zenpundit.com

This has some possible geopolitical implications:

Greek government in chaos with debt deal in doubt

ATHENS, Greece (AP) – The Greek government teetered and stock markets around the world plummeted Tuesday after a hard-won European plan to save the Greek economy was suddenly thrown into doubt by the prospect of a public vote.

One day after Prime Minister George Papandreou stunned Europe by calling for a referendum, the ripples reached from Athens, where some of his own lawmakers rebelled against him, to Wall Street, where the Dow Jones industrial average plunged almost 300 points.

Papandreou convened his ministers Tuesday night, and a spokesman said the prime minister was sticking to his decision to hold the referendum, which would be the first since Greeks voted to abolish the monarchy in 1974. Papandreou has also called a vote of confidence in his government, to be held midnight Friday.

“The government is not falling,” said Angelos Tolkas, a deputy government spokesman.

….A Greek rejection of the second rescue package could cause bank failures in Europe and perhaps a new recession in Europe, the market for 20 percent of American exports. It could also cause Greece to leave the alliance of 17 nations that use the euro.

European leaders made no secret of their displeasure.

“This announcement surprised all of Europe,” said a clearly annoyed French President Nicolas Sarkozy, who has been scrambling to save face for Europe before he hosts leaders of the Group of 20 major world economies later this week.

“Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts,” he said.

French lawmaker Christian Estrosi was even more direct. He told France-Info radio that the move was “totally irresponsible” and reflected “a wind of panic” blowing on Papandreou and his party.

“I want to tell the Greek government that when you are in a situation of crisis, and others want to help you, it is insulting to try to save your skin instead of assuming your responsibilities,” Estrosi said.

Sarkozy and German Chancellor Angela Merkel, who have been at the forefront of Europe’s efforts to contain national debt, talked by phone and agreed to convene emergency talks Wednesday in Cannes, France. Papandreou will also attend.

Merkel also spoke by telephone Tuesday with Papandreou, his office said.

The response was brutal in the international financial markets, especially in Europe. Greece’s general price index plunged to close down 6.92 percent, while in Germany the Dax index, the major stock market average, lost 5 percent – the equivalent of about 600 points on the Dow.

The French stock market closed down 5.4 percent, the Italian 6.7 percent and London 2.2 percent.

“Talk about your all-time bonehead moves,” said Benjamin Reitzes, an analyst at BMO Capital Markets….

While it is likely that the EU will muddle through this latest Greek crisis, I have to wonder if the EU will exist at all in five years? Or perhaps as a rump Northwest European confederation? This will not be the last debt crisis.

Our unlamented and departed Soviet adversaries used to talk about what they called “the contradictions of capitalism”. In the current crisis we are seeing the contradictions of technocratic governance as practiced by European elites. It seems that lacking the political ability to coerce Southern member states into genuinely accepting austerity programs, or alternatively spur their less developed economies to higher growth rates, the EU structure is both the raison d’etre and the obstacle to a solution.

An essentially undemocratic elite project, the EU is stymied by the residual democratic capacity of national citizenry to resist. Ordinary Greeks are not inclined to accept financial castor oil spooned by foreigners to please the international markets and I suspect the tolerance of German taxpayers for footing more than their share of the EU bills is wearing dangerously thin.

Either power will increasingly flow to the EU nations still writing the checks, making the EU even more unrepresentative, but more economically rational in political decision-making, or there will be a rush for the exit door.

ADDENDUM:

Greek Prime Minister abruptly sacks military chiefs

[by J. Scott Shipman]

To have an executable strategy, a nation needs the wherewithal to pay for it. This applies the United States, too. 

As the United States heads into an election year with rising unemployment, a double-dip recession threatening, and deep cuts to defense on the horizon (even as we continue to prosecute the war on terror) a controversy continues to brew in the South China Sea. China has increasingly heated up the rhetoric. On 30 September the Taipei Times reported on an opinion article in the Chinese Communist Party-run Global Times (the original article is here), calling on the Chinese to declare war on Vietnam and the Philippines over their intransigence with respect to China’s claim of the South China Sea as being part of China proper. While this tantrum might be a saber-rattling “fire for effect” exercise aimed at intimidation, the writer surmised the position of the United States:

“The US has not withdrawn from the war on terrorism and the Middle East … so it cannot afford to open a second front in the South China Sea,” he wrote…“[Military] action by a big country in the international arena may result in initial shock, but in the long run, regional stability can be achieved through great power strategic reconciliation.”

