A new world is being born, one without the US dollar greasing the wheels of commerce, notes Eric Walberg
Yekaterinburg, famous tragically as the spot Lenin chose to have the Tsar and his family executed in 1918, and ironically as the fiefdom of Boris Yeltsin, who finished off the Russian revolution itself in 1991, witnessed something no less remarkable last week when leaders of the so-called BRIC nations (Brazil, Russia, India and China) held their first summit, following the yearly meeting of the Shanghai Cooperation Organisation (SCO). The BRIC countries comprise 15 per cent of the world economy, 40 per cent of global currency reserves and half the world’s population. Brazil , India and China have also weathered the financial crisis better than the world as a whole.
Holding the two meetings together meant that Indian Prime Minister Manmohan Singh attended the SCO for the first time. The SCO, Russian and China ’s Eurasian security organization, has become a key counterweight to US hegemony in the world, and Russia and China are eager to have India upgrade its position of observer to member. This summit appeared to have coaxed India a step closer, as the SCO security agenda has shifted its emphasis to the growing security threat from Afghanistan, which satisfies the more pro-US India .
But the headline-stealer was the BRIC summit. While the US plays its tiresome geopolitical games on Russia ’s eastern borders, Russian President Dmitri Medvedev was busy charting a new economic and political reality in the heart of Eurasia . “The artificially maintained unipolar system”, he lectured, is based on “one big centre of consumption, financed by a growing deficit and ... one formerly strong reserve currency.” At the root of the global financial crisis, he concluded, is that the US makes too little and spends too much. Especially upsetting for Russia is its continued military largesse to Georgia , the missile shield in Eastern Europe and its invasions of Iraq and Afghanistan . “The summit must create the conditions for a fairer world order,” he read out, as Presidents Hu Jintao of China , Luiz Inacio Lula da Silva of Brazil and the Indian prime minister looked on approvingly.
China backs Russia ’s two big gripes with the US : “The security of some states cannot be ensured at the expense of others, including the expansion of military-political alliances or the creation of global or regional missile defense systems,” the joint Chinese-Russian statement says. Chinese leader Hu Jintao also joined Medvedev in denouncing US plans to militarise outer space: “Russia and China advocate peaceful uses of outer space and oppose the prospect of it being turned into a new area for deploying weapons ... The sides will actively facilitate practical work on a draft treaty on the prevention of the deployment of weapons in outer space, and of the use of force or threats to use force against space facilities.”
Iranian President Ahmedinejad, fresh from trouncing his pro-Western rival in presidential elections, dotted the “i”s at the SCO meeting, taking a leaf from Venezuela ’s Hugo Chavez: “The international capitalist order is retreating. It is absolutely obvious that the age of empires has ended and its revival will not take place.”
But there was more than colourful rhetoric in all this, despite the pooh-poohing of Western pundits, who deride the SCO and BRIC as a collection of misfits and wannabes. The BRICs have put the US dollar on notice, and are already finding alternatives as a means of clearing accounts. Medvedev called for the IMF to include the Russian ruble and the Chinese yuan in the basket of currencies used to value its financial products. But that is just for starters. Chinese Central Bank governor Zhou Xiaochuan says the goal is now to create a reserve currency “that is disconnected from individual nations.”
Even more ominous for the threadbare dollar, though perfectly sensible in the computer age, is the revival of stone-age barter on a big scale, which bypasses the need for any reserve currency at all. Brazil ’s biggest trading partner, once the US , is now (surprise) China , and they are using barter deals to settler their accounts, bypassing the dollar altogether. Two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in yuan.
As dollars are the world’s default reserve currency today, the US government can churn them out at will to paper over its massive foreign debt and budget deficit, effectively letting it steal other countries assets legally and forcing countries everywhere to finance its military spending. China , Russia , Brazil and now India are well aware of this, have had enough, and have the international heft to do something about it. For them, the US is the ultimate rogue nation. How else to characterise a country that insists other countries follow one set of laws – on war, debt repayment and treatment of prisoners – but ignores them itself? The US is now the world’s largest debtor yet has curiously avoided the pain of “structural adjustments” that the IMF imposes on other debtor economies, refusing to cut its bloated military budget or increase taxes meaningfully. “The world economy should not remain entangled, so directly and unnecessarily, in the vicissitudes of a single great world power,” said Roberto Mangabeira Unger, Brazil’s minister for strategic affairs.
