Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Trade Page 7 of 13

On the Causes and Consequences of the Oil Price Crash

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On April 23, 2020

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Image by Yuan2003

So, we had a crash of oil prices, where some futures contracts were actually negative, which means that sellers had to pay people to take oil off their hands.

Obviously, oil use has dropped during the Covid-19 crisis, and before that, prices had already decreased in an attempt by non-US producers to reduce prices low enough to crush US shale production.

Oil is a real thing: It takes up storage. Storage space is running out, and it’s not clear when demand will recover, so oil that is to be delivered now-ish is an expense–you have to pay to store it. Thus, the negative prices.

There was a bounce Wednesday, ostensibly due to Trump saying he had ordered the US Navy to blow up Iranian boats if they continued to hassle other ships. (If they do this in the Gulf, and it goes to shooting, Iran will win the initial confrontation. They have a lot of missiles.)

One could equally say this is a dead-dog bounce.

At any rate, even double digit prices are below most people’s production costs for oil, and they are above the price every major government that relies on oil needs to balance their books. This means Saudi Arabia, the four gulf oil states, Iraq, Iran, Russia, and so on. Ironically, Iran, having been under sanctions already, will be in better shape than most of the others.

It is also, obviously, low enough to make US (and Canadian) shale oil production completely uneconomical: generally that needs at least $60/barrel, and much of it needs more.

So we have countries and companies with bleeding treasuries. The US has the ability to print money, presumably it will do so to keep Shale oil around in Zombie form. Countries which cannot print money and have other countries accept it could be in trouble. This depends mostly on how long this goes on. A couple months, even three or four, uncomfortable, but no big deal.

If this crisis bubbles on for a year and a half of shutdowns, partial relaxations, then more shutdowns, we’re into some very dangerous territory. I’m not sure the House of Saud, for example, can survive that scenario (it couldn’t happen to a nicer country, etc.).

The world has been in a very long economic relationship, in which the most important commodity has been oil, and the producers sold it in dollars, so the US and the swing producers all benefited. Obama and Trump more or less broke the deal with the promotion of shale oil, and China has increasingly been insisting on buying oil in Yuan, but the relationship had stumbled on, even though it meant enabling countries that the US has been treating as enemies, like Russia.

Trump wanted to force Europeans to buy more American oil and less Russian oil: This was a major part of his economic plan, such as it was. Trump likes to find a place where he’s more powerful, and push that as hard as possible, and things like sanctions against Russia, Iran, and Venezuela were–and still are–situations in which he has unilateral power that no one else has been entirely able to get around (though China has somewhat). The EU has proven unwilling to stand up to the US in the case of sanctions.

Right now, there’s no particular reason to think this can’t continue. The US can still print infinite dollars, because foreigners will still accept them–even though the US is no longer the most important manufacturing state. So the US can bail out shale oil. Oil producers, who do not have hegemonic currencies, do not have infinite rope.

This changes only the major producers of things the US needs cease to be willing to trade in US dollars. China and the EU could (but I very much doubt will) cut the US’s throat if they ever chose to act together. Perhaps China could even do it alone. The problem, of course, is that there would be a lot of collateral damage to them. US oil is expensive, but the US can produce it. China and the EU need to import it. If they want to make such a change, they have to secure strong supply guarantee from other nations.

This is theoretically possible, but the problem is simple: Any nation that did this would then fall under (even more) US military threat. Bombs are very good at ending oil exports, and neither the US nor China is willing to go to war over this. Perhaps China could move troops and nukes into vulnerable countries, but that would trigger a new cold war, and the Chinese don’t want that–at least not yet. China is working on their own trade area, to compete with the US-led trade area (which the US is abandoning anyway, as it shits on the WTO it created), but it is not ready yet (the Belt and Road Initiative is China’s name for this trade restructuring).

The current collapse of oil prices is unexpected; while a pandemic has always been possible, knowing when it would happen was not. The pandemic has simply revealed the current production’s costs and dynamics. Saudi Arabia has been moving towards vast danger for ages because of its over-reliance on oil; this simply means the consequences may hit sooner. Oi-consuming nations have been maneuvering to reduce their dependence on imported oil in general, and unreliable oil in particular, but they were not yet ready to make any big moves. Almost everyone has been chafing under the petrodollar and under the current world payment system, which the US has abused with its constant sanctions. Despite this, no one has created a viable alternative and been willing to take the hits necessary to move off the dollar and the US/eu payment system (“EU” is in lower case deliberately).

