Back to the Future

In 1992, a very famous book announced the End of History. For the better or for the worse, current events may be pulling us back to the future, i.e. to change under incertitude, the old feature of human condition. One of the foremost economic crises in modern times is not only blurring the vision of a triumphant capitalist market, but is also reopening the possibility of a political eschatology somewhat different from the everlasting parliamentary State.

While governments minimize by a full order of magnitude the quantities of financial medicine they should inject into the arteries of a chocking world trade, entire populations get closer everyday from feeling personally the pains of new poverty. The higher the recent growth their respective countries had reached, the harsher the depression will be for them. The most dependent zones on foreign trade are likely to undergo a severe social turmoil. For once, Western Europe is not the weakest link. Equipped with the strongest social infrastructures and relatively good reserves, the area is also protected by its dominant inner trade, as well as a long habit of bad news and of lagging in economic growth. “Chinamerica” should be the seismic zone, together with Eastern Europe. The United States cannot solve all issues by simply playing with an overwhelming currency, as in the good old days, and the Chinese armed forces are not strong enough to fight a violent resentment against so great lost expectations.

What’s really new is that domination of the State is not as much at stake as the State itself. We are not confronted with the prospect of opposition parties taking over, but with the one of a pervasive distrust for States in general. Tax boycotts could very well appear in America, and riots in many places. Young people raised in false hopes will show their anger. Nihilistic sabotage, rejection of intellectual property may also join the symptoms. Such disorders, not being driven by a structured vision of society, are among the most difficult to fight by anything else than extreme ideologies. Even Islam may prove unable to capture a negative energy essentially indifferent to geopolitics.

You may smile at this kind of doom saying and you may be right in only one case: if we can rebuild the system nearly as fast as we destroyed it, if the economy can take a fresh start on the basis of a fraction only of the assets which were annihilated. If you do not believe this is a real possibility, then better get ready to meet History again.

Bertolt Brecht had a say for the optimist and one for the pessimist. You can now make your choice: ‘The worst is never certain’ and ‘The belly is still fertile from which the foul beast sprang’. Personally, I would pick both.

This is how the world goes.

No explosion, Turkish-style strangulation

Quite a lot was learnt yesterday from the settlement of Lehman’s credit default swaps. First of all, we were all relieved to see the process complete with no major incident. Simultaneously, the reasons to continue worrying were made clear: (i) the main losses had already been taken and gradually paid for over the last weeks, under the form of both margin calls or “stop loss” returned positions; (ii) payments were made using the recent giant bailout packages as well as the central banks’ new credit facilities; (iii) and such packages and facilities had precisely been precipitated in order to allow the settlement. We also learnt the exact amount of CDS contracts now registered in the Depositary Trust and Clearing Corporation’s clearing warehouse, totaling approximately $34.8 trillion at this time (as opposed to the previously estimated $ 60 trillion, which was based on surveys, and down from an actual $44 trillion in April).

The residual funds transfers that took place yesterday were only the last ones to complete an actual monster loss of about $400 billion. There was basically no difference between nominal and actual losses: margin calls are not a free ride, nor is returning one’s position (unless this can been done way before the event and in a none-volatile environment). Instead of one-day explosion, death took therefore the smoother form of a slower Turkish-like strangulation.

One has to remember that Lehman’s CDS were nothing but a first test of the process, representing a minute portion only of the total outstanding Credit Default Swaps. It is true that the percentage of loss was extremely high in this specific case due to an underlying bankruptcy. It is yet fair to say that very few net positions on all other CDS are winning, in a global situation when almost if not all credit ratings are crumbling down fast.

Regulators are of course scrambling to take some control over CDS. All they can do, however, is limit the creation of new ones and give them more transparency. They cannot reduce by 1 cent the present amounts of further losses to settle which should reflect in the quarterly reports to come, at least for listed companies.

This is not good news for the stock markets and yet

this is how the world goes.

Multiple organ dysfunction syndrome

Considering that the lead physician in the intensive care room was, by far, the most incompetent of all, we are very lucky a proper treatment was eventually applied. Following the bold plan designed in UK, Europe has mobilized enough resources to reestablish interbank confidence, and driven a clumsy US administration into following (more or less) the same path. Theoretically things should improve for some time: guarantying interbank credit is like inserting a pacemaker to make a failing heart continue to beat. Recapitalizing major institutions is also a good remedy: it is not only a better way of injecting liquidity than adding to the total amount of debts, but also leaves some hope of getting part of the taxpayers money back once the markets are completely cured.