“It cannot afford” is writ large. What, indeed, would the US do if China followed the advice of this hot-headed pundit? The US Navy is operating at about 283 ships, and the op-tempo is wearing out both ships and crews—fast. A recent article in the Atlanta Constitution reported the USN is investigating extending the typical six month deployment for fast-attack submarines. As I wrote earlier, we are retiring our submarines faster than we’re replacing them. With the US defense budget under the axe for even further cuts, what is the proper course of action? And do we have a strategy supported by an adequate budget? Are we strengthening our relationships among allies, or are we neglecting relationships that will be vital if hostilities break out? I would submit the US refusal to Taiwan’s request to purchase modern F-16 C/D variants, offering instead upgrades for A/B sends a message of waning US resolve to honor the Taiwan Relations Act (TRA). (A rumor within the Beltway is the upgrades were a first step, with what the administration hopes will be a request by Taiwan for the troubled and increasingly costly F-35.) The TRA requires the United States “to provide Taiwan with arms of a defensive character”, and “to maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.” We may have that “capacity” today, but what are we doing to insure we sustain the capacity to maintain open sea lines of communications? Can we afford it?

Our friends in the South China Sea environs aren’t feeling the love. India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Vietnam have all expressed concern about China’s increasingly belligerent actions with respect to the South China Sea areas. All of these nations rely ultimately on the USN to keep the sea lanes of communication open. Most have modest defense budgets, but they’re beginning to realize the new reality and are acting and good for them—we could learn something in the reality department. Vietnam has ordered six Russian Kilo Class diesel boats (very good subs, btw), and the Philippines are shopping. Singapore has a pretty impressive sub fleet (six reasonably modern hulls) and national defense given her size. Taiwan has two 20-plus year old subs and two WWII era US boats that are 60 years old!

If we look at numbers, our strategy seems pretty puny. As our fleet continues to atrophy in numbers, the Chinese continue to build. An inventory of submarines in the area shows that between China and North Korea there are about 128 hulls compared to a total of 42 among the aforementioned nations. Our friends in the area will continue to need US submarine support in the area for the foreseeable future as subs are long lead time platforms.

In this theater alone, cutting our defenses seems nuts. Rather than cut line units, perhaps DoD should begin to improve/streamline our antiquated procurement and acquisition processes. Our acquisition process is so complicated we have a Defense Acquisition University (DAU)! At an estimated $124M for FY012, perhaps we should cut DAU first. Last year at Boyd & Beyond 2010, Dr. Ray Leopold shared the contrasts in commercial contracting versus government contracting. Commercial contracts are built on the presumption of trust, government contracts are written on the presumption of distrust. Rather than use normal legal remedies to hold mischievous and unscrupulous contractors to account, DoD has erected mind-numbing processes that attempt to eliminate any risk a contractor could successfully rip-off the government. And when a contractor does rip-off the government, the contractor pays a fine and continues to do business with the Pentagon. If someone steals from you, do you continue to do business with them? Not me. This would be a good place for DoD to begin true accountability—you can bet one defense company out of the market would send a message to the others. The sad truth is the revolving door between the military and the contractor community has created a incestuous and inbred swamp of rules and processes only the participants understand that are so impenetrable DoD has no idea how much money it is spending (never mind tracking waste)—so fiscal irresponsibility continues in an increasingly dangerous world with budget cuts guaranteed. What’s the strategy again? This madness is fast becoming an issue of national security. On our current track we could well be incapable of defending ourselves, much less our allies.

Here are few other ideas for consideration before touching a single line unit:

• DoD should lay-off every nonessential employee. Whenever there is a snowstorm in the DC area, nonessential personell are instructed to stay home or “liberal leave” is in effect. We need to disabuse ourselves of the luxury of the nonessential employee. Regular businesses don’t operate like this, neither should DoD. Every employee should be integral, essential, and necessary; if they’re not essential, we can’t afford them—not while we have troops in harm’s way.
• Stop double-dipping on 1 January. If a member retires from the military, they shouldn’t be able work for the government (often in the same office where they separated from service) and draw two salaries. If the member wants to work for the government,  pick one, but not both. We can’t afford it and this contributes to the ongoing inbreeding in defense. And here’s a cruel truth: why should we pay a member who could not continue advancing in the military a military pension and a government civil service salary?
• Flag officers and members of the Senior Executive Service should have a minimum five year ban on working in the defense or defense lobbying industry. Stop the revolving door. Our current mess was created by many of these folks (even if well-intentioned), they should take a five-year time out and give others a chance to fix the mess they’ve helped create.
• Abandon the current acquisition process and close DAU. Hire commercial attorneys at a commercial rate to write contracts based on trust, but contracts with teeth. This would be cheaper than the bloated and incestuous bureaucracy we now carry.  If a contractor defrauds the government, ban that company for 10 years from doing business with the government, and put the offending members in jail. Word will get around, and folks will behave.
• Allow contractors to earn 8-10% on their work and stop nickel-diming them on fee. Businesses are in business to make money.
• The government should assume more technical oversight/intimacy in procurement programs. We have too many generalist contracting officers who can be misled by an unscrupulous contractor, or perhaps worse, have no idea “what” they’re buying. The government needs to get engaged and informed and know “what” they are buying and know real costs.
• Develop a promotion system based on merit, not time in grade. Our promotion system breeds risk averse officers who focus on punching career tickets instead of doing. Following John Boyd’s “to be or to do” maxim, the promotion system should reward officers who think and take risks, not poster-boy/cookie cutter conformists. “We’re warriors, dammit!” was a phrase my old CO used—let warriors be warriors! Scrap time in grade and promote based on performance, and if folks don’t perform well enough to be promoted, separate them from service.