Most oil producing nations, including the US and Canada, are generally bad actors on the international stage: with crimes ranging from moderately bad to invading oil producing nations regularly and sanctioning other ones constantly, or to being the world’s premier supporters of fundamentalist religion and terrorists.

So don’t cry too much for oil producing nations, nor even for their customers, who have enabled them greatly. But beware that the game is changing: Covid-19 has highlighted existing issues and if it continues long enough it could precipitate changes which have been desired by many, but remained unimplemented because people have been unwilling to bear the costs and risks.

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Should NATO Exist? Will It?

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On September 20, 2019

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One of Trump’s constant cries is that American allies aren’t spending enough on their militaries and that the US is, thus, carrying them.

While there is a temptation to scorn this argument because it was made by Trump, it has a fair bit of truth to it, as Matt Stoller suggested today:

The American military umbrella is a bad deal for America and a good deal for our “allies.” Japan gets protected channels to Middle Eastern oil, for free. Germany gets protection from Russia, for free. They all export to us at terms unfavorable to our own industries/middle class.

The problem with this is that it is, well, true.

And that Europe “needs” America for defense against Russia is absurd:

Let us be clear, the EU’s population is 508 million. When the UK leaves, it will be 447 million.

Russia’s population is 143 million.

The EU minus Britain has a GDP of 18.1 trillion (purchasing power parity), Russia has an economy of 3.5 trillion (ppp). Germany alone has a GDP (ppp) of four trillion.

If Europe “needs” the US, it’s because it can’t be bothered to raise a proper army. That’s all. It is genuinely free-riding.

Chinese and American flags flying together

But then NATO is a large part of why Russia is a “threat”. The expansion of NATO, which Bush Sr. promised Gorbachev would not happen, is a large part of why Russia has armed up.

It’s not clear that NATO should even exist. Its purpose was to resist the Warsaw Pact and the USSR, neither of which exist. Russia has a lot of nukes, and is relatively strong militarily, but it is no USSR and has no grand alliance facing NATO. It is not a threat unless terribly mismanaged. (Which, I suppose, it has been.)

Disband NATO. Let the Europeans take care of their own defense, or lay prostate before the Russians as they choose.

Japan is a trickier proposition. What American military presence there does is simple enough: It prevents Japan from needing its own nuclear weapons. The same is true of American bases in South Korea. Leave and those two countries have to nuclearize or become Chinese satrapies (and Japan will need a much larger navy).

It’s also worth noting that the US didn’t start protecting “Japan’s oil.” The US needed foreign oil too; it is only recently, under Obama, that the US has again reached petrocarbon self-sufficiency and is able to say, “We’re protecting other people’s oil.”

WWII was won by the powers who had access to more oil. Generals and admirals at the time understood the war was, to a large extent, about oil.

America may not need foreign oil now, but it did for decades and that is why it protected maritime oil trade.

In general, however, a US withdrawal from its forward bases will be a good thing. A rebalancing of trade will also be a good thing, though it will hurt as it happens (Trump is not doing it well). Deliberately offshoring and outsourcing the US (and Britain’s) industrial base led, more or less directly, to Trump and other social ills. It created a group of people who have lost for 40 to 50 years. Their parents had better lives. They had better lives. They know it. You cannot lie to them with BS statistics and pretend otherwise.

So they are willing to vote for and support anyone who seems like they will wreck a system which doesn’t serve them. Maybe what happens will be worse, but what’s happening right now is shit.

This is not contradicted by Trump’s support from red-state elites. They are also scared, because they also know their situation is precarious and that power and wealth has flowed away from them. And they rule over Hell. It isn’t always better to reign in Hell.

So the world is changing. It was changing before Trump: The Trans-Pacific Partnership was intended to be a trade bloc AGAINST China.

Note carefully Stoller’s hostility to China. It is constant. The American elite is finally reorienting. They don’t see Russia as a primary threat. They’re moving away from caring about the Middle East as they now have enough oil of their own and see a post-oil future coming. They know the rising great/super power is China.

