The 1930s Feeling Returns

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The global economy in flames leads to the fire of civil unrest and war between nations

History demonstrates repeating cycles and the 2010s are perilously close to repeating the 1930s.

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The last few days have seen a sequence of events that are a chilling parallel to the Great Depression.

Europe has been involved in a slow speed train wreck. Attempts to paper over the fundamental flaws of the European Single Currency, the Euro, were never very effective, doing little more than to buy some time for the prayed for miracle which never came. Each time the cracks were papered over, they became exposed again faster than the time before. Now the European Emperor is exposed as naked and, apart from one or two Eurocrats and Eurofanatics, no one believes that the Emperor is clothed. The PIGS were believed only to comprise Portugal, Ireland, Greece and Spain. With the exception of Spain, many commentators were skeptical that Portugal, Ireland and Greece ever really met the criteria for membership of the Euro Zone. Some also believed that Spanish membership was deeply suspect. Germany and the Netherlands effectively operated as a single currency before the Euro was created, so that their membership was never doubted. France was considered a natural member, if not on economic grounds, then because Germany and France had joined politically to rule the European Union. Beyond those three countries, all other Euro Zone members had some questions hanging over their membership, if only that their political elite might be completely out of touch with their citizens. The major questions that some commentators had about the whole Euro Zone project was that it was promoting the Euro for political reasons and not for economic reasons. Some pointed out very early on that the European Union had never managed to persuade an auditor to sign off on the EU accounts. The level of corruption and incompetence had been at epic levels.

When the Euro began to unravel, it was no great surprise. What was surprising was that steps to address issues were seriously ineffective. The Euro Zone countries tried hard to hide problems but showed little appetite for their correction. Almost from the start, the membership rules were bent, twisted, fractured and ignored to allow the countries with the weakest economic and political controls to continue to spend way beyond their means. This should have been no surprise because of the endemic corruption across the European Union, where the political elite regarded office as an extension of the family bank account and regarded any form of auditing and accountability as an infringement of their God-given rights.

Over the first seven months of 2010, what has been a surprise for most is the extent of weakness in the Euro Zone. The PIGS became the PIIGS, as Italy joined this group of basket case nations within the Euro. The Belgium had its credit rating downgraded and suddenly not even Germany looked safe. The Euro Zone has had years to get its act together. It became clear that not only was political union the objective of the Euro, but it was mandatory for economic credibility. The only way for the Euro to survive, without massive loss of membership, is for all its members to hand over all economic control to a single political power and a Central Bank. The Eurofanatics have always wanted a single regime for all of Europe, where all the old nations vanished, to be replaced by new Soviet Republics that spanned the old national borders and placed control in the hands of a self appointing Central Polit Bureau. That policy has a small minority support across Europe, but for the Single Currency to survive economically the Euro Zone must operate as a Single Economic State. A single treasury leader must have the power to impose taxation on all members and to move funds around the zone as he or she wishes. If a Soviet Republic tries to engage in a program that would destabilize the Single Economic State, the Treasury Leader and the Euro Central Bank would have the power to force them back into line without following the traditional Euro Zone process of moving the goal posts to hide the problem and to avoid disputes.

This is all a long way from the heady days when Eurocrats planned to humble the mighty US$ and replace it as the prime reserve currency for the world, with the EUSSR as THE Ultimate Super Power. It does not however mean that the Euro is unable to damage the US$. In the current situation that the US finds itself in, a major destabilization of the Euro will add further pressure on the US$. The European markets are too important to the US for the Euro not to affect the $ position.