No doubt governments will use the opportunity to treat the very origin of the disease, i.e. uncontrolled leverage. Most financial institutions should be submitted from now on to banking rules, and especially the Cook ratio. Exposure will become more explicit and subject to surveillance. New equivalents of the good old Glass-Steagall Act, which had protected generations of depositors against the hidden risk of seeing their own money burn under the form of mindboggling securities, should be put into place. There is no need of a world government to achieve this; any local regulator of a market large enough to be indispensable to global investors, can impose it worldwide.

Everything would then be fine if the banking system was the only failing organ. Unfortunately the volume of wealth destruction which has occurred goes far beyond the $ 3 (or perhaps 5) 000 billion governments can possibly gather to reflate the economy at a proper level, and goes far beyond banks. The sepsis has reached industrial corporations, both as stockholders and as suppliers of markets. It has reached pension funds, as well as consumers directly. Even if the real risk represented by CDS (see previous posts) did not turn out as disastrous as it could be (we’ll know for sure before the end of year), a consumers’ market crunch is inevitable, which cannot be adequately compensated by sufficiently massive injections of additional cash. Even if some confidence was to be restored for a while, a deep recession would still be inevitable.

This recession will be dangerous for fragile stock markets and for depleted public treasuries. It should also bear large-scale social consequences. The average person is still stunned and silent. Scared for his (or her) family‘s future, he cannot believe what he is witnessing, and hardly realizes he will be the main payer of other peoples faults, the same people who just kicked him out of his home and his job or threaten to do so anytime soon. It will not be long before he awakens to the fact he has been playing an unfair game for the profit of an unreliable, reckless and somewhat criminal elite. Then what is likely to happen?

This is how the world goes.

Good Sunday

Today is Sunday; most stock markets are closed except in the Gulf area; it’s time for a pause. My recent posts have be depressing friends and giving nightmares to my son. So, let’s sit down for a minute and look and at the bright side of things. Yes, there is a good side.

Free markets, as opposed to planned economy, are as important and useful an invention as writing. They allow people to exchange any services (the so-called ‘goods’ are in fact services) they are capable and willing to exchange, and thus to benefit from the existence of other economic agents also capable and willing to exchange. As such, free markets are definitely a good thing and should be preserved.

Free markets, however, must always be regulated. Aristotle, who was the first theorist of markets, explained it very well: without a public control of weights and measures, people could not possibly know what they are actually exchanging, and would end up being cheated most of the times. Indeed, a large majority of goods cannot be checked at the time of purchase: how would we know what molecule is in the pills, if the pilot of the flight we are about to take has been properly trained, if the securities we intend to buy correspond to real assets? Two millennia later, Adam Smith, who was not a communist, insisted on the importance of public infrastructures, including courts, to make the system work.

An essential aspect of globalization is that a significant part of the financial markets was able to evade public regulations and controls. This is the main cause of the major problems we are currently confronted with. Things could have gone otherwise: it would have been relatively easy for the regulators of either or both the two most important economies, the USA and Europe, to impose global regulations. Exactly in the same way that the USA were able to efficiently pressure Switzerland (and other countries with ‘offshore’ banking) into submitting themselves to certain US rules (the deadly threat being to ban their banks from US markets), it would have been possible to prevent the global trading of uncontrolled securities, such as subprime loans and CDS. Ideology was the sole obstacle: 20 booming years of reagonomics and thatcherism had convinced many – against the constant opinion of free markets thinkers- that markets could self-regulate. We now realize that this was nothing but magical thinking. The good news is that, after we are finished paying the tremendous price, we know the cause and we know the remedy. No doubt it won’t happen again for a very long while.

Toxic securities are not the only issue the current crisis can help solving. The price of assets had reached ridiculous levels. Some companies were selling for 100 years of profits, when we now know (see Adam Hartung’s excellent blog on the blogroll) that no company has ever been able to anticipate the necessary market disruptions for any such length of time. The same applies to real estate which had been reaching price levels which would have made sense only if the earth was overcrowded, whereas millions of square miles can still be build (most of London is underused), and whereas most office space in the world is empty at least half of the time. It will take a long while before a closet should reasonably be worth $50.000, a price recently reached in several cities, including Mumbai…A world with cheaper enterprises, real estate and commodities can only be a better world.

Last but not least, the economic comeback will be centered on high-tech sectors, including green techs. This is also very good news. Feeling better now?

Have a nice Sunday. Worries on Monday. Perhaps also a quieter weather for a few days… until October 21, date of the first test for the CDS blast.

This is how the world goes

How will the world look like when the shock wave hits?