They want to reorient their alliances against China. The price of keeping NATO will be keeping China OUT. When Germany said they wanted to do more business with China, Stoller was angry and said it was an argument against NATO. No Huawei, no China.

The world is very likely to divide into trade blocs–probably two, maybe three.

China rises. The US moves to protect its position.

Great power politics continue, as they ever have.

There is no end to history, save an end to humans. Only fools ever thought so.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

A Few Words About Argentina

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On August 13, 2019

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Okay, so Argentina elected a neoliberal president. He went to deep austerity, removed capital controls, and sought an IMF bailout.

Now it looks like a socialist may win and markets are freaking out, because he may default on some of the debt and re-institute capital controls.

Argentina’s problems have a long history, but it’s worth remembering this: Before WWII, it was a first world country, with a standard of living about equal to Canada’s.

Argentina partially defaulted in 2001. We should remember that that default was caused by following the conservative policy of pegging the Peso to the dollar, which any moron should have known would eventually backfire.

It is also worth remembering that, when Argentina defaulted in 2001, it wasn’t actually allowed to. American courts wouldn’t let Argentina pay the creditors who allowed their debt to be reduced unless they also paid those debtors who didn’t take the deal.

We live in a stupid, perverse world where people don’t understand that there has to be a balance between debtors and creditors. Creditors are making a bet, and if they lend to the wrong entity, and that entity eventually can’t pay back the debt, they should have to eat their losses. Don’t lend to people who can’t pay you back. Everyone knew that Argentina was going to have debt problems, every time, but they took the chance because they wanted high returns.

But the central financial system, the NY and London courts, and the IMF act as debt collectors for people who want the upside of high payments from distressed borrowers without the downside of possibly losing the money.

Worse, they act as enforcers for bad actors, who won’t cut deals, and expect to litigate.

Debtors may lose some money, but leg-breaking countries for rich debtors kills and impoverishes poor people.

Now, none of this is to say Argentina hasn’t made mistakes. Flipping back and forth between neoliberals and socialists is stupid. Pick one, and suck it up. Electing Macri was stupid, but then being outraged when he does what a neoliberal technocrat would do (i.e., austerity and sucking up to the IMF) is equally stupid.

Pick a governing philosophy and elect governments that adhere to that philosophy until the leading parties all follow it (like when Labour became neoliberal under Blair, cementing Thatcher’s victory).

Right now, Argentina is getting the worst of both worlds.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Why Would Iran Attack Tankers?

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On June 19, 2019

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Well, if it did.

Let me tell a story, possibly apocryphal. Back in the 1970s, the Russian (USSR) ambassador supposedly had a talk with the Pakistani leader of the day. This is what he is reputed to have said.

” I do not know who will be in charge in Moscow in ten, twenty, or even 50 years. But what I do know is that whoever is there will want the same things then, that we do today. You can trust us, not because we pretend we are your friends, but because we are consistent.

Anyway, remember, that we’ll come back to it.

In the meantime, on June 13th there were reports that two tankers had been sunk in the Gulf. Claims were made they were sunk by Iran.

I shrugged. Important people want war between Iran and the United States, and in such a situation it’s hard to know what’s true and what’s not. I moved on with my day.

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

But yesterday I discovered an interesting fact. Before the two tankers were sunk, something else happened:

On June 5, 2019, a huge fire consumed a storage facility for oil products at the Shahid Rajaee port in the southern Hormozgan Province. Located west of Bandar Abbas, the Shahid Rajaee port is Iran’s largest container shipping port. Reportedly, a vehicle used for transporting shipping containers exploded and caught fire. Since there were oil products near the site of the explosion, the blaze spread quickly to several tanks and storage sites and caused heavy damage to the port. The spreading fire set off huge explosions which shot fireballs and heavy smoke high into the air.

On June 7, 2019, six Iranian merchant ships were set ablaze almost simultaneously in two Persian Gulf ports.

First, five ships “caught fire” in the port of Nakhl Taghi in the Asaluyeh region of the Bushehr Province. Three of these ships were completely burned and the two others suffered major damage. Several port workers and sailors were injured. As well, at least one cargo ship burst into flames and burned completely at the port of Bualhir, near Delvar. The fire was attributed to “incendiary devices” of “unknown origin.” The local authorities in the Bushehr Province called the fires a “suspicious event” and went no further.