The US can never “repay” the $4 trillion debt it owes foreign governments, their central banks and the wealth funds set up precisely to dispose of the global dollar glut. “ America has become a deadbeat – and indeed, a militarily aggressive one,” notes Michael Hudson. The problem is how to contain it. Rumblings are coming not only from fringe peaceniks. Yu Yongding, a former Chinese central bank advisor now with China ’s Academy of Sciences, advises US Treasury Secretary Tim Geithner that the US should save by cutting back on its military spending. “ US tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars’”.
The BRICs are trying to organise their affairs so that they are no longer the unwilling recipients of dollars. No matter what they think of the US , they hasten to insist they don’t want to see the US dollar collapse, since they hold most of their own reserves in dollars. But they are beginning to withdraw the life-support system the US has been relying on since Nixon completed the transition from a gold-based reserve currency to a purely paper one in 1971.
Just to emphasise how serious the situation is, according to the Financial Times, the top 5 financial institutions by market capitalisation in 1999 were, in order, Citigroup (US), Bank of America (US), HSBC (UK), Lloyds TSB (UK), Fannie Mae (US). The top 5 as of 2009 are Industrial & Commercial Bank of China, China Construction Bank, Bank of China, HSBC (UK), and JPMorgan Chase (US). From 0:3 to 3:1 for China, now officially the world’s second largest economy after the US – a rout.
Just as countries are beginning to rediscover age-old barter, fixed, pegged and dual exchange rates are also being considered, mechanisms once derided as passe. In the face of continued US overspending, de-dollarisation will force countries to return to nationally determined fixed exchange rates and dual exchange rates – one exchange rate for commodity trade, another for capital movements and investments.
The world is discarding its sixty-year old framework, though the historic meetings in Yekaterinburg elicited only a collective yawn from most media. “Between the BRIC countries, there is really little in common,” said Yevgeni Yasin, head of research at the Higher School of Economics in Moscow. “Each of them has its own destiny, its own special character, and it will be much more difficult for them to agree among themselves than separately with Western countries.” China depends on manufactured exports to the US and Europe. Russia sells oil, natural gas and other natural resources. Brazil relies on agricultural exports, while India ’s growth has been largely based on its domestic market.
However, Jeng Fengin at the Chinese Institute of Modern-Day International Relations is less blase: “The financial crisis has given a much-needed boost to the fledgling partnership between Brazil, Russia, India and China and helped our voice to be heard everywhere.” President of the Brazil-Russia Chamber of Commerce, Industry and Tourism Gilberto Ramos warned sceptics that the BRIC countries are all powers of a truly continental scope and have very much in common, both geographically and macroeconomically.
In case Obama hasn’t noticed, Eurasia is coalescing, not around littler Georgia and big brother Poland, with their pretensions as forward bases for the mighty US empire, but around China, Russia and India. He would do well to remember Yekaterinburg is not only famous for its Russian past, but for Gary Powers, the US spy shot down in 1960, a fitting metaphor for how Russia and China are taking aim at the US-dominated international financial order.
***
Eric Walberg writes for Al-Ahram Weekly. You can reach him at
http://ericwalberg.com/
Showing posts with label brazil. Show all posts
Showing posts with label brazil. Show all posts
25 June 2009
26 March 2009
Liquid war: Welcome to Pipelineistan
What happens on the immense battlefield for the control of Eurasia will provide the ultimate plot line in the tumultuous rush towards a new, polycentric world order, also known as the New Great Game.
Our good ol' friend the nonsensical "global war on terror", which the Pentagon has slyly rebranded "the Long War", sports a far more important, if half-hidden, twin - a global energy war. I like to think of it as the Liquid War, because its bloodstream is the pipelines that crisscross the potential imperial battlefields of the planet. Put another way, if its crucial embattled frontier these days is the Caspian Basin, the whole of Eurasia is its chessboard. Think of it, geographically, as Pipelineistan.
All geopolitical junkies need a fix. Since the second half of the1990s, I've been hooked on pipelines. I've crossed the Caspian in an Azeri cargo ship just to follow the $4 billion Baku-Tblisi-Ceyhan pipeline, better known in this chess game by its acronym, BTC, through the Caucasus. (Oh, by the way, the map of Pipelineistan is chicken-scratched with acronyms, so get used to them!)
I've also trekked various of the overlapping modern Silk Roads, or perhaps Silk Pipelines, of possible future energy flows from Shanghai to Istanbul, annotating my own do-it-yourself routes for LNG (liquefied natural gas). I used to avidly follow the adventures of that once-but-not-future Sun-King of Central Asia, the now deceased Turkmenbashi or "leader of the Turkmen", Saparmurat Niyazov, head of the immensely gas-rich Republic of Turkmenistan, as if he were a Conradian hero.
