Persian dreams

Is there any limit to how deeply Washington can misunderstand the world? Persia is a showcase for the negative answer. Since the 1953 coup at least, now officially acknowledged as the US operation ‘Ajax’, American foreign policy has been going from one misconception to another: notably, from a candid Carter administration pressuring the Shah into exile and triggering Khomeini’s revolution, to the staggering reinforcement of Iran by the destruction of its nemesis and main regional counter-weight, Iraq. Now, when the US position in the Middle-east would have seemed to reach its nadir, a series of clumsy moves indicate that things could still worsen.

The Obama administration is wise in trying to defuse the explosive situation left by the last presidency. This is not a good reason, however, to play naively in the opponent’s hand. The belief that the mere prospect of entering in Washington’s good grace will move the Iranians to the tears and will be sufficient to get their badly needed assistance or neutrality, looks like the idea of a dreamer or a madman. It is, though, what the DOD seems to have in mind.

NATO’s Supreme Allied Commander, Gen. Bantz J. Craddock just came up with the astonishing idea to ‘allow’ NATO state members to ask Teheran for supply routes into Afghanistan. Why not ask Pyongyang for intelligence support about China? General Craddock avoided requesting personally Iran’s assistance in better invading a neighboring country, and hinted that Germany or France would be welcome to make the first move. After an initial chuckle, Teheran might in fact take the ‘bait’: wouldn’t it be nice to have a say in any further deployment of NATO countries in Afghanistan? After all, the more the Iranians facilitate the switching of troops from Iraq to Afghanistan (at the considered levels which are way too low to bring a real military control), the easier it becomes for them to take over Iraq directly or by proxy. In the event you believe this was a whim from some isolated general, please note that the US Treasury one-sidedly labeled the Kurdish resistance movement against Iran a ‘Terror Organization’ on the next day.

It is difficult to understand why Iran is such a puzzle for the United States. The simple reading of a history book should be enough to make it clear that Persia is used to being a unified super-power (the only one who could resist the Roman empire), with a long patriotic – now nationalistic – tradition, and viewing itself as a matrix of culture. The basic mistake is to see a contradiction between an appetite for modern technologies and the safekeeping of local traditions, including Shiite Islam. Iran is not interested in becoming a part of the Western world, as many Iranians are convinced that US technological superiority is temporary and hides a cultural deficiency. It is therefore perfectly logical to combine an industrial and military modernization, financed by enormous mineral resources, with an effort to promote Shiite values all over the world, starting with the Middle-east and central Asia, the two mains parts of Persia’s courtyard. As long as the curve of American decline –which is seen as inevitable – does not cross Iran’s recovery curve, Teheran can rely on a strategy which has proven its efficiency: war by proxy and martyrdom. This low-cost method was capable of creating chaos at will in Lebanon and in Iraq, leaving Iran as a key-player in both places. It is now applied also with success In Palestine; where Israel is considered by Iran as nothing but a US stronghold. This strategy could be turned anytime against Saudi Arabia and the emirates, once the Palestinian showdown is settled under terms found acceptable by Teheran.

It is now too late to prevent Iran from building up a Mesopotamian hegemony after the departure of US forces. Western presence in Afghanistan does not represent a threat for Iran, as only massive investments (an option now closed by the economic crisis), not additional (and yet insufficient) troops could have made a US success conceivable there.

To complete the picture, the Russian-built nuclear reactor of Bushehr will be operational by the end of the year, in spite of constant Western opposition. Moreover, the acquisition of a military nuclear capacity is not unlikely over the next 2 years. Inside Iran, the search for this capacity is considered natural and legitimate, as a guaranty against US/Israeli arsenals and the repeated threats of invasion expressed during the past decades. It is kept as unofficial as the Israeli (now obsolete) nuclear bomb.

The idea that the next elections or the elections after next will dramatically alter this perception, strategy and power position is sheer wishful thinking. Mahmud Ahmadinejad is obviously not a very educated man, considering his poor knowledge of world history, but is neither the author of Iran’s present political vision nor will he be its last defender. No indication whatsoever has been given that Iran would embrace a complete or even a significant reversal of strategy after his fall.