Oh hey.

So, assuming the Iranians did attack the ships, they were retaliating.

Iran has long said that if they can’t get their oil to customers, no one will get oil to customers through the Gulf.

Yeah.

But this has bigger consequences. The real problem is simpler: The US made a deal with the Iranians, under Obama, then repudiated it when the President changed.

The US has arrogated to itself the right to impose sanctions on anyone it wants, for any reason, with no recourse by the victim. It is using this “right” in an attempt to remove Iran’s government.

The US cannot be trusted. Every few years, it changes. You can’t make a deal and be sure it will be honored for any length of time, let alone 10, 20, or 50 years.

Americans who squeal about Trump being an aberration both miss the point (your system allowed him) and are wrong: Bush attacked Iraq based on lies, and everyone knows it. Hilary Clinton promised the Russians that Qaddafi would not be removed, then removed him and gloated about him being killed after being raped by a knife.

The US can’t be trusted.

So the larger consequence is that a coalition of countries, including multiple oil producers, China and Russia are moving to sell and buy oil in a bundle of currencies which does not include the US dollar, and where no payments go through the payment system which the US can control (systems like SWIFT, to slightly oversimplify).

Dollar hegemony is one of the main supports of American hegemony. Misuse of dollar hegemony to attack other countries has brought us to this point.

I’ve been a bit of a broken record on this issue, but that’s because it’s been the obvious consequence of the US Treasury’s misuse of its powers.

Other great powers and their allies can put up with a cruel, even an evil, hegemon. What they will not put up with is a capricious one whom they cannot predict.

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Why the Economy Is Bad for Most People and How to Make It Better

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On June 10, 2019

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This is the second collation of articles on why our world is what it is, and how we can change it. Some of these articles are old, as I don’t write as much as I used to about economics, mostly because the decision points for avoiding a completely lousy economy are now in the past. The last decision points were passed by when Barack Obama announced his economics team and refused to try and get rid of, or bypass, Bernanke to enforce decent policy on the Federal Reserve.

However, this economy was decades in the making, and if we do not understand how it happened we will only wind up in a good economy through accident, and, having obtained a good economy, will not be able to keep it. These articles aren’t exhaustive; a better list would include almost five centuries of economic history, at least in summary, and certainly deal with the 19th century and early 20th centuries.

I was heartened that hundreds of people read the articles linked in my compendium on ideology and character so I dare hope that you will, again, read these pieces. If you do, you will walk away vastly better informed than almost anyone you know, including most formal economists, about why the economy is as it is.

The Decline and Fall of Post-war Liberalism

Pundits today natter on and on about income inequality, but the fundamental cause of income inequality is almost always determined by how society distributes power. As power goes, so goes income–and wealth. The last period of broad-based equality was the “Liberal Period,” which started with the Great Depression. You can locate the end of that era at various points from 1968 to 1980, but 1980 was the point at which turning back became vastly difficult. This was the moment when a new political order was born; an order conceived to crush those who were willing and able to fight effectively for their share of income and money.

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

Why Elites Have Pushed “Free Trade”

Those who are middle-aged or beyond remember the relentless march of free trade agreements, the creation of the WTO, and the endless drumbeat of propaganda about how FREE trade was wonderful, inevitable, and going to make us all rich. It didn’t, and it was never intended to. Fully understanding why “free trade” has only enriched a few requires understanding the circumstances required for free trade to work, the incentives for free trade, and the power dynamics which make free trade perfect for elites who want to become rich (often by destroying the prosperity of their own countries). Free trade is about power, and power is about who gets how much.

The Isolation of Elites and the Madness of the Crowd

All societies change and face new challenges. What matters is how they deal with new circumstances. The US, in specific, and most of the developed world, in general, is in decline because of simple broken feedback loops. Put simply, ordinary people live in a world of propaganda and lies, while the rich and the powerful live in a bubble, isolated from the consequences their decisions have on the majority of the population, or on the future.