It has been fashionable for some time now to distinguish between ‘finance’ and the ‘real economy’. This is not very sound as finance is nothing but the cardiovascular system of the economy (made of goods and other services). The heart is now in surgery room, surrounded by physicians with limited knowledge and – above all – limited means. All they know is not to repeat the same mistake that was made in 1929, which consisted in adding a liquidity crisis to a stock market crash, and putting the overall activity close to a standstill. Governments and central banks are now pouring all the cash they have and soon all the cash they don’t into the failing arteries, in order to keep liquidity at a par with the massive destruction of wealth which is now occurring on stock markets. They definitely try their very best to save the banking system from complete crumble, by guarantying and nationalizing one after the other major financial institutions. Even after their current reserves are gone, they should be able to continue doing this by using their status of ‘least bad’ borrowers: sovereign obligations (close to having null interests’ rates) shall allow them to pursue this exercise for a while.

There is however a quantitative limit to the number and scope of entities they can bail out. Financial institutions are one important thing, and yet not the only components of the financial system. Corporations, pension funds, high net worth individuals are also facing almost unprecedented financial losses. Even massive tax cuts cannot compensate such losses (tax cuts are more or less automatically granted as losses are not supposed to be taxed in any case). For the economy to work, corporations and high net worth individuals must invest and pay salaries, while pension funds must pay pensions to consumers. Globally, they will not be able to do it at previous levels for a long while. And this is precisely how the shock waves hit the rest of the economy.

At this point, even if both causes and treatments are different from what they were in the 1930s, the phenomenology of the crisis shall look pretty much the same: massive plunge in the price of assets, massive unemployment, and massive physical poverty. As during the 30s, there will be some winners too: these are basically the owners of cash, now able to purchase the massively discounted assets as they come, provided however their cash is in safe currencies placed in a safety deposit boxes or nationalized banks. Opportunities, as a matter of fact, should multiply for them when the stock market goes down to 25-30% of its peak values, and real estate (or contemporary art) 50 to 20%. The problem is obviously that most people and corporations not only have little cash but are carrying heavy debts. Leveraged assets (many exist in the private equity sector) should go bust, and consumers’ markets will violently contract, fueling the vicious circle of recession. This should happen even if the CDS shock wave does not hit (see previous posts). If it does, you’ll see your attorney offer to work for food, and fascism come back.

Many people do not realize this. As few of them were directly exposed to the stock market, they are happy to see the ‘traders’ and the rich in general pay the price of their own mistakes, and believe they won’t have to pick the tab also, while governments are finding a solution. How wrong. They should start discovering the ugly truth sometime in 2009, and feel the consequences for a while (5 or 20 years?) afterwards.

How will the final relief come? As usual instant experts will promote gigantic schemes involving new ‘Bretton Woods’ (to achieve what as this is not a monetary crisis?) and ‘Marshall Plans’ (how can this be done in the absence of the equivalent of the 1945 USA?). As usual also, the military will attempt to be the new trusted economists, pointing at strategic hotpots (Iran, Taiwan) and lurking at weaker countries were money is left.

Let’s hope Obama can resist and someone comes up with better ideas.

This is how the world goes (sorry about that)

Don’t bother to be pessimistic: things are much worse than you may think

Remember my last post on the Credit Default Swaps? Dubai just obtained a 15 billion $ bailout from Abu Dhabi to face a default of their own Credit Default swaps. Dubai…

Let’s look again at the issue. The outstanding amount of subprime debt is about of 1,300 billion $. The outstanding amount of CDS is about 50 times larger. The good news is that a large part of this amount is made of offset positions by players reducing their exposure or netting their own contracts. As it is currently impossible to know the net total amount of outstanding CDS, let’s make the most unrealistically optimistic assumption, and consider 90% of the positions as offsets. The bad news is we are still left with at least 5 times the total amount of subprime debt.

Another element to be taken into consideration is that subprime debt is somehow based on real assets: even if they are worth a fraction only of their nominal value, buildings and apartments are still worth something. This is not at all the case with credit default swaps which are based on nothing else than gambling, a very special case of gambling, indeed. Casino gambling is regulated, CDS are not. Casinos have money to pay their own losses; this is not the case with CDS issuers. Casino’s risks are stable; CDS’s risks are not. Quite the opposite in fact: Credit Default Swaps are bets on the credit quality of third parties, at a time when the credit quality of all institutions in the world (including governments) is crumbling down under the effect of the financial crisis. Therefore most (net) CDS are doomed.

Just as the explosion of an H-bomb is initiated by the explosion of an A-bomb, the subprime crisis is getting ready to trigger the CDS crisis.