Robert Frost said good fences make good neighbors; well a good deterrent makes good neighbors, too—but fences and deterrence costs money. DoD can and must do better; business as usual is becoming a death of a thousand paper cuts for us, and our allies. We need a real strategy and the budget to make it happen—that won’t happen with our current acquisition rules. The axe should fall on the Pentagon procurement bureaucracy before it touches a single line unit.

America is better than this, we must raise the standard by bringing DoD into the real world of fiscal responsibility and contract law, so whatever our strategy it can have a sound fiscal and legal foundation.

That are complementary:

Fabius Maximus –Our fears are unwarranted. America is in fact well-governed.

….America is in better shape than Europe and Japan.  We have good demographics, sound fundamentals, relatively easily solved problems, and no powerful enemies.  Why the constant sense of crisis?  QE2, hyperinflation, climate armageddon, Obama the socialist, AIDS, alar on apples, jihadists, debt, swine flu – a constant drumroll of doom, explained by Peter Moore in “The Crisis Crisis” (Playboy, March 1987).   Answer:  elites govern a weak people by exploiting their fears.  For example, look at the “government is broke” panic.

• The Federal government’s net debt is only 2/3 of GDP, well below the 100% of GDP “red line” (that Italy reached many years ago).
• The short-term deficit is mostly the result of the recession.  The medium-term deficit results from the Bush tax cuts.
• Social security’s funding gap is small vs. GDP and easily fixed.
• The massive funding gap is mostly Medicare, easily fixed by adopting features from the mixed public-private systems in Europe.

Panic pushes Americans to allow cuts to popular social services plus increased and highly regressive taxes.  No matter who wins, after the 2012 election our representatives will implement the necessary policy changes:  raising taxes, cutting expenditures, rebuilding our infrastructure, and beginning the long process of reforming health care.  It will be another morning in America.  There is no crippling polarization, just distracting noise masking a consensus between both parties about the key points of economic and foreign policy.

We do not see this long-standing pattern (see the previous post for details) because our collective OODA loop is broken (see section 6 here).  That makes us easier to lead.  Relying on wealth-based elites to run the country has a cost.  They take a large share of the pie; we take a small slice….

Global Guerrillas –JOURNAL: Global Financial Cancer

….A couple of years ago, I wrote that the underlying structure of the global financial system was a “bow-tie.”  Here’s what I said (it’s worth going back and reading the entire article and this paper on bow-ties from John Doyle at Caltech):

If we look at this new global system from a distance, its architecture is something called a bow-tie. This is a universal control system architecture that underlies complex systems from the Internet to cell metabolism.

What is a Bow Tie?

The bow-tie is a very powerful approach to organizing a complex system (it’s a system design that is used by controls engineers.)  Visually, it starts with complex inputs (the left side of the bow-tie), boils them down into simple build blocks (the knot), which then allows the construction of complex outputs (the right side of the bow-tie….

….Unfortunately, as I mentioned in the earlier article, bow-ties are vulnerable to organisms that attach themselves to the knot at their center (like the way cancer uses the body’s metabolism system).  These organisms relentlessly use the bow-tie’s knot to for selfish ends (rapid growth).  The end result is typically death for the system.  My suggestion was that the instability we were seeing in the financial system was an indication that it had been co-opted by a malicious, self-serving organism.

Of course, at the time there wasn’t much data to support this systemic analysis.  That has been rectified with a new paper, The Network of Global Corporate Control by Vitali et. al. from ETH in Zurich.  This paper finds, through extensive network analysis, that a small group of tightly intertwined financial institutions control the bow of the global financial system.  It is in effect, the world’s first super-organism….

They are both right. Probably not perfectly, the American economy, even more the world’s, is too complex a subject, but right enough.

FM is right that the emerging class of people I have been calling “the Oligarchy” the past couple of years do not intend to deliberately implode the system that is working outrageously to their benefit. They are currently in the stage of trying to come up with an arsenal of tax-farming schemes that will pass political muster (i.e. – not provoke uncontrollable, “Arab Spring” street demonstrations or a successful populist electoral revolt  that would eject their sycophants from government en masse in a single election) and are quietly, methodically and strategically neutering the capacity of the populace to resist their rule over the long term. It is there that we see seemingly unrelated measures as the coordinated political attack on public education and university education, restrictions on the ability of citizens to get courts to review arbitrary actions of Federal agencies, imposition of laws to permit total surveillance of US citizens and acquisition of their personal information and so on.