The Bailouts Caused the Lousy “Recovery”

This may be the hardest thing to explain to anyone with a connection to power or money: The bailouts are WHY the world has a lousy economy, not why it isn’t even worse. If people cannot understand why this is so, if they cannot understand that other options were, and are, available, other than making the people who destroyed the world economy even richer and more powerful, we will never see a good economy, ever again.

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

The Rapid Destruction of Countries

You may have noticed, you probably have noticed, that most countries are becoming basketcases faster and faster. Some are destroyed by war and revolution, others by forced austerity. However it happens, the end of anything resembling a good economy through austerity in places like Greece, the Ukraine, Italy, or Ireland, or through war, in places like Lybia and Syria, is sure. Understand this: What is done to those countries, is being done to yours if you live in the developed world, just at a slower pace–and one day, you, too, will be more valuable dead than alive.

Why Countries Can’t Resist Austerity

Many of you will realize that much of the answer to this is related to the article on free trade. Weakness, national weakness, is built into the world economic system, and done so deliberately. The austerity of the past six years is simply the deliberate impoverishment of ordinary people, for the profit of elites, on steroids. But it is worth examining, in detail, why countries can’t or won’t stop it, and what is required for a country to be able to do so.

Why Public Opinion Doesn’t Matter

We live in the remnants of a mass society, but we aren’t in one any more (though we think we are). In a mass-mobilization society with relatively evenly distributed wealth and income, and something approaching competitive markets, public opinion mattered. If it was not a King, well, it was at least a Duke. Today it matters only at the margins, on decisions where the elites do not have consensus. Understand this, and understand why, or all your efforts to resist will be for nothing.

The Golden Rule

Money, my friends, is Permission, as Stirling Newberry once explained to me. It is how we determine who gets to do what. He who can create money, rules. This is more subtle than it seems, so read and weep.

It’s Not How Much Money, It’s Who We Give It to and Why

We have almost no significant problems in the world today which we could either not have fixed had we acted soon enough, or that we could not fix or mitigate today, were we to act. We don’t act because we misallocate, on a scale which would put Pyramid-building Pharoahs to shame, our social efforts.

Higher Profits Produce a Worse Society

No one ever told you that, I’m sure. Read and learn.

The Fall of the USSR

The USSR fell in large part because of constant and radical misallocation of resources. This misallocation occurred because those running the economy did not receive accurate feedback. Despite the triumphal cries of the West and the managerial class who pretend to be capitalists, a version of this exact problem is at the root of our current decline, and it would serve us well to understand how and why the USSR fell.

What Privatization Does

Of all the ideological bugaboos of our current age, one of the strongest is the idea that private enterprise is always more efficient and better. It’s not, but that belief is a very profitable to our elites, and understanding how the engine of privatization works is essential to understanding both our current economic collapse and how the fakely-bright economies of the neoliberal era–especially the early neoliberal period of Thatcher and Reagan–were generated.

What Prosperity Is and Isn’t

It is, perhaps, odd to put this article so far down the list, but it’s wonky and important and not very dramatic. Simply enough, what we define as prosperity is not prosperity, which is why we are sick, fat, and unhappy with rates of depression and mental illness and chronic disease which dwarf those of our forbears despite having so much more stuff. Fix everything else, but if we insist on continuing to produce that which makes us sick and unhappy, what we have will not be what we need or want, nor will it be, truly, prosperity worth having.

The Four Principles of Prosperity

Prosperity, at its heart, is an ethical phenomenon, as much as it is anything else. Without the right ethics, the right spirit, it will not last, nor be widespread. If we want a lasting prosperity, which is actually good for us, we will start by reforming our public ethics.

How to Create a Good Internet Economy

The internet is wonderful, but despite all the cries of “Progress, progress!” it has mostly made a few people rich, created a prosperous class of software engineers who often lose their jobs in their 50s, and has simultaneously overseen the decline of the prosperity for most people in the developed world. It has not produced the prosperity we hoped it would. Here’s why and how to fix it.

Concluding Remarks

The above is so far from comprehensive as to make me cry, but it’s a start. I do hope that you will read it and come away with a far better idea of why the economy sucks for most people, and a clearer understanding of the fact that it is intended to suck, why it is intended to suck, and how the old, better economy was lost.