How many crises are we dealing with? Let’s count. 1 is the end of cycle which started last year and was accelerated by the surge in the price of commodities. 1 was strong enough to entail a recession that the general public would have started feeling in any case by the end of 2008. 2 is the subprime loans crisis, which already turned out to be big enough to shake the world banking system. 3 is the CDS crisis which has not started yet but looks inevitable, considering the combination of 1 and 2. 3 is definitely capable of destroying a large part of the global financial system. 4 is the subsequent mega recession which should logically follow, with major expected unemployment levels and market crunches.

Oh my, enough for today (to be continued though if you can still face it)

This is how the world goes.

From Financial A-bomb to Financial H-bomb

On the A-bomb (i.e. subprime securities meltdown), please see the March 11, 2008 and March 20, 2008 posts.

As if things were not bad enough, a financial H-bomb is about to explode in Wall Street. The name is CDS for Credit Default Swaps. Please get ready for the blast.

Subprime securities and Credit default securities have a lot in common: i) they were designed for the sole purpose of generating fees, ii) they are submitted to no control, regulation or authority whatsoever, iii) they appear as assets from the outside, iv) they are in fact instruments of credit deprived of guaranties or collaterals, v) they are worth a small fraction only of their book value, v) they contaminate any other assets they are combined with, vi) they are the product of a collective crime (by financial institutions and absentee- regulators), vii) they have generated unheard of amounts of fees for the culprits, as well as vast quantities of ideological exhilaration for the self-restrained regulators, viii) their necessary elimination may represent the strongest blow ever on the world economy.

The technical difference between them is minor. Subprime securities consist in postponing as long as possible the built-in default of borrowers, by lending (third party’s) money to people who cannot pay it back, and differing installments for a while. CDS consist in being paid to guaranty the credit quality of any entity, with no obligation of offering a collateral. You do not have to be an insurance company to do this, not even a bank, but simply licensed to sell securities. You do not have to tell the market how much risk you are taking, as these securities do not appear on your balance sheet, except as generated fees. Of course you do not need to have the money to fulfill your commitments. Best of all, you can get rid of the risk by selling the securities (confusingly mixed with other derivatives or assets) to your victims. I know, it sounds like a joke or a mistake. If you do not believe me (how could I blame you?), just search the web for “Credit Default Swaps” and see by yourselves.

Now the main difference between them is not technical. It is their magnitude. Subprime securities are in thousands of billions of dollars. That is certainly a lot of money, and enough to create a recession when taxpayers have to pick the tab. But it can still be handled somehow.

So, what about CDS? Their total outstanding value this morning was close to (hold your breath) 60.000 billion dollars, i.e. slightly more than the total of all bank deposits on earth or 10,000$ per living human being (including infants in Ethiopia) . If any significant fraction of them go bust, then we’d better have kept a few rolls of cash in our drawers.

What can I say?

This is how the world goes.

A solution to the oil crisis?

The most serious dangers come unannounced and generals are not the only ones to prepare for the last war. We became aware of the depletion of oil& gas resources and now start panicking at the very time an exit solution is at hand.

No matter what the primary source of energy is (hydrocarbons, biomass, nuclear, solar, geothermal, aeolian or hydraulic), electricity is a universal carrier, as any primary source of energy can be transformed into electric current. Electromechanical heat engines or kinetic energy directly activate turbines which in turn produce electricity ready for distribution.

The only limit to existing centralized or semi-centralized electric distribution grids is a lack of portability, excluding most mobile engines, with the notable exception of railways. Until very recently the weight and inefficiency of batteries was such that the additional energy needed to simply transport them, made electricity impractical for most vehicles.

The situation has changed. A combination of major improvements in the technology of batteries and a bright and simple idea are placing us on the eve of a major energy revolution. By 2011 the automotive industry will put on the market not prototypes but mass series of electric cars with an average autonomy of about 150 miles, a threshold for convenient urban use. A larger autonomy is of course required for a full substitution of thermal engines, considering in particular the time it takes to recharge a battery. This is where the bright and simple idea comes into the picture. Just as Formula1 cars can be refueled in a matter of seconds, car batteries can be instantly replaced at will. Using the existing network of gas stations, extended to other kinds of outlets, car batteries will be recharged from the power grid, allowing subscribing drivers to exchange their empty battery against a charged one for a fee, with no waiting time. The system is being experimented by Total in Israel as we speak. No doubt it will be a tremendous success, leaving only aircrafts and boats (partially) to the old hydrocarbons system… until the next generation of batteries comes up.