Germany may force political union of Euro Zone Members. It is not at all certain because German voters are overwhelmingly in favour of withdrawal from the Euro Zone and leaving it to sink. That may be an innocent view because Germany could not recreate its own currency and let the Euro fail without suffering consequences. In the longer term, Germans could benefit hugely from once again having self determination and independence, having now paid off the enormous costs of German reunification. The alternative to creating a new sovereign nation out of the Euro Zone is to cut away the weakest members but the intractable problem is agreeing where to cut and an acceptance that the European Union would not be able to survive in its current form. Originally, it would have been less of a problem to cast the PIGS adrift. The main area of debate would have been whether Spain could stay or should go. Today, Italy and Spain would have to join Portugal, Ireland and Greece at the mercy of the economic Tempest. Where the real problems come in is that more Euro Zone Members would have to be cast into the maelstrom. Belgium has not only had its credit rating reduced but it still stands at risk of being divided into two countries. France is coming under scrutiny, suddenly no one is safe.

The limited options for the Euro Zone may seem like an academic question where a formula could be produced that would value each option and make it a simple matter to taking the least painful route to recovery. Unfortunately it is not that simple, if it ever was. Some commentators take the view that a reasonably painless option existed, had the problems been tackled six years ago. That can be argued, but the situation is so very different today, that is something in the distant past that might or might not have been the case. It is now quite clear that when the European politicians realized they were in a deep hole they respond by placing a propaganda screen around the hole and digging faster. In Britain the disastrous Gordon “Bottler” Brown was still being hailed as the economic mastermind and his version of reality was seductive. He claimed to have abolished boom and bust for ever across the globe and in Parliament he even claimed to have “saved the World”. When things began heading down fast, he claimed that it could all be solved by epic levels of borrowing and by printing money. Even the slowest individual with the the weakest grasp of economic theory and practice can see that “Bottler” was wrong, encouraging the world to head towards the financial cliff and jump off with him. Fortunately for Britons, the voters saw through him and dismissed his regime. What replaced him was less than ideal. The Whig Tory Coalition has seen the Whigs working hard to hold back recovery, holding a similar philosophy to “Bottler” Brown’s. However, Britain is doing relatively well at the moment. All of the economic and social indicators show improvement, but much of that improvement is down to a mixture of Tory policies and the markets’ perception of Tory Government. Britain received a valuable boost when the markets saw “Bottler” thrown out of office. The statement that Whigs and Tories would put aside party political interests for a full 5 year government, and concentrate on sorting out the economic mess left by “Bottler” Brown, was a great confidence booster for the markets. That was further helped as the IMF and other independent specialists joined to congratulate the Chancellor Osborne and the Coalition Government for taking the necessary steps to move into recovery. The danger for Britain is that the nation’s finances are in recovery rather than recovering. The situation has stopped getting worse, it is showing some evident of improvement and it is showing healthier trends than most other major economies, but it still has a very long way to go and it is vulnerable to external influences, particularly to a failure of the Euro, a slow continuation of the Euro’s troubles, and to a serious problem with the US$ and the US economy.

As the Euro saga drags on, the US$ has been suffering from the incompetence of the Obama Administration. It can be argued that the credit rating agencies decided to punish the US for the lengthy battle between US politicians that almost saw a default. There is a view that the loss of AAA rating was a warning shot by the credit ratings agencies rather than a simple credit assessment of the current US credit worthyness. There might be some elements of that but already the agencies are talking about a further downward assessment. This is very serious for confidence in the US economy and ability to pay its way. The markets have already responded by going into free fall.

The policies of the 1930s are emerging once more. Countries are thinking of themselves. It is difficult to condemn politicians for thinking of their own citizens in simple terms, and many politicians are very simple people, but countries are inter-twined. A large part of the troubles of the 1930s resulted from a failure by politicians to appreciate just how much countries had come together in global trading. In the 2010s politicians seem to have failed to appreciate how much faster global trading decisions have become and how fickle confidence now is.