(Author’s Note: This was originally published October 6, 2014. I’m putting it back up top, as I have gained many new readers since then.)

Oncoming Recession and the Chinese/US Trade War

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On May 29, 2019

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Chinese and American flags flying together.

So, it’s been a long time since the last recession and indicators are turning negative. While this is never a science, odds are good for a recession in 2020 or early 2021 in the United States.

This is not due to the China/US trade war, but that conflict will make things worse. There is an argument for what Trump is doing. However, even if this has overall good effects for the US, in the long run there are significant dislocation costs when moving production back to the US and there are always going to be losers, because the US does sell a lot to China even if it has a trade deficit, and those people will lose markets. (Hello, soybean farmers!)

Meanwhile the Chinese are ratcheting up their rhetoric. Multiple newspapers have suggested embargoing rare-earths to the United States and this seems like a near certainty if there isn’t a deal soon.

Rare earths exist other places than China, but China has been able to mine them more cheaply than anywhere else, so no one has bothered to create significant production, as it isn’t profitable. China produces 80 percent of rare earths. So, if there is an embargo, other sources can be developed, but that will take time: again, dislocation costs.

The last time a rare-earth embargo happened, I noted that it was insane to have only one country producing all rare-earths and that sensible policy would subsidize production somewhere else just to avoid this scenario. But modern trade rules make subsidizing production of most items (except agriculture and defense) essentially illegal, so we have to wait for a crisis to do the sensible thing.

Chinese rhetoric around the trade war has become very serious, with the People’s Daily newspaper (official Communist newspaper) writing:

“We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!”

…The expression “Don’t say we didn’t warn you!” is generally only used by official Chinese media to warn rivals over major areas of disagreement, for example during a border dispute with India in 2017 and in 1978 before China invaded Vietnam.

I’m going to discuss the oncoming new trade-era more in the future. For now, note that this isn’t just about Trump. Moves in this direction had already started under Obama (the Trans-Pacific Partnership was meant to isolate China).

(I am fundraising to determine how much I’ll write this year. If you value my writing and want more of it, please consider donating.)

What is different about Trump is that he prefers unilateral negotiations to multilateral (WTO) or plurilateral (a few countries).

This is not stupid. Out of anyone in a singular deal, the US will always be the stronger partner. It prevents other nations from ganging up on the giant, and trying to use numbers to make up for their weakness.

The US can almost always inflict more damage on any one other nation than that nation can on the US.

Again, not stupid; entirely rational and good negotiating tactics.The larger issue is that the US is, itself, dismantling a trade order created, largely, by the US. That trade order had significant disadvantages for the US working and middle classes, but it also was to their advantage geopolitically. The US chose who could industrialize or re-industrialize (its allies – Taiwan, Japan, Germany, South Korea), and so on.

This worked well for the US (not so much most other people) until the Americans got stupid and greedy under neoliberalism. Then, the US corporate class, looking at China, lost their heads: Especially as China went out of its way to make sure that various Americans made a lot of money helping China industrialize.

The difference, of course, is that China is the world’s natural leading power. Has been for most of the last two thousand years. China would be an actual competitor with the US, if it was allowed to get back onto its feet.

And it was.

As a Canadian, I have a dog in this fight. Canada is an American subject state, and we’ll be on the US’s side, because we won’t have a choice. Nor am I particularly a fan of how China is run.

But this is the cycle of great powers. There is always a new challenger, and the old Hegemon always resists (and is virtually always in a late Imperial stage of incompetence and corruption).

When giants clash, ants (you and me) are advised to beware.

Make money now, before the recession, if you can. If your income or wealth is tied to trade, try and mitigate your exposure.

Meanwhile, we may as well enjoy the show.

Everyone’s Noticed the Oncoming US/China Cold War

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On May 22, 2019

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Chinese and American flags flying together

Horowitz calls it a tech cold war, but it is unlikely to stay that way.

Cutting Huawei off from all non-open source Google services, including the Play Store, and not allowing it to buy US components is a huge blow to Huawei.

Huawei is ahead in 5G, and American allies have been reluctant to ban it, but the US can do great damage to China’s tech industry, because in many other ways it is still far behind America’s. (Horwitz is good on this.)