Technically, substituting most of the existing installed base of mobile thermal engines can be done in a decade, and this is the kind of good news both the world economy and the environment were badly waiting for. Extending the substitution to coal-supplied plants is nothing but a matter of political opportunity, as it is both easy and tempting for certain countries to tax ‘dirty’ imports, made from polluting energies together with other negative factors (e.g. slave work). Heating is likely to be the last element to be aligned with the new system, and the price of fossil energies mostly will decide of the pace for this sector.

While these events are taking place, the skyrocketing price of oil & gas is generating a new cycle in exploration. This means that as the use of petroleum products decreases the amount of reserves will increase in possibly unprecedented proportions. For instance, it has been know since the 70’s (before the first oil crisis) that the Western Mediterranean basin, having been depleted 150.000 years ago, is covered with a thick layer of salt, which is not unlikely to hide among the largest fields of fossil energy on earth. Exploration (now possible at such depth) should soon start in Marseille and Cyprus. If successful, the oil & gas markets are doomed even sooner than the above mentioned revolution would have entailed by itself.

A zero oil economy, therefore, with local exceptions in the poorest countries (then unwillingly limited to using ‘cheap’ oil!), far from belonging to science fiction or utopia, is a good prospect for the middle of this century. Obviously, the question of the primary energies remains open. Most large resources have a limit or a downside. Nuclear energy is dangerous, coal and biomass extremely polluting; and other energies still insufficiently efficient. Nuclear energy, however, is the only one which can sustain the new energy system on a massive scale, until technological innovation allows its potential elimination. Reserves are not a problem at this stage. The proven reserves of uranium can cover 60 years of the current needs. The limited proportion of mineral costs in nuclear energy (about 5% of total costs) makes exploration (today almost at a stop) financially easy. Above all, a new generation of so-called ‘rapid neutrons reactors’ exploiting the plutonium produced by the very transformation process occurring in reactors, should soon increase by a factor 50 to 100 the efficiency of Uranium 238 (which represents 99.3% of the reserves). Nuclear energy can therefore offer a constant fallback position, as long as it takes to make non-polluting renewable energies, e.g. solar and tidal, efficient enough to become the main sources of primary energy for the electric power grid.

The laughable paradox in all this is that crumbling petroleum markets could become be the main factor of slowdown in the change, postponing somewhat the major economic benefits of the energy revolution to come (new technologies, new products, new markets, new investments, reduced financial and environmental costs). The other factor is more simply political. How long will it take for Europe, Japan and other countries to force the US (where 49% of electricity generation comes from burning coal) as well as China to drastically reduce their consumption of highly polluting coal, through new treaties against global warming and import taxes? Some time indeed.

This is how the world goes.

Capitalodespotism in Chinamerica and other places

Capitalism likes Free Market up to a certain point, i.e. as long as it means not to be hindered from selling and buying any quantity of merchandise. Capitalism, however, starts disliking Free Market when it allows foreign products to do better than your own and manpower to increase its costs, or when it prevents the governments under your influence to grant you subsidies and de facto monopolies, or to negotiate for you some privilege abroad.

The ne plus ultra is a combination of Free Market and Despotism, a good model of which is now in place in Chinamerica, a chimera which should stay alive as long as the two economies can complement each other. In order to do so, the West must keep the most advanced technologies, while the East keeps sheltering the cheapest mass production system. The West must continue to shift its intermediary productions to the East, while retaining most of the profit margins as a payment for its own technologies. In exchange, the East benefits from massive investments, becomes a dominant exporter, and grows at a rapid pace.

Despotism plays here a double role. Totalitarianism – a direct legacy of the Communist system – is used to control the cost of manpower and reduce sovereign risks in the East, while covert public subsidies and militarization allow the West to maintain its vital technological edge.

Unfortunately for its beneficiaries, such a synergy cannot last forever: a) Western governments are unable to justify their hidden support to totalitarianism, a system absolutely opposed to their own public opinion’s ideology. The Olympic flame crisis is nothing but an example of this difficulty. b) Transfers of production entail transfers of technology; while at the same time a constant increase of wealth in the East allows a gradual build up of an autonomous technological capacity. At some point the two poles are therefore bound to compete on the same technologies, losing their complementarities. c) Shifting production in the East also implies growing unemployment in the West, reducing in relative terms the size of Western markets and increasing social costs and pressures in the West. This reduction cannot be fully compensated in the East by the growth of its inner market, exports representing too large a share of the national income.

For the battle to come, the West is at first sight better placed than China, as India represents an excellent substitute for cheap mast production with less ideological downsides. A political liberalization of China is a very difficult exercise, never attempted to this day. Economic growth being a strong factor leading to it, the immediate outcome is likely to be a new surge of despotism and repression, making it very difficult for the West to keep a harmonious relationship with China, and fostering the shift to India.