Within this context, the West is right now clearly in a weaker situation than Iran in the Middle–east and Central Eurasia. Granting with condescendence a reintegration into the ‘concert of nations’ will achieve nothing under the circumstance. If anything can be certain in world affairs, no doubt the sudden US need of Iran will but raise all stakes. The opening of talks, the reduction of diplomatic anathema, the reluctant acceptance of Iran’s inevitable civilian nuclear industry and the lifting of ineffective economic sanctions will not be enough to obtain Iran’s passive neutrality. It would additionally take a settlement in Palestine, the only way to contain Iran’s proxies in the South.

Preventing the Persian nuclear bomb, would require an even bolder move. As suggested already in a previous post, only a military denuclearization of the Middle-East and central Asia could offer an alternative attractive enough for Teheran. The concept is not entirely new, but its time may have come. If the US administration is not ready for it, its main rival in this key region will be virtually impossible to contain for quite a long time.

This is how the world goes.

Rationality vs. Nationalism in the Palestinian conflict – Part II

Public opinion is as strong a force as it can be blind. Sides are usually taken according to the proximity of the respective propaganda sources. Historical rectifications are conceived as aggressions, and self-righteousness reigns on all parts. A rational approach can still be attempted, with limited chances of success. It is however the last resort left for not dying or killing based on utterly wrong reasons. The worst in never certain, after all.

 Let’s start by putting the historical background aside, as it is unable (as we have seen in the previous post) to show us anything else than the extreme relativity of the foundations of all opposing claims. The present issue is not anymore the historical legitimacy of Israel or of a Palestinian State, which is simply dry wood for the flaming ideologies. We should rather consider the rationality and efficiency of the strategies now determining the future of Palestine and Israel.

 The basic objective fact is the following: although at this time militarily unmovable, Israel is facing a lethal danger if the state of war persists indefinitely, because of Israel’s vital dependence on external supports which in turn depend on public opinions that are emotionally inclined to back victims. In an environment where nationalism feeds political analysis with its own notions, when confronted to a conflict between State-haves and State-have-nots, public opinion tends to back the have-nots. Even Congress can abandon a cause it was supposedly ready to die for, when a shift in public opinion starts blowing the whistle of a new electoral tone. Gradually, appalling TV images undermine the most solid positions: South Vietnam, the former ‘bulwark of our liberties’ is long gone and only one example of what it is fact a general rule when you look at it close enough. Many Israeli leaders know it; most Islamic extremists know it too. For this very reason, and sometimes for other motives, most Israeli are aware of the necessity for Israel to make a Palestinian State happen, and most Islamic extremists are convinced they will get one sooner rather than later.

 The issue therefore boils down to the negotiating muscle of the respective parties. The Palestinian strength rests almost exclusively on the public opinion battle, a battle in which Israel has been continuously losing ground since the First Intifada. The weakening of PLO, the war in Lebanon, the building of the wall, the retaliatory incursions into the West Bank, the one-sided withdrawal from the Gaza Strip followed by siege and reinvasion, all carried much more negative consequences than positive ones from the public opinion standpoint, no matter how much sense they might have made for other purposes.

 Symmetrically, the strategy adopted by the Islamic Extremists has recently shown to be much more efficient than the one of the Moderates. It consists in deliberately worsening the situation through aggressive martyrdom: provoking the opponent in order to become a martyr in the eyes of public opinion. Such strategy, the (non-aggressive) roots of which are to be found in the Christian martyrs (who took over the Roman Empire), in the pacifist Indian martyrs (who took the upper hand against the British Empire) or even in the martyrdom of Haile Selassie facing Mussolini, is extremely powerful and should not be underestimated. Triggering a full scale invasion with numerous civilian victims, by launching psychologically dreadful and yet physically almost harmless series of homemade missiles (3 dead at this time), is almost as winning a strategy as having children throw stones at tanks. It is much more efficient than the ill-designed methods of Al-Qaeda (spectacular destruction of civilian targets, and human bombs, especially women or children) which turn to be somewhat counter-productive for the goal pursued by their authors (i.e. the elimination of the United Sates from the Islamic world).

 Countering such a politique du pire cannot be done by simply accusing opponents to be terrorists, criminals, primitive or stupid, even when they are. It can definitely not be done by a sheer repression; hoping to exhaust the opponent’s determination while actually reinforcing it (Please note that Hamas leaders gave themselves the pleasure of initially rejecting the ceasefire in their favor, and asking for more martyrdom). It can only be done by offering terms that public opinion – right or wrong – will consider fair.