In Almaty, the former capital of Kazakhstan (before it was moved to Astana, in the middle of the middle of nowhere) the locals were puzzled when I expressed an overwhelming urge to drive to that country's oil boomtown Aktau. ("Why? There's nothing there.") Entering the Space Odyssey-style map room at the Russian energy giant Gazprom's headquarters in Moscow - which digitally details every single pipeline in Eurasia - or the National Iranian Oil Company (NIOC)'s corporate HQ in Tehran, with its neat rows of female experts in full chador, was my equivalent of entering Aladdin's cave. And never reading the words "Afghanistan" and "oil" in the same sentence is still a source of endless amusement for me.
Last year, oil cost a king's ransom. This year, it's relatively cheap. But don't be fooled. Price isn't the point here. Like it or not, energy is still what everyone who's anyone wants to get their hands on. So consider this dispatch just the first installment in a long, long tale of some of the moves that have been, or will be, made in the maddeningly complex New Great Game, which goes on unceasingly, no matter what else muscles into the headlines this week.
Forget the mainstream media's obsession with al-Qaeda, Osama "dead or alive" bin Laden, the Taliban - neo, light or classic - or that "war on terror", whatever name it goes by. These are diversions compared to the high-stakes, hardcore geopolitical game that follows what flows along the pipelines of the planet.
Who said Pipelineistan couldn't be fun?
Calling Dr Zbig In his 1997 magnum opus The Grand Chessboard, Zbigniew Brzezinski - realpolitik practitioner extraordinaire and former national security advisor to Jimmy Carter, the president who launched the US on its modern energy wars - laid out in some detail just how to hang on to American "global primacy". Later, his master plan would be duly copied by that lethal bunch of Dr No's congregated at Bill Kristol's Project for a New American Century (PNAC, in case you'd forgotten the acronym since its website and its followers went down).
For Dr Zbig, who, like me, gets his fix from Eurasia - from, that is, thinking big - it all boils down to fostering the emergence of just the right set of "strategically compatible partners" for Washington in places where energy flows are strongest. This, as he so politely put it back then, should be done to shape "a more cooperative trans-Eurasian security system".
By now, Dr Zbig - among whose fans is evidently President Barack Obama - must have noticed that the Eurasian train which was to deliver the energy goods has been slightly derailed. The Asian part of Eurasia, it seems, begs to differ.
Global financial crisis or not, oil and natural gas are the long-term keys to an inexorable transfer of economic power from the West to Asia. Those who control Pipelineistan - and despite all the dreaming and planning that's gone on there, it's unlikely to be Washington - will have the upper hand in whatever is to come, and there's not a terrorist in the world, or even a "long war", that can change that.
Energy expert Michael Klare has been instrumental in identifying the key vectors in the wild, ongoing global scramble for power over Pipelineistan. These range from the increasing scarcity (and difficulty of reaching) primary energy supplies to "the painfully slow development of energy alternatives". Though you may not have noticed, the first skirmishes in Pipelineistan's Liquid War are already on, and even in the worst of economic times, the risk mounts constantly, given the relentless competition between the West and Asia, be it in the Middle East, in the Caspian theater, or in African oil-rich states like Angola, Nigeria and Sudan.
In these early skirmishes of the 21st century, China reacted swiftly indeed. Even before the attacks of September 11, 2001, its leaders were formulating a response to what they saw as the reptilian encroachment of the West on the oil and gas lands of Central Asia, especially in the Caspian Sea region. To be specific, in June 2001, its leaders joined with Russia's to form the Shanghai Cooperation Organization. It's known as the SCO and that's an acronym you should memorize. It's going to be around for a while.
Back then, the SCO's junior members were, tellingly enough, the Stans, the energy-rich former SSRs of the Soviet Union - Kyrgyzstan, Uzbekistan, Kazakhstan and Tajikistan - which the Bill Clinton administration and then the new George W Bush administration, run by those former energy men, had been eyeing covetously. The organization was to be a multi-layered economic and military regional cooperation society that, as both the Chinese and the Russians saw it, would function as a kind of security blanket around the upper rim of Afghanistan.
Iran is, of course, a crucial energy node of West Asia and that country's leaders, too, would prove no slouches when it came to the New Great Game. It needs at least $200 billion in foreign investment to truly modernize its fabulous oil and gas reserves - and thus sell much more to the West than US-imposed sanctions now allow.