On the longer run, however, the West is likely to lose the economic war, for lack of innovation. Mechanical engineering and electronics are already behind. Its advance in both computing, telecommunications, energy technologies is soon to be reduced to nothing. Its financial techniques are currently undergoing a fatal blow. Biotechs and materials are lagging. The absence of both large-scale military opponents and financial reserves of governments limits the prospects of military funding of R&D. The cost of manpower in developed countries has seriously weakened their agriculture. Remain the consumers’ brands. How long will it take before there are taken over by the actual producers?

If and when this happens, a new poverty in the West will call for a new despotism.

This is how the world goes.

Who is leading trade? – The facts

(source WTO, 2007)

Share of world merchandise exports

o   1948: United States 21.7% Europe: 35.1% China 0.9%

o   2006: United States 14.2% Europe: 42.1% China 8.2%

Share of world merchandise imports

o   1948: United States 18.5% Europe: 45.3% China 0.6%

o   2006: United States 21.0% Europe: 43.1% China 6.5%

Intra-regional trade flows (2006)

o   North America: 905 b$

o   Europe: 3651 $b

o   Asia: 1638 $b

Inter-regional trade flows (2006)

o   North America-Asia: 1022 b$

o   North America-Europe: 709 $b

o   Europe-Asia: 970 $b

Western identity & Residual Privacy

Conflicts between public order and private liberties are as old as jurisprudence. The only conclusion, however, that was able to survive after centuries of critical thinking and political experience, is that whenever privacy disappears and the limits to public control are lifted, law becomes a mere shadow of itself. There may be, as a matter of fact, no better definition of totalitarianism and tyranny than the crossing of these borders by governments and public force.

It is also a constant lesson of history that, at any given point of time, excellent reasons can be found for shrinking somehow the sphere of privacy or violating it altogether. Authorities can always point to some actual or imaginary danger, coming from some inside or outside enemy, to justify such abuse. Every time the argument remains the same: “honest people have nothing to fear: their life can be turned into a glass house at no risk to them, as only the guilty has motives to protest”. Opponents to invasions of privacy are thus accused of criminal inclinations, absence of civic sense or lack of patriotism. Submission at all costs to the supposedly superior interests of law enforcement authorities becomes the sign of a good citizen, while taking at heart the principles of law in a civilized society is seen as proof of moral weakness, as if  hoping for a good police prevented  from blaming a bad one.

Perfectly aware of the implications of so dangerous an ideology, the fathers of modern constitutions were unanimous in safeguarding privacy against recurrent attacks. All over the Western hemisphere, these men thought that individual freedom is together with dignity the only value to be placed above any other consideration, even when efficiency and security are at stake.

The Universal Declaration of Human Rights thus sets forth: “No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honor and reputation. Everyone has the right to the protection of the law against such interference or attacks.” Few principles are now turned into more mockery. The “War on terrorism” was the occasion for the United States and the United Kingdom to ridicule all such rules. Germany, the most protective country for privacy, and France, against its own constitution, are now on the move. Spyware – ironically renamed ‘policeware’ – will be officially allowed, putting the entire content of private computers at the disposal of law enforcement authorities. At all times and from any place, all communications and data belonging to the targeted persons will be available online for analysis and storage, – an invasion of privacy in many ways much worse than putting cameras in bedrooms.

The fact that these new methods of surveillance are initially placed under the control of a judge is far from insignificant, but is certainly not a sufficient protection. As long as judges are not granted the appropriate tools allowing them to verify effectively the strict application of their orders, as well as the destruction of data irrelevant to specifically authorized investigation, the door is more than open to abuse. No one of course will give judges access to spyware allowing them to check the computers belonging to law enforcement agencies.

These methods are relatively inefficient against criminals, as was shown by the inability to catch Osama bin Laden in spite of the largest deployment ever of surveillance technologies. Criminals will use pigeons if need be. They are on the contrary very efficient against the average man, generally unaware of such threats and always defenceless against them.

There was a time when the Western legal system could be arguably opposed to Eastern despotism. This time is no more. The only residual differences are between primitive methods of coercion, such as actively blocking access to selected website, and the more sophisticated invasions of privacy through spyware or similar instruments.

The main combat of the 21^st century will not be between Right or Left or West and East, it will be between the defence of civil liberties and the submission to the universal tyranny which taking shape in front of us. Time has come to take sides.

This how the world goes.