 The core of such terms has been known for a while, and it is probably a mistake to keep them under the table in order only to hopefully maintain one’s bargaining position. To be viable, the future Palestinian state must be territorially unified, have a critical size and the capacity to economically and socially absorb the refuges under decent conditions. It must be exempt from enclaves justifying major claims. Territorially, this implies not only the restitution of almost all Occupied Territories, but also some concession on the status of Jerusalem. A delicate issue seems to be the Right of Return, yet more apparent than real: the combination of a moratory with a viable Palestinian State should logically lead a majority of former refugees to waive it. Palestinian concessions will be essentially limited to the formal acceptance of the negotiated borders and the actual banning of terrorist activities, under the control and assistance of an adapted International police force.

 It is likely that the next Israeli government and the new US administration will give it a try to a certain degree, the main problem being to find counterparts to negotiate with, in the absence of a strong moderate Palestinian leadership. As it is neither in the Hamas nor in its Iranian backer’s immediate interest to pursue a rapid peace which would reduce considerably their role and influence, the only sound option for Israel is to create the conditions for a political comeback of the Fatah. This could hardly be achieved in the absence of an intermediary phase during which the extend of the territorial concessions that are being considered is publicized, the settlements are methodically dismantled, response to attacks while remaining firm is restrained and targeted from a distance, the daily life of Arab Israeli and Palestinian workers in Israel – an important link – is proactively improved, and the reelection of the few Arab Israeli MPs facilitated.

 This is of course faster said than done. At least this sets a reasonable course of action, foreign to ideologies and partisanship. The coming elections in Israel and the visible aspiration of the new US administration to get out of the hornet’s nest give it at least some minimal possibility.

 At some point, for peace to eventually take place the Iranian pressure will have to be released. I doubt mere ‘conversations’ will do the job, unless a trump is put on the table. The only pacific one I could see is the prospect of an International conference on the global denuclearization of the Middle-east, which is no not entirely impossible as a good way to temper the region.

 If none of this happens, if no real attempt is made to enact a reasonable plan prepared by intermediary phase, Israel will survive but its situation will continue to degrade. Both local populations will continue to undergo unsafety or misery and extremists will thrive.

 I am not sure bookmakers would bet on a rational development rather than an intensification of nationalism. Yet, who knows?

  

 

 

Maalox for Madoff

You are inevitably aware of the nature and magnitude of the fraud: $50b lost in a Ponzi scheme, according to Madoff’s own confession, the exact amount remaining to be determined. The scam is different from any of those which were recently revealed, as it is based on an absence of due diligence rather than an absence of regulations. The most interesting aspect is that a man, for over 20 years, was able to convince most members of an entire profession he could fulfill their dreams, and maintain their unwilling complicity, by offering high and constant returns insensitive to market conditions and generating high fees.

Asset managers – a motto in this blog – are totally unable to produce – as advertised – long term returns for their clients at higher rates than economic growth corrected by inflation, while grossing for themselves between 2 to 4% of the mass under management. They know they cannot achieve this by themselves individually or as a profession globally. They are ready, however, to believe in exceptions in others, and prefer to leverage such exceptions for their own profit rather than question their reliability. Although betting on exceptions made into an average phenomenon is certainly not the soundest of ideas, it seems a good way for average people to reach impossible goals.The most reckless and/or naive  among money managers started doing this in the 80s. The 90s turned it into an industry trend.

It is true, after all, that at any given moment, a handful of asset managers have beaten the market for a long time and made an impressive fortune. The best known are Warren Buffet and George Soros, others are Louis Bacon, Paul Tudor Jones, Julian Robertson and …Bernard Madoff. Obviously, not all are crooks like the later. Most are simply lucky. Some are even lucky and shrewd. Luck is a very important element in what is essentially a random distribution of outcomes. It is a well known fact that the ‘Monkey’ investment (i.e. random stock picking with positions held over a long period of time) produces results that are strictly superior to those of average professional asset managers. One of the reasons for this is that the Monkey is not concerned with generating fees by a fast turnover of portfolios, and carries fewer costs. Shrewdness cannot hurt: Warren Buffet has shown that Grand Pa’s type defiance against anything sophisticated, together with a witty wording of principles, can be good for business. Shrewdness may also reach some rationality when arbitrating between market discrepancies over identical assets. This last method – the best one – is unfortunately limited in scope and self-cannibalizing, as the more discrepancies are used the less remain to be exploited.