China has ways of retaliating. The most potent is to embargo rare earths. China did this once before and the WTO declared it illegal, but that won’t necessarily stop the Chinese from doing it again. The WTO, which is also under attack by the Trump administration, may not have the teeth necessary to stop the Chinese, especially as the US is scarcely innocent in the tariff escalation.

I’ve been on the Huawei situation for months, because I believed it was the first step in a dangerous escalation between the current hegemonic power and the challenging power.

The best book on the subject is Thucydides Trap, by Graham Allison. Allison also wrote a foreign affairs article on Thucydides Trap. The summary is that in the past 500 years there have been 16 similar challenges. Twelve of them led to war.

America was a particularly aggressive rising power: seizing huge amounts of Mexico, grabbing the Alaskan panhandle under threat of war with Great Britain (who couldn’t afford to move their forces away from the Germans, and so let Teddy Roosevelt, an aggressive asshole in foreign affairs, take it.)

And of course, America terrorized South and Central America, as it still does, while claiming foreign naval forces had no right to be in the Americas (an echo to China’s expansion in the South China Sea most Americans refuse to acknowledge.)

Now that America is the hegemonic power they want to stay the hegemonic power.

The current international order was mostly created when China was weak, recovering from arguably the worst position it had been in for 2,500 years.

The Chinese do not accept the current international order; created by America, with European help, after WWII as legitimate, because it was created almost entirely without their input when they were weak. Indeed, a clear-eyed realpolitik view is that America enforced the order because they were massively strong, then further enforced it after the collapse of the USSR.

Put aside all the bullshit, the Pax Americana, like all Pax’s comes out American force: the barrel of a lot of guns, and the boom of a lot of nukes.

So China is moving to retake what it regards as its rightful place in the world: The greatest nation in the world. America is doing what all hegemonic powers do when an upstart rises: Resisting.

This is not a temporary thing and it is not just a result of Trump. There are real differences, and the pivot to China as the big enemy began under Obama, not Trump. Ironically, the Trans Pacific Partnership (which Trump refused to ratify) was an effort to contain China.

Trump’s addition is a preference for unilateralism. Under mulitalternalism the Americans had found it harder and harder to get their way, as the failure of the Doha round of WTO negotiations showed.

One-on-one America is always greater than anyone else. It always has the advantage. Trump is not wrong about that. So he is using that might to “re-negotiate” with other nations, including China.

Meanwhile the Chinese have been forming their Belt and Road system, which is an alliance and trade organization substitute, meant to form deals 1:1 with other countries, and to create trade links, especially a land-route across Asian to Europe,  which will allow China to bypass America’s stranglehold on naval power, and especially on the Straits of Malacca.

And so on.

Let’s cut to the chase. There will be many tactical and strategic moves, but China is about as economically powerful now as the US. They are currently, overall, a middle income country, but many cities are high income.

Because China has three times the population of the US, if they can move their population to high income, they will have an economy about three times the size of the US.

They will win.

The US should think about that carefully, because if they oppose the Chinese at every point, when China becomes the hegemonic power, the US may find themselves treated badly. The Chinese won’t feel badly about it, at all, given how they feel about how China was treated when it was weak by Europeans and Americans.

The Chinese, meanwhile, should remember that their rise to hegemonic power isn’t certain, and that if it requires great power war in a world with nuclear weapons, that may go very badly for everyone involved.

Neither side, as an aside, are good guys. The Chinese are, domestically, creating a rather nasty authoritarian surveillance state. America domestically is a shit show for many, and it has been far more likely to go to war with other countries than the Chinese have.

In fact, while Chinese actions in the South China Sea are nasty, they are mild by rising hegemonic power standards, and certainly, so far, less nasty than how the US acted when it was the rising power.

A new cold war, with the world dividing into two blocs, would be shitty. A hot war would be worse.

But I’m not at all sure “cooler heads” will prevail. The simple fact is that Americans think they are the indispensable nation, and good people, and therefore have the right to rule the world. Meanwhile the Chinese nurse their own powerful sense of superiority, added to a massive feeling of grievance and ill-use. Nor can the Chinese Communist Party allow economic growth to falter without danger to their own power and legitimacy. If it does, be sure they will focus the anger at foreign enemies.