Nationalities in Europe: Confederacy or Commonwealth?

The European Union started as a future confederacy, all it has become is an intricate commonwealth. Both have their own advantage. It is however important to neither mix the two things up, nor consider them as mutually exclusive. A confederacy or confederation can emerge within a commonwealth and be a part of it. Conversely, not all members of the commonwealth wish to participate in a confederacy. Trying to reform the European commonwealth in order to turn it into a confederation would be a mistake, for members actively resisting such integration will always be found. The two entities are compatible as long as they remain separate.

The British (or should I rather say the English?) are experienced and comfortable with commonwealths. They reject the idea of a confederation, for a good reason among many. UK is the only country in Europe entirely made of clearly distinct nations placed under the domination of one, and odds are high that several of them would obtain quasi-independence as autonomous parts of a confederation. Scotland and Wales do not have the critical mass to be actual countries in the modern world, but could become direct participants in a confederation, severing more ties with England than what they have already been doing. The more diluted the European Union, the safer Westminster is. Italians, for symmetrical motives, are inclined towards a confederation: as none of their rival regions ever succeeds in dominating all others, more European integration can only reduce their persistent tensions, while preserving the concept of Italian unity. Belgium is placed in a similar situation, with none of the two provinces being able to takeover.

Some other countries in Europe also have serious problems with their nationalities, but these are minority problems of a different nature. Spain is the main one with Basques and Catalans, followed by Greece with the Turks in Cyprus. Hungarian minorities in Romania and Slovakia, or Corsican separatists in France do not have as much momentum and resolve. As Greece, Romania and Slovakia are most unlikely to be initial members of a European confederation, the only real question mark comes from Spain which, until now, has been demonstrating strong pro-European inclinations (while keeping a close eye on its historical ties with Latin America).

A commonwealth, in any case, doesn’t help solve such issues. Being indefinitely extensive, even the presence of Turkey in the current commonwealth is easily conceivable, whereas its presence in a European confederation would hardly make any sense. A confederation can only happen between countries willing to share at least the same currency, and common physical borders, a step already taken by many. They must also accept to form a joint constituency and elect a confederate administration endowed with actual (yet not exclusive) judiciary, diplomatic and military responsibilities. This does not look totally unrealistic if we consider at least the initial core countries of the EU, too strong to leave all their military decisions to NATO, too weak to act separately and by themselves on any significant scale. In agreement on most international issues, they also share more or less the same economic and social model.

European integration was put at a standstill by its extension to Central European nations. No matter the structure of institutions, there was no way so many actors could to be in agreement on all major policies, or could build anything else than a forced free market economy, opposed to the views an traditions of countries that had initiated EU. France was the first one to back off, vetoing by referendum the treaty of Nice. This does not mean that the confederal idea is dead. Having supported and ratified the so-called ‘mini-treaty’, which effectively ends the institutional deadlock, France has proven to be back in Europe. With his Mediterranean Union initiative, the French President is also trying to show that a loose commonwealth can be added to a tighter one, a concept Germany is reluctant to accept. Would a loose confederacy within a tight commonwealth be agreeable to both of them? That’s about all it would take to make it happen.

A small European confederation would inevitably become the dominant element in the large European commonwealth, an unpleasant prospect for some other members, but one they could do little to prevent, as any move towards unification can be made within the framework of the established system of “reinforced cooperation”.

As it is already hard to understand the past, I shall certainly refrain from predicting the future. All I can hope is that clarifying what EU has become, i.e. an over-administrated (and under-managed) commonwealth, may help find new and perhaps more reasonable solutions. Reasonable solutions are rarely the most probable, and yet may never be deemed impossible.

This is how the world goes.

Italian discipline and stability

Seen from abroad, Italians are undisciplined and their politics chaotic. Forget the cliché. Having inherited from Ancient Rome, one of the most militarily societies in history, they are disciplined. Having inherited from the Florentines, they consider politics as a science.

When a bill of law was introduced a few years ago prohibiting smoking in restaurants, bars and public buildings overnight, you might have bet anything that it would have been treated as a joke. You would have lost. The rule was instantly enforced with total efficiency. Likewise, if you believe that the Italian government is utterly unable to collect taxes, you may find it difficult to explain why this is the only place on earth where any citizen has a personal tax number which must be reported on every invoice.

It is true that each and every Italian citizen violates some law at any given time. The reason for this is not a bizarre anthropological inclination against law and order, but a legal system cunningly designed to make it impossible to abide fully with the law. Such system allowing the authorities to go after you whenever you start being a nuisance, it is necessary for anyone to belong to a political network which will be of critical assistance in many circumstances: finding a job, avoiding a fine, obtaining a market, just name it.