No wonder Iran soon became a target in Washington. No wonder an air assault on that country remains the ultimate wet dream of assorted Likudniks as well as former vice president Dick ("Angler") Cheney and his neo-conservative chamberlains and comrades-in-arms. As seen by the elite from Tehran and Delhi to Beijing and Moscow, such a US attack, now likely off the radar screen until at least 2012, would be a war not only against Russia and China, but against the whole project of Asian integration that the SCO is coming to represent.
Global BRIC-a-brac
Meanwhile, as the Obama administration tries to sort out its Iranian, Afghan, and Central Asian policies, Beijing continues to dream of a secure, fast-flowing, energy version of the old Silk Road, extending from the Caspian Basin (the energy-rich Stans plus Iran and Russia) to Xinjiang province, its Far West.
The SCO has expanded its aims and scope since 2001. Today, Iran, India, and Pakistan enjoy "observer status" in an organization that increasingly aims to control and protect not just regional energy supplies, but Pipelineistan in every direction. This is, of course, the role the Washington ruling elite would like the North Atlantic Treaty Organization (NATO) to play across Eurasia. Given that Russia and China expect the SCO to play a similar role across Asia, clashes of various sorts are inevitable.
Ask any relevant expert at the Chinese Academy of Social Sciences in Beijing and he will tell you that the SCO should be understood as a historically unique alliance of five non-Western civilizations - Russian, Chinese, Muslim, Hindu, and Buddhist - and, because of that, capable of evolving into the basis for a collective security system in Eurasia. That's a thought sure to discomfort classic inside-the-Beltway global strategists like Dr Zbig and president George H W Bush's national security advisor Brent Scowcroft.
According to the view from Beijing, the rising world order of the 21st century will be significantly determined by a quadrangle of BRIC countries - for those of you by now collecting New Great Game acronyms, that stands for Brazil, Russia, India and China - plus the future Islamic triangle of Iran, Saudi Arabia and Turkey. Add in a unified South America, no longer in thrall to Washington, and you have a global SCO-plus. On the drawing boards, at least, it's a high-octane dream.
The key to any of this is a continuing Sino-Russian entente cordiale.
Already in 1999, watching NATO and the United States aggressively expand into the distant Balkans, Beijing identified this new game for what it was: a developing energy war. And at stake were the oil and natural gas reserves of what Americans would soon be calling the "arc of instability," a vast span of lands extending from North Africa to the Chinese border.
No less important would be the routes pipelines would take in bringing the energy buried in those lands to the West. Where they would be built, the countries they would cross, would determine much in the world to come. And this was where the empire of US military bases (think, for instance, Camp Bondsteel in Kosovo) met Pipelineistan (represented, way back in 1999, by the AMBO pipeline).
AMBO, short for Albanian Macedonian Bulgarian Oil Corporation, an entity registered in the US, is building a $1.1 billion pipeline, aka "the Trans-Balkan", slated to be finished by 2011. It will bring Caspian oil to the West without taking it through either Russia or Iran. As a pipeline, AMBO fit well into a geopolitical strategy of creating a US-controlled energy-security grid that was first developed by president Bill Clinton's energy secretary Bill
Richardson and later by Cheney.
Behind the idea of that "grid" lay a go-for-broke militarization of an energy corridor that would stretch from the Caspian Sea in Central Asia through a series of now independent former SSRs of the Soviet Union to Turkey, and from there into the Balkans (from thence onto Europe). It was meant to sabotage the larger energy plans of both Russia and Iran. AMBO itself would bring oil from the Caspian basin to a terminal in the former SSR of Georgia in the Caucasus, and then transport it by tanker through the Black Sea to the Bulgarian port of Burgas, where another pipeline would connect to Macedonia and then to the Albanian port of Vlora.
As for Camp Bondsteel, it was the "enduring" military base that Washington gained from the wars for the remains of Yugoslavia. It would be the largest overseas base the US had built since the Vietnam War. Halliburton's subsidiary Kellogg Brown & Root would, with the Army Corps of Engineers, put it up on 400 hectares of farmland near the Macedonian border in southern Kosovo.
Think of it as a user-friendly, five-star version of Guantanamo with perks for those stationed there that included Thai massage and loads of junk food. Bondsteel is the Balkan equivalent of a giant immobile aircraft carrier, capable of exercising surveillance not only over the Balkans but also over Turkey and the Black Sea region (considered in the neo-con-speak of the Bush years "the new interface" between the "Euro-Atlantic community" and the "Greater Middle East").
How could Russia, China, and Iran not interpret the war in Kosovo, then the