Before the invention of the telegraphs, information traveled no faster than a man on horseback, or a ship under sail. Markets were then fragmented and even within a country, commodity exchanges were regional. A corn exchange had, for example, to serve an agricultural area surrounding it. Surpluses might be traded with other countries but that required information to be exchanged slowly. The telegraph and the ticker tape changed all of that. By the 1920s, telegraph trading between trading centers was commonplace but, although telegraph, telephone and radio transmitted at the speed of light, markets continued to operate their traditional opening hours. That meant that small delays were introduced between the time when information was transmitted to the time when someone read it and acted upon it.

Today, information is transmitted around the world at the speed of light and markets are to some extent always open. An Exchange may still follow opening hours in local time, but traders work very long hours, in shifts, or by the use of pagers. Much trading is done outside the Exchanges in the back offices of traders and traders increasingly rely on computer systems to advise them. Computers work 24 x 7 and warning systems trigger when trades reach unusual levels. Once trader’s screens start turning to red, panic sets in around the world and traders dump stock and commodities without giving much thought to the longer picture. Confidence is now so fickle that a minor problem can trigger a slide and a slide can trigger a depression that will cause major pain until confidence struggles up again.

The dive in confidence and markets, together with politicians thinking nervously in the national interest, are not the only parallels with the 1930s

China has long posed a potential threat to world peace. Until the fall of the USSR, little attention was paid to China which was in the throes of internal warfare as the Cultural revolution saw the type of purges that the world had assumed ended with the deaths of Hitler and Stalin. Even as China began to operated more boldly beyond its borders, little attention was paid outside Western intelligence agencies where the potential Chinese threat level began to be increased. Some politicians paid little attention to the intelligence reports because they assumed that this only indicated that the intelligence agencies were seeking ways to recover the budgets cut when the USSR collapsed. It is only during the last two years that some politicians have started to appreciate the size of the Chinese threat. Their attention has however been diverted by the late and unlamented Bin Laden and his religious fanatics. With economics taking center stage, attention is diverted from the military and political implicatios of the Chinese arms race. This is similar to the situation in the 1930s when no one paid much attention to the rising threats posed by Germany

China has been growing as an economic power and that growth is accelerating. At the same time China was busy quietly expanding its influence in Africa and taking control of African raw materials. Neither factor was beneficial to established economies or to the African people (because the raw materials were being sold by dictators). During the last two years more has been leaking out of China about the extensive military expansion that has been underway for two decades. The Chinese space program has a very strong military feel and aims to build its own space station and its own settlements on the moon, before building similar settlements on Mars. That space program has similar objectives to the new Russian space program where military advantage and raw materials extraction are seen as the primary benefits. This comes at a time when the US has given up its ability to launch manned spacecraft for at least several years. India and Japan are also expanding their space programs and planning on manned space flight as national programs. This puts them in conflict with China. India has already faced conflict with China and China has made no secret of its desire to absorb Taiwan or its desire to conquer Japan. As these countries develop their rockets, and nuclear technology proliferates, the danger of China taking on India and Japan in nuclear war increases dramatically. The development of stealth aircraft and the launching of the first Chinese aircraft carrier demonstrate the rising military threat posed by China.

The Chinese have now raised the bar by giving US President Obama a verbal lashing over his economic incompetence. The lashing may have been well deserved, many Americans would have been pleased to express their anger at his performance, but it is a serious step politically. Americans may think Hussein Obama is a walking disaster as President, but they may not take kindly to a foreign power taking him to task and they would be right because the Chinese comments are not friendly advice or the expression of a creditor who may now think his investment unwise, with a default likely. These comments were partly a marker that China now considers it superior to the US in world politics and the first step to attempting to remove reserve status from the US$. The country with the primary reserve currency is at an advantage in trade and at an advantage in international negotiations.

The very grave international situation may be similar in many respects to the 1930s, but in other ways it is unprecedented. The great danger is that politicians react to the unknown with fear and attempt to withdraw into their national comfort zones. In the process they pull up the drawn bridge and the global trading situation becomes even worse. When that happens the only known way to recovery is a new arms race and a global conflict.

Editor

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