The Syrian quagmire ending?

Probably the most newsworthy item at present again involves Syria, with the collapse of the rebel forces in Aleppo, and the associated reduction of that part of the city to rubble. We are starting to get images from the region, and it is clear that an enormous amount of money will be required to rebuild that part of the city. An effort has been made to offer the insurgents transport to insurgent held villages elsewhere, and what we see is a lit of civilians are going as well. To my mind, this indicates that the reason the rebels held Eastern Aleppo is because the civilians were sympathetic. In turn, that strongly suggests the rebellion is now down to religion: Sunnis attempting to get rid of the Shias. With Hezbollah and Iran involved, that is not going to happen.

One of the biggest disasters there is undoubtedly the high number of civilian casualties, and a number of commentators in the West have called for war crimes trials on certain Russians. At the same time, the West has been strangely quiet relating to casualties in Mosul, where the US is bombing, and, strangely enough, the attack is being managed by the Shias. This bombing and the inevitable casualties has raised the issue of justice and international law, and I am afraid from my point of view, many of those in the West are merely arm-waving and arguing that “they are war criminals”. Nobody denies that killing of civilians is bad, but what could Assad and the Russians do? The objective is to remove the rebels, and to be quite clear, the rebels included factions that wished to impose the strictest form of Islamic law. Women should be kept at home and do nothing but housework and breed. As for nobility amongst the rebels, I saw a TV clip from an observer who had been in eastern Aleppo, and saw a family “home invaded” by rebels looking for food. They took everything, and when the mother complained about feeding the children, they shot her through the jaw to stop her complaints. So much for the noble rebels. There is no way those involved in something like the al Nusra front can be expected to change their ways and be persuaded to become peaceful citizens, so Assad either has to defeat them, or let Syria be run by them and ISIS in full Wahabbi extremism.

Let us look at “International Law”. Who is the sovereign entity? Who imposes the law? As far as I can make out, it is at a very similar state to that of ancient Rome, except that there is no clear law-making entity. In ancient Rome, prosecutions were made by citizens, and the results tended to be resolved by the eloquence of the lawyer, or the standing of the participants. Thus during the late Republic, Clodius could organize a gang to beat up a politician he did not like, or even burn down someone’s house. Nothing would stop him. So-called international justice is a bit like that now: victor’s justice.

At the end of WW II, a lot of Nazis were tried for war crimes, not that there were such recognized crimes, although many were guilty of crimes under the German criminal code. Most people are not particularly concerned about the doubtful legality of the process because those found guilty were mainly really very bad people. But there were double standards. Any German who could be of any further use to one of the occupying powers was immediately granted immunity.

Then, if we consider killing innocent civilians to be a war crime, was the fire bombing of Hamburg a war crime? Of Tokyo? Were Hiroshima and Nagasaki war crimes? If not, why not? For me, the fire bombing of Dresden had to be a crime, because the war was clearly essentially over, Dresden had no military value then, and 35,000 civilians were killed for no good purpose. Why is that not a war crime? Hopefully, not because it was us that did it, not them. In more recent times, the invasion of Iraq has led to some unknown number of deaths, but certainly in the hundred thousand range.

My view is Syria will be better off with the Wahabbi extremists defeated. If so, and given a somewhat lacking of alternatives, I believe that the Russian bombing of Aleppo was a valid means of pursuing the war. Yes, innocent people were killed, but at least we now see the possibility of an end to the carnage. The question we must ask is, what was the alternative? Just leaving the rebels alone to rearm and reorganize? Prolong the misery indefinitely?

So what happens now? If there is going to be peace, how do you arrange that? Negotiate with ISIS and the al Qaeda derivatives? Separate the country and give them their Caliphate? Or have a secular government, and force the citizens to behave? That would be essentially a return to what Syria was before all this started. If you think you could do this without Assad, then nominate who will be the new government, and outline why will it work. How do you impose order? And most importantly, how do you get the economy of a country bombed to bits back running again? It took Germany many years after WW II, and the US put a lot of money in to get restoration going. Further, there was a well-established industry in Germany. Syria seems to have none of those advantages.

