grandfather of fourth generation warfare.

ADDENDUM:

Congratulations to 4GW theorist and blogger Fabius Maximus for being picked up by the BBC.

I’m with Fabius Maximus on this one, Stratfor contemplating a major military intervention in Mexico is akin to lunacy:

Two of the many benefits of subscribing to Stratfor are (1) its reporting on geopolitical trends not yet visible to the mainstream media, and (2) it provides a window into the thinking of America’s elites (Stratfor’s customers, senior business and government officials with whom it must stay in synch).

We get both in a new report:  “High Stakes South of the Border.”  This continues their excellent reporting during the past few years on the disintegration of Mexico’s polity – another “decline of the state” in progress.  Just as interesting, Stratfor’s conclusion shows its (and our) assumption of America’s unlimited power and resources.

“U.S. forces are largely preoccupied in Iraq and Afghanistan. While it would take a great deal to tip the scale toward a U.S. military intervention in Mexico, we may now be at a point where that has to be considered given what is at stake.

The last time the United States meaningfully asserted control over a deteriorating situation in Mexico was in the early 20th century during the Mexican Revolution, when the United States occupied Veracruz for six months to protect U.S. business interests. If violence on the border started hurting the bottom line, the cost of not doing anything would start to approach the cost of military action. The potential for an escalation of violence between the cartels and the government spiraling out of control could tip that balance.

It is unclear what the threshold for U.S. action in Mexico would be. But the stakes are high. If the United States sees trade flows threatened, and the security situation deteriorating, Washington might see fit to intervene. And just because it hasn’t done so in a century doesn’t mean it will not choose to do so in the future.”

Belief that we could stabilize Mexico is amazing, on several levels.  Mexico’s population is over one hundred million people, roughly one-third the size of ours.  Their long-standing hostility to us, with considerable historical basis, would make intervention potentially explosive.  But most of all, this displays no awareness of how the world has changed.

Amazing ain’t the word. Stratfor’s analysis here caters to the bipartisan Washinton elite’s view that absolutely nothing should be done to put pressure on Mexico to reform but instead that the United States ( or rather, the American middle-class and below) should shoulder all of the spillover costs of poor governance by the Mexican state. Mexico has serious social, political and economic problems but they are fixable, at this stage but most of them relate to the corruption and parasitic culture of the Mexican elite itself. Invading Mexico is a proposal that is wrong on so many levels for American national interests that I hardly know where to begin.

Tighten the “safety valves” on which Mexico’s elite rely – the borders and remittances – and then diplomatically press for improvement in the economic prospects of Mexico’s bottom third of the population. Mexico is not a poor country, it’s a middle income nation where the state is traditionally used to enrich a loose political oligarchy.

Hat tip to Fester via Twitter.