Political networks are the very essence of the Italian society. They have little to do with ideology, although (minor) differences can still be noticed between right and left. Tens of millions of Italians, for instance, are or have been “communists”, including a large majority of artists (an essential profession in the Peninsula), intellectuals and journalists, and communists have participated in dozens of governments. None of them are bolsheviks. Being a communist simply means you belong to a certain network (often since your birth), and you dislike Berlusconi. You can be a billionaire, an aristocrat and a dandy, you are still a communist as long as other communists are the first people you call when you are in trouble, and vote for the left.

These various networks interact under the form of mutual checks and balances. This is why the Italian constitution favours proportional elections instead of majorities, and protects regional powers from federal authorities. No one is allowed to be dominant or dominant for very long, and no government can take the country into dramatically different directions. Cabinets succeed each other at high speed (61 governments since 1945) and Italy is nevertheless stable, being ruled on a day to day basis by a bureaucratic elite, formed of members of all networks, closely connected to the corporate world, unions and/or to the Church, with a Pro-European tilt and a strong Western commitment. When something important needs to be done, such as cleaning up a gigantic public debt to adopt the European currency, or reducing the influence of the Mafia, it gets done.

Although it would take a lifetime for a foreigner to fully understand Italy, this highly sophisticated democracy remains one of the richest and most pleasant countries to be in, and is a threat to no one. Instead of analyzing its mysteries or bothering about the name of the next Prime Minister, count Italy as an ally, open a bottle of Chianti, walk slowly in the streets of almost any village, and enjoy!

This is also how the world goes.

The mortal trap of innovation

For over 20 years European countries have done everything they could possibly think of in order to “modernize”. Even socialist governments have privatized their formerly enormous public sectors and deregulated. Continental economies have adopted a single currency. Corporations went for the whole shebang: concentrating, shifting production overseas, and downsizing personnel. Apparently to no avail, as it would take sheer blindness not to see Europe’s economy and therefore rank in the world sliding down in relative terms.

The reasons for this decline are many and well known. The main one, in my opinion, is that economic dominance is always based on innovation, a dimension under which Europe is now lagging. As long as you are on the edge of technological discovery, you are doing fine. Except in the case of natural resources, which are distributed at random, the industrious introduction of more efficient products or services remains the best way to obtain domination in a sector. Of course, cheaper manpower elsewhere, together with the natural diffusion of knowledge, will slowly generate competition abroad. Don’t worry, you may still benefit from this competition in several ways. Your accumulated investment capacity allows you to control in variable proportions your main “competitors”. Their countries become markets for your new products. Lower procurement costs increase either your standards of living or your own competitively or both. In other words, while surfing on renewed waves of technology, you constantly dominate new sectors, transfer older industries to other countries under your control, and improve your costs while your markets grow. I should add that profits made by foreign countries tend to be recycled in your own economy, as successful innovation is generally a better investment than cheap manpower, and as more developed governments are also normally more stable. Last bit not least, brain drain plays at your advantage.

This looks like magic, except for 2 problems. The first one is that countries which are competitive in older sectors will try their best to enter directly the new ones. After all, you can easily fight this by imposing them “free trade” (use your armies when need be), preventing them from raising temporary barriers to your own products, in such a way they can never build up any strength in any new sector. The second problem is you have to make really sure you stay on the edge of innovation, but cannot take your superiority as granted.

Unless I am mistaken, there is no better path to critical innovation than intense research: even serendipity occurs in the right environment. This is where the trap is to be found. The best research is long term research, as it is the only one which favours thinking out of the box. Corporations by themselves are not very good at this, for the simple reason that their value is measured on short term scales. Only governments can afford thinking on longer terms. There are basically two ways to do this: one, the “European” way, is directly through public universities, public research agencies, and public sector research labs; the other, more “American” is to subsidize private research by military contracts. When subsidized corporations don’t find anything, things are still ok, as they are in any case reinforced by the subsidies they receive. When they do find something, it’s even better, as they can now invade markets with the subsequent innovations. Another advantage of military contracts is to appear not as subsidies, but as mere contracts that may be reserved to nationals. When this is done, in the name of free trade you can now prevent other countries (with more limited military budgets and/or using civilian channels) to subsidize their own companies.

The more European countries “modernized”, the more they reduced their public sectors and military spending, the less research they had. Inevitably they started losing market share to US companies directly or indirectly benefiting from growing military contracts, as well as to emerging countries where they had been moving their production.

Europeans are still wondering what went wrong.

This is how the world goes.