I’m not sure there’s much point being worked up by all this, mind you. Rising and falling hegemonic powers act like this, that’s just how it is. Most of us don’t have enough power to affect these events. Just be aware of them, and if you have some power, perhaps put your finger on the scale that at least avoids hot war.

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The Coming War with Iran?

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On May 7, 2019

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It may turn out that the worst thing Donald Trump ever did was hire John Bolton as his National Security Advisor.

Trump was already deranged on the subject of Iran, possibly because Jared Kushner is his son-in-law, and Jared is having a (presumably) platonic love affair with Saudi Crown Prince (and de facto ruler) Mohammad Bin Salman Al Saud. Saudi Royals both hate and fear Shia Islam, in part because the regions of Saudi Arabia with the oil are Shia.

So Trump unilaterally left the nuclear weapons treaty with Iran, and the Treasury department has made it illegal for any country to buy oil from Iran. Since almost all finance in the world goes through US banks, the Treasury can do this. Only firms which don’t use the SWIFT system can avoid the Treasury’s grasp.

These sanctions are having a terrible effect on Iran, and one which will grow even greater as the final waivers expire. There will be smuggling, but even so, Iran will be starved of foreign currency.

The US has also declared the Iranian military to be a terrorist organization, the first time part of a foreign government has ever received that designation.

And a carrier task group has been sent to the region, specifically as a warning to Iran.

It is well known that the NeoCons, of which Bolton is a prominent member, want a war with Iran, to remake the Middle East. (This is part of the same project which saw Iraq destroyed, and which fuel US-led regime change aspirations in Syria. A little further afield, Libya, while not in the Middle East, was similarly dealt with.)

The issue, as Escobar points out, is that a new alliance is rising. Its key members are China and Russia, but Iran is part of it as well. The Chinese Belt and Road Initiative is meant to create routes to Europe and a Chinese-led trade zone. It is meant to bypass the straits of Malacca (which the US can shut down at any time to strangle China), and the land parts will be a lot faster (though not cheaper) than sea transport.

Iran is a key part of this system.

Because other countries aren’t cooperating with the US when it tries to stop the B&R system (indeed, Italy just signed on), the US needs to actually destroy part of it.

Thus Iran.

This isn’t the only reason, needless to say, the NeoCons have wanted to destroy Iran for far longer than the B&R system has existed, but it is now an important consideration.

But what if Iran survives the sanctions? No one except the US is happy about the sanctions. Others may submit, but they don’t like it. The Chinese will do a huge end-run, as with the Russians. Even the Europeans are angry, and have created a “special vehicle” to avoid sanctions. (Consensus seems to be that it doesn’t do a good job and that if they’re serious they need to improve it.)

Because no one is happy, there’s going to be a lot of oil still sold. It may be enough to keep the Iranian government in power.

Then what?

Well, war, maybe.

The problem with that is that Iranians can shut down the Strait of Hormuz. There is no situation, short of nuclear glassing, in which the US can keep it open. That spikes the price of oil to hundreds of dollars a barrel, because, at that point, a quarter of the world’s oil cannot get to the market at all.

And that causes an economic and financial crisis, likely even larger than 2008, because it involves economic fundamentals.

So the question is whether or not Bolton, who is a true believer, can talk Trump into it.

And the answer is… I don’t know. Just don’t know.

But that’s a serious precipice on which we’re walking.

Even without war, this is a serious situation. The US’s continued abuse of its privileged position in the world payments system to sanction countries like Iran and Venezuela, even when other great powers disagree, means that the loss of that privileged position through the creation of alternatives is inevitable. It is already happening and only a matter of time before they become viable enough that major countries will simply be able to ignore the Treasury’s sanctions.

This is also true because other markets are large enough that access to the American market is no longer required. Especially if the EU comes onside with this, the ability to sanction is basically finished if the other great powers (and especially China), don’t agree.

This is, for the US, a late Imperial period. Don’t mistake it as anything else. And remember, very few countries manage to regain their pre-eminence or Empire. Britain lost one Empire and gained another, but it is an exception, and driven by a specific situation (first mover in the Industrial revolution) which has no modern parallel (no, the information revolution is not even a rounding error on the industrial revolution.)

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

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