This will be my last post for 2016, but I shall be back mid January. In the meantime, I wish you all a Merry Christmas, and all the best for a successful and healthy 2017.

Where to now, economy?

While I write futuristic novels, none of them involve trying to predict the future; rather I use the future as an excuse to formulate a situation that has little merit other than to be the background to a story that is really looking at something else. However, like most people, I am curious about what could be coming. That includes wondering where the economy is going.

Some time ago I saw an interview with Mervyn King, an ex-Governor of the Bank of England. According to him, in a market economy banking crises are endemic because a market economy cannot provide all the required price and investment signals. This is effectively a statement that there is an inherent failure in the market economy, and it arises because nobody can predict the future, and there are the problems of positive feedback (where the effects of the problem make it worse) and hunting (where the correction dramatically overshoots and causes the opposite problem). Thus suppose commodity A suddenly has a shortage. Prices rise, the masses start acquiring A and the price rises further, but there is no fundamental reason for the rise. When reality strikes, prices drop, and keep dropping.

I recall in my youth the price of potatoes tanked, and farmers found themselves dumping them. My father immediately began renting land, and with a trailer, went around the potato dumps and picked up free seed. Next season, because everyone had got out of potatoes, and also partly because of adverse weather in places, prices leaped five times above average. At that point, my father made a lot of money, but immediately got out of potatoes, on the grounds that next year everyone would be back into them. Now, King’s point is, bankers lend to farmers, but they cannot know what next season’s prices will be, and hence cannot know whether the farmer will prosper or go bust. In New Zealand there are a number of dairy farmers who got into it with expensive farm conversions when prices were very high a couple of years ago. When the world became swimming in milk, the debts still had to be serviced.

The question then is, can anything be done about this? My guess is, so far there are no signs that anything better would work. A long time ago I was in the old USSR, a command economy, and basically it was not working at all well. Prices were stable, by command. I went into a restaurant and picked up a menu that was printed twenty years before and the prices held! The problem was, I also went into a major store to see an array of empty shelves. The prices might have been stable, but if the goods were not available, their price was irrelevant. In one of my trilogies, I proposed an economy that was stable, BUT there is no evidence it would actually work. The proposal was simply background to make the rest of the story easier to follow, and in any case, there were price rises due to resource shortages. However, there was no possibility of major recessions, or major booms. Perhaps I was dreaming?

Another one of King’s points was that while central banks avoided a catastrophe in 2007 – 2008, since then, the basic fundamentals have not been corrected. In particular, there is a serious disequilibrium between saving and debt, largely due to very low interest rates. The problem is, the longer this goes on, the harder it will be to return to some desirable “normal”.

King was also somewhat skeptical about the European Union, and noted that a single interest rate imposed on countries with varying rates of wage and cost inflation leads inexorably to divergence in competitiveness. Well, yes, it would. German banks would seem to have to take some major losses, but they seem reluctant to do so. (Note that Germany itself has defaulted on debt before.)

King’s way out is to boost productivity and growth, and he was enthusiastic about the TPP trade agreement. My guess is that Trump will kill that option.

The problem I see with that analysis is that King thinks society in the future will be more or less the same as now. I am less convinced. In many western countries, the biggest problem is that local manufacturing has been exported, and this has led to the hollowing out of middle classes. While the very top corporations are raking in huge profits (and paying increasingly less tax) the wage earners tend to find their wages actually reduced. Governments are compensating by increasing their borrowing, thus taking advantage of lower interest rates. The problem here is, with the exception of the US and others undertaking quantitative easing, while central banks might offer low interest rates, they do not lend because to do so without borrowing is simply to enlarge the money supply. The US has got away with quantitative easing largely because trillions of dollars have been secreted away in foreign banks as a consequence of tax avoidance. However, the debts remain.