In any case, as these exceptions do exist, the advertized concept became: our bank (or financial entity of some sort), is formed of professionals capable not of outstanding results (something as a matter of fact difficult to believe) but of identifying outstanding independent asset managers. Asset managers picking soon replaced ‘stock picking’. The hunt was supposed to be so difficult and tricky that funds of funds had to be created and a whole new profession of distributors of funds invented. These new distributors of funds did not need any specific training, except in hunting, golfing and/or gourmet dining. Most came either from banking mid-management or impoverished aristocratic families. All they had to do was to be lavish enough in their invitations and jolly enough in their conversations to become your friend (if you are a ‘high net-worth individual’) and your banker’s friend (if you are not). In this way they could foster trust, a necessary item when dealing with expensive opacity.

From this moment on, bankers enjoyed a wonderful streak. Salaries paid to well trained asset managers for managing your money according to your own actual needs could now be eliminated. Younger, better looking and less paid account managers were in charge of convincing you to accept the new products: house funds mimicking successful funds, funds of funds, and ‘alternative’ funds that few could understand and less could explain. Not only these products came to the bankers at no cost, but they also started receiving kickbacks (more politely called ‘retrocessions’ from brokerage fees), on top of the fees you were officially paying (entrance fees, redemption fees, management fees, performance fees, custody fees). Your banker friend being your friend he could be nice with you and lift one of these many fees generated by your own money.

All such funds were supposed to have long track records showing steady returns and outperforming markets. When the emphasis is on performance, the track record is usually limited to an ad hoc selection of the best performing among a series of sister funds. When the emphasis is on the duration of the track record, a scarce item, a promise is made to provide funds by the most successful managers. This is where Madoff played his best cards. In order to create the proper hype, he made people believe that his funds were ‘closed’ and would not accept any new investors. In other words the most open of funds (what can be more open than a Ponzi scheme?) were sold as closed. Letting you in was a favor made to friends.

In a way, you can consider it good marketing: against all expectations, the ‘Dom Perignon’ is the best sold champagne in the world (it really is). Yet, this has had far reaching consequences. One cannot be too picky with favors. Illiquidity (redemption notice on the last day of each month, 35 days to redeem, then 30 days to obtain payment) was overseen. Complete opacity of the underlying assets was accepted as an effect of a necessary confidentiality (after all funds of funds have even more opacity as they refuse not only to disclose the nature of the assets – your assets- but even sometimes the name of the asset managers). Absence of understanding of the techniques being used was partly an effect of opacity. Absence of real guaranties, by the formal waiving of most rights, seemed a natural condition for products reserved to ‘sophisticated investors’. Absence of alignment with the client‘s interests was hidden, as most banks would prefer to cash-in their fees rather than include such products in their own portfolio, or simply denied (‘the managers have their own money in the fund’). Market risks involved were covered by distortions in the terminology: sheer speculation was called ‘arbitrage’, build-up of leveraged open positions were called ‘hedging’.

Facing such hype and making money at every step, the financial industry forgot all diligence: money managers trusted their bank, banks trusted distributors, distributors trusted custodians, and custodians trusted auditors. All trusted their own fees to come, and no one checked. This confederation of dunces became so powerful that regulators and authorities had to look somewhere else.

This is how an average man who certainly started his career with reasonably good performances, based on a right combination of luck and insider’s information, could then become a crook when his investments started going array. He is probably not alone in the present state of the financial industry. But we shall know quite soon, as no scam can resist for long the current storm. Attorneys are likely to be the only winners when one of the largest class-action ever starts, including the SEC among the many defendants. Last but not least, beneficiaries of a Ponzi scheme are liable to give their returns back to indemnify the last comers and victims. Considering the exceptional duration and magnitude of the scam,  it is going to be very messy.

There is little doubt that the money management industry is going to change dramatically after such events.  After a period of attempted resistance, bankers who had cautiously stored their profits in Treasury bonds while their own (now infuriated) clients are the first victims of their policies, will have to take some commercial (or legal) losses. Insurance companies, custodians, auditors and governments will contribute. Most hedge funds boutiques will have to shut down. Funds of funds will slowly vanish . Regulations will be drastically reinforced. Opacity will be banned and kickbacks will disappear. Bankers’ and managers’ responsibilities will be increased. Asset management will cease to be the cure-all for banks who had opted-out from lending. Risks awareness will be somewhat restored. Bankers will start playing serious golf or  kill less game.  Perhaps, the day will come when the best offer on the market will be a guarantied loss of 1% per year in real terms: a serious improvement indeed.