The elite, who are not completely cohesive or formally organized, are supremely confident in their ability to manage the technocratic economy they are putting into place, or if bumps in the road appear, to squeeze sufficient new leverage from the populace through inflation, devaluation and other forms of expropriation. Unfortunately, I am not confident that these folks are nearly as competent as they imagine themselves to be. Nor am I sure that the global system that they have built, a high-performance, deeply complex, ultra-leveraged, financial sector dominant political economy isn’t as fragile and dangerously unstable as people like John Robb and Nassim Nicholas Taleb have maintained it is. The system might not just crash, it could crash to extreme depths with unprecedented speed with unforseen consequences (financial systems also ensure the reliable and continuous logistical flow of *food* and *power* to population centers).

Gifts from a generous Meatball:

Hardcovers too. Nice.

The Party: The Secret World of China’s Communist Rulers by Richard McGregor

Monsoon: The Indian Ocean and the Future of American Power by Robert D. Kaplan

I have already dived a few chapters into the McGregor book and it is very good. What makes it good is that is running counter to the message of the herd in terms of popular Sinology, which is to emphasize that China is a) uniquely Chinese with deeply introspective Confucian civilizational traditions (that’s modern PC-speak for “inscrutable”) and b) the brave new world of liberal, globalized, capitalism with a benign technocratic face.

Now there’s important truths in both of the popular mass messages on China, incompatible as they can be with one another. The economic rise of China in a globalized economy is the most important story of the last quarter of the 20th century and the first quarter of the 21st ( collapse of the USSR is second; the Soviets were beaten before they imploded and imploded largely because they knew they were beaten). China is also not like America, not even when they imported stock options, blue jeans, McDonald’s and the American jobs that used to create all those things. China’s civilization is truly of a dizzying depth, complexity and scale that is best compared to Europe rather than a specific country. That in itself, is important because it points to how ignorant the average American policy maker is, never mind the average American, about what makes their Chinese counterpart tick.

[ Sidebar: Perhaps the Obama administration assembling a new senior “China/East Asia” diplomatic and national security team that does not include a single official with any professional knowledge of China was unwise? How is that better than the Bush II administration shunning Arabists during the run up to and occupation of Iraq? It is not that these diplomats and officers are poor, they are smart and experienced, but none of them are China specialists. Or Japan specialists, for that matter and only one has expertise in Korean affairs. These are the region’s great powers! This is like turning EU/NATO policy over to diplomats who speak Hindi and Swahili ]

What McGregor is doing in The Party that is important is reminding Westerners that the Soviet experience, particularly the Leninist Party model, is still deeply embedded in China’s political DNA. Not in an ideologically Marxist, Khrushchevian, shoe-pounding sense but in a functional sense. In a structural sense. In an instrumental governance sense. In a networking theory sense. And all these characteristics, which are largely innately hostile or indifferent to the values of liberal democracy, continue to shape Chinese policy, leadership succession, national security, defense strategy and geopolitical outlook to this day.

That doesn’t mean China is itching for a war with the United States, but it means they are playing a longitudinal strategic game where the first goal is to stay in power forever and the next is to advance one’s position relative to others.

We are the other.

China is not an enemy but she is no friend or ally of the United States either, yet it is the most important relationship the US has to manage for the next thirty years – and that relationship in a strategic context with rising India, Japan, South Korea and Australia.

It might help if America brought a team to the table that included people who could tell Han Fei Tzu from Mencius or spoke Chinese.

Not John Boyd this time, but John Robb.

John recently gave me a preview of this idea in a much more specific context:

….Here are some of the economic reforms that turned the horde of Genghis Khan into a steamroller than flattened most of the world’s kingdoms/empires.*  He:

1. Delayed gratification.  He banned the sacking of the enemy’s camp/city until all of the fleeing soldiers, baggage, etc. were rounded up.  This radically increased the loot accumulated and ensured it could be shared among all of the participants (he confliscated the wealth of those men that cheated by looting early).
2. Systematically shared the loot based on contribution and merit.  He disregarded title or status and systematically rewarded loot to everyone in the horde that earned it (the traditional approach was to let a few take it all — sound familiar?).  Of course, that fairness pissed off the nobility since they were used to backroom dealing and hereditary rights.  However, the benefits of this system, were far greater than the costs.  To wit:  He cemented the loyalty of the men and was able to attract thousands to his banner for every noble lost.
3. Protected those that make sacrifices.  For men killed in the campaign, he paid their share of loot to their widows/orphans posthumously.  

*of course, the first unsaid lesson is:  attack the places with the most loot.