For the general economies of countries like New Zealand, while the Reserve Bank recently lowered interest rates, the commercial banks actually slightly raised them. The reason: they need deposits, and as interest rates have dropped, people have gone searching for yield elsewhere. Here, a lot has gone into housing, largely because there is a shortage of houses, but this has not created a lot of new houses. Instead, as King would have noted, this must lead to a bubble happily fermenting, although because of the underlying shortage (which is politician induced) it may not burst. Here, politicians are the problem through sending perverse signals and regulations to the market. Money has also fled towards stocks, but again that tends to raise the price when more money goes there than into new ventures. Now, what happens if this bubble bursts? Governments are in so much debt they have little room to maneuver. By itself, politicians might consider that as merely unfortunate, but the problem then is the consequences, one of which I included in my novel ‘Bot War. I hope that consequence does not come to pass, but I am far from confident.

Governments want inflation

It is a bit like Alice in Wonderland: governments want some inflation; not too much but not too little. When there is inflation, debts shrink in real magnitude, and governments are notoriously deeply into debt. So, the more the better? Well, not quite. The classic example was Germany during the 1920s, where as soon as you got money, you spent it, or even better, converted it into something else that was not inflating. The German economy effectively collapsed, apart from isolated examples, such as the chemical industry. The reason they survived was because they exported much of their production to the US, and received their income in US dollars. They then paid their workers in something such as “aniline money”, which was convertible to US dollars, and their workers generally made purchases at company stores that sold in “aniline money”. So, in any economic problem, there are always some who survive, usually through being big enough.

There is the other side of the coin. While debtors see their debts inflate away, which in my opinion is essentially basic dishonesty, few want to lend, and if inflation gets high enough, nobody has anything liquid to lend. If you have money, it is converted into something else as quickly as possible. Workers don’t work very hard because the employer is not paying them. The instant they are paid, they are off to turn this paper into something else. So while governments want inflation to get their debts inflated away, and they will wave away the dishonesty aspect by arguing it is the people as a whole who benefit, they do not want it to be so big that people refuse to lend.

So why have inflation at all? One reason stated is that if there is next to zero inflation, the next downturn will lead to deflation, and during deflation people try not to spend, which exacerbates the problem. If people stop buying, there is no point in making the same amount of stuff. Companies either fire staff or go under, which leads to more unemployment and so many more people who cannot service their previous debt. This leads to a higher risk of bank failure. The risks of debt to equity ratios get worse, so more firms will go under, and that puts a lot more pressure on the banks. Another reason is that sustained low inflation means that there is little scope to cushion the next downturn, i.e. the banks have no tools left. As turnover drops, tax returns decrease in value but debt levels stay high, and accordingly the governments have less room to move. As you may notice in these situations, the whole reasoning for whatever is being decided is to make life easier for the banks, or for the government. The whole financial management system is designed to require the least effort from financial managers!

There is a problem here that can be left for a later post, but basically it lies in the possibility that the economies of the world are changing, the rules are changing, and we cannot use the past to predict what is likely to happen in the near future.

Which leaves the question, is zero inflation a disaster? In this context, after Isaac Newton left the British Mint, the value of the pound remained constant more or less until the first world war. During that time, Britain became an economic superpower. Since then, the value of the pound has tanked, and Britain is not. True, there is more involved in Britain’s decline, but the prolonged time during which there was effectively zero inflation did not do Britain any harm. (Note that some prices would, of course, rise. Property prices in certain parts of London rose because there was a shortage of land, but that does not count in the inflation concept.) Further, during that period there was significant investment that powered the Industrial Revolution. Of course it also contained horrible wealth inequality, but that was endemic, and was essentially a consequence of feudalism. There were also serious downturns, but there is no evidence whatsoever that that had anything to do with the value of money, and as yet I do not believe we have an answer to the question of economic cycles and their downturns. So my conclusion is, there is no reason whatsoever to argue that we need inflation, other than to make life for governments and bankers easier. That, in my view, is not an acceptable reason as it has little or no public value.

All of which leaves a problem for writers such as me who write futuristic novels. It seems to me that the world economic situation is changing, but it is far from clear what to? That it is changing is something I shall write about in a future post, but right now, if anyone has any comments along the “what to?” lines, I would love to hear them. In my ‘Bot War novel, the change is forced on the government because economic growth has become negative, and debt servicing takes up too much of the income. Accordingly, the government is forced to reduce current services, and this is not what is required when a crisis appears. But there have to be other possibilities. Your opinion?