This is how the world goes.

 

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.

Bloodbath aftermath

A quieter week was wrongly expected after the interbank pacemaker was put into place and before October 21^st, the day when the general public discovers the meaning of the three letters C.D.S.

Leveraged investors are now forced to sell and the professional wishful thinkers (e.g. your account managers) are losing drive, leading markets to nervously slide down to the levels reached 6 years ago (2002). This is much steeper than the 87 crash, the oldest memory of most traders, and the main obstacle to their comprehension of current events. As they were raised to believe that stock markets downturns are short-lived, they took immediate comfort in a ready-made solution: just wait for recovery while only the panicking fools are selling. These ideas led them to ignore 2 important facts: thresholds can be reached beyond which situations do not repeat themselves; and this crash has causes (uncontrolled financial leverage on a giant scale) that the 87 crash did not have. Even the optimist is now aware of the recession to come (it has hardly started yet), under the impact of the inevitable crunch of consumers’ markets which shall follow mechanically a universal loss of net worth, leverage and employment The only debate is how deep? How long?

This depends on various factors, such as the intensity with which leveraged real estate shall blowup, the magnitude if the CDS blast and the capacity of governments, which are already drained of blood, to ‘reflate’ the economy. Concerning real estate, prices have not yet declined in percentages anywhere close to those of the early 80s. Thus the risk is high in many places, including Europe and emerging countries, where a 50% decline is not unrealistic at all. For the CDS, better not talk about them until October 21, where we shall know the proportion of net exposure in the due $410 billion for Lehman only (i.e. 0.6% of the total), who are the main victims and if they can survive. As to what’s left of the capability of governments to compensate all the losses, no one has the slightest idea at this time.

Let’s fasten our seat belts (before tightening our own belts)

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.

Food or drug administration?

Genetic Modification technologies are neither good nor bad, they are tools. Anyone can agree with this, including activists and Monsanto.

Can GMOs be bad? They certainly can, for simple logical reasons. When a genetic modification is introduced, the resulting organism is different by definition. The differences may be small or large, visible at first sight or after microscopic investigation only, immediate or delayed; they may relate to the shape, chemical composition or biological properties (such as resistance of reproduction) of the resulting organism. A GMO may therefore carry or produce toxins, hormones, proteins which were absent from the natural organism. Their presence may induce, on the short or longer term, allergies, epidemics, all of which may also be extended and multiplied by genetic alterations all over the food chain, as well as by contamination of other cultures.

It is therefore a logical property of Genetic Modification technologies to induce a high level of risks. Theoretically, risks of the same kind are also present in the random natural modifications described by the theory of evolution. They exist, however, at a much higher order of magnitude in GMOs, as modifications occur and spread at a completely different pace and on a totally different scale. Traditional graft hybrids were unable to affect most aspects of the DNA and definitely did not cross the animal/vegetal-barrier, generating moderate biological risks. It should also be noted that graft hybrids increased biodiversity, when GMOs now tend to reduce it, because of the existence of specific ‘kill-all non GMOs’ pesticides (namely the ‘RoundUp’), as well as for economic reasons.

Now that we have the certitude that Genetic Modification technologies can induce dangerous biological consequences on a very large scale, the only question becomes: how should we handle them?

Industrial GMOs appeared in the 90’s, during the peak of the Great Deregulation move. Instead of being submitted to at least the same control than pharmaceutical products, or even the same than mere food additives, they benefited from an extraordinary political decision in the U.S. It was legally decided (not scientifically established, which would have been impossible) that a ‘substantial equivalence’ existed between them and natural organisms. The meaning of this decision, which is still in force, is that no evidence of their innocuousness has to be established by their producer, under the control of independent public agencies like the FDA, before they are put on the market. Moreover GMOs should not be tagged as different for the consumer who thus becomes the unwilling guinea-pig of a free and large scale experiment from which no one can opt out.

In practice, free trade agreements do not allow any country to decide in favor of more reasonable precautions. The maximum limit to GMOs is the possibility to tag them locally or suspend their distribution when and only when positive evidence of their actual dangers can be legally set forth. As even complete bans could not protect entirely other crops from contamination (which already happened in the case of the Mexican maize), any shorter measure represents a superior level of risk.

The advantages of GMOs would deserve a specific discussion. Let’s say briefly that they are unclear. They probably can increase the productivity of certain crops, prolong the delay of conservation of fresh products, improve the visual quality or even the taste of insipid industrial food, and they certainly can increase the profits of Monsanto. This is well enough to build up strong lobbies in their favor. On the other hand, they cannot eliminate or even reduce the need for pesticides. They increase the cost of seeds now submitted to a growing monopoly. They tend to eliminate agricultural independence of other countries. It is also interesting to note that the generalization of GMOs preceded a spectacular surge in the price of agricultural commodities, particularly those, like soy, in which their market share is the largest. Once these macroeconomic downsides and the biological risks described above are put together, the cost/advantage balance seems to go clearly at this stage against the GMOs.

One would like to review more scientific literature on such a major topic. It unfortunately turns out that most of the relevant research is directly or indirectly funded by Monsanto, and should be considered as unreliable at best, a situation which in turn increases the level of incertitude and risk.

The problem is that no matter how powerful lobby is, it cannot resolve the issues it so actively keeps hiding. No matter how blind a government is, when pushing across all borders a potentially very dangerous type of product for a short-term trade-balance advantage, it cannot prevent disasters to occur. Innovation does not imply letting irreversible problems take place before we learn how to take them under control.

GMOs may have a brilliant future once we know how to handle them. This is not the case yet. Even though genetically induced pandemias have been avoided during their very recent industrial devolopement, biological and economic incidents have already taken place, from mass suicides of Indian peasants, to accidental contamination of crops and allergies to associated pesticides. Time has come for independent research, limited experiment, premarket control, not yet to wild and world-scale industrial applications. The exact opposite is happening.

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

Neither angel nor beast

The governor of New-York was forced to resign after the revelation of his using the services of a high-end escort service. Europeans observers were shocked by the price the gentleman was paying (hourly fees being in the $ 3,000-5,000 range), a disturbing sign of sky-rocketing inflation in the United States. American observers viewed his lack of personal morality as a proof of unfitness to public office. Who is right?

It is a constant principle of Puritanism that private behavior is a good indicator of public capacities. What makes this principle slightly inconsistent is that Puritanism also places a wall around sexual activities, which are supposed to be actively hidden from public view. In practice, the indicator is therefore discretion rather than actual morality, and can only be used if dissimilation is considered a political virtue.

More importantly, history does not seem to conclude in favor of the puritan principle. Many among the great political criminals of all times preferred mass murder as a channel for releasing their libido, to mere personal excess. Savonarola was impeccably abstinent, Aurangzeb, the most cruel of all the Great Moguls slept on the floor and seldom took time to visit his own harem, Philip II of Spain ruled his empire from a monk cell in the Escorial, while his troops where annihilating entire populations. Stalin was famous for having water poured into his glass instead of vodka, and using a modest office in the Kremlin. Adolph Hitler was anything but a womanizer. Ascetic personal behavior is no more a guaranty of political fairness, than debauch the sign of a statesman.

One does not need to suffer from a divided self to be capable of minor personal disorders while being at the same time completly able to run a government. Blaise Pascal wisely said: “Man is neither angel nor beast; and the misfortune is that he who would act the angel acts the beast”. What we need are competent politicians innocent of public crimes, rather than dangerous fakirs or even incompetent saints.

Abiding with the law certainly remains a legitimate requirement for politicians in a civilized country. In this respect, however, a reasonable scale should be applied. No one would consider a parking violation as a good motive for losing office (unless one is mainly in charge of parking policies). Corruption, a major public vice, is of much more importance.

Prostitution is a specific concern, less for its illegal character, than for its potential encouragement of sexual slavery, an unlikely possibility when consenting adults contract at the surprisingly high rates the Governor was willing to pay. In his case, embarrassment and matrimonial tensions could have been considered enough of a punishment, particularly at a time when financial abuse and white collar crime – Eliot Spizer’s specialty when District Attorney – is one of the most serious dangers we are confronted to.

This is yet how the world goes.

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.

Dealing with socialist leaders in Latin America

Of the three main diplomatic issues the future administration in Washington will be confronted to, one can be considered as more easily manageable than the others, i.e. the relationship with socialist leaders in Latin America. It is disconnected from the intricacies of the Middle Eastern situation, and free from direct involvement of foreign powers.

This was not always the case. Until the fall of the Berlin wall in 1989, Latin America had been a major field of confrontation between East and West. The following decade was the time of an illusion for the U.S., then contemplating the prospects of unbound hyper-power. Concerns were limited to minor local conflicts, and the strategy was to focus on imposing the Washington consensus (also dated 1989) to the global economy, including obviously South and Central America. The possibility to enforce unopposed both the Monroe doctrine and the Washington consensus led to pursue a policy of eradication of socialism in Latin America. Masterminds of covert and clandestine operations went unleashed. The debt crisis of the 1980s (when banks had been losing almost overnight in the region a century of profits) was forgotten. Military dictatorships received full support.

After 2001came the discovery that hyper-power has limits. No matter how many troops, how much money, how many restrictions to civil liberties, how much acceptance of the deterioration of one’s public image, the best that could be achieved, even in the absence of any strategic rival, was the abduction and execution of an obnoxious leader in a weak country. Almost everyone came to understand that time had come for revised foreign policies.

Unfortunately, instead of considering the easiest problem at hand (Latin America), the attention remained focused on the most difficult one (Iraq and the Middle-East). Escaping the mud pit in Iraq will be almost as tricky as calming down the hornet’s nest in Palestine. Things can certainly be put on a better track. No free ride can yet be expected. The more, however, Washington will pull back from the East, the more important dealing with issues in the West will become.

Discussing a strategy for Latin America should not remain a parlor conversation, and should move up in the priority list, even though socialism in Latin America certainly does not attract masses of supporters in Washington. Introducing the topic in the presidential campaign would even be a dangerous move: who, other than a radical or a wimp, could even think of softening the hard-line? On the other hand, Latin America can become a problem.

The danger does not come from governments. Putting propaganda aside, any one who does not get his primary information from TV, knows that Hugo Chavez, Evo Morales, Raul Castro, Alan Garcia, Daniel Ortega, and of course Lula da Silva, Tabaré Vasquez or Michelle Bachelet, are no threat at all for the security of the United States. The danger is more in the fact that – except the Castros who are a legacy from the past – all of them have been democratically elected, in spite of powerful opponents strongly backed from the North. Even Chavez was able to lose a referendum (not something that would happen frequently in a regular dictatorship). He had previously managed to be reinstated after a coup attempt supported by the local media. This means that the majority of the population of the entire subcontinent has now shifted to left-wing opinions, an evolution not to be taken lightly, and which cannot be countered anymore by series of military coups like during the good old days. The reasons for this are well-known: extreme poverty, extreme inequalities, resentment against right-wing authoritarian regimes, discredit of the U.S. administration.

None of these leaders obviously intends to serve the U.S. economic interests and it may be unpleasant to see Chavez pressuring ExxonMobile Corp. for more tax income, unpleasant and yet certainly not tragic. Not only the amounts at stake are limited, but the motivations are also understandable. Let’s try a thought experiment: let’s imagine that Venezuela is by far the largest economic and military power in the world or that Bolivian oil companies are the biggest, while extreme poverty and unemployment is dominant in the North, a handful of billionaires close to Caracas pushing for always more international control over U.S. companies. Who in Washington would not be tempted by reclaiming part of the oil fields in Texas, and preventing some Bolivian TV network based in D.C. from pouring its propaganda all over the country? Not even going as far as imagining Nicaraguan covert operations in Virginia, the whole thing sounds like a joke or madness. It nevertheless reflects a widely spread feeling down there.

There are only two ways to go about it. One is ” too bad, tough life, that’s how things are, in any case this could not happen as socialism cannot build strong companies (what about Gazprom?), so let’s continue as before”. The other way is to compromise in order to avoid further radicalization, as well as a possible connection with other sources of radicalism elsewhere. One can be a believer in the virtues of free market economy and still understand than certain situations, such as the one which justified the New Deal, require a modified treatment. Persistent extreme poverty and growing inequalities in Latin America are a long term problem which can only made worse by short-sighted views.

Normalizing the relations with socialist leaders is a two-way street. In all fairness, there is a double cost attached to it: ideological, as the Washington consensus may have to be softened down; and financial, as one would have to allow theses countries to reclaim some of their national resources. In exchange, a consolidation of Latin America (including Cuba) as a safe strategic area may be obtained, together with an much improved image of the U.S. in the world, a weakening of purely revolutionary movements, and a reduction in sovereign risks.

Unfortunately manly hardliners often look better than long-term and more pacific strategists. Brutal thinking is an all-time bestseller.

This is how the world goes.

Opinions & readers’ mail

An interesting entry today in Opinions & reader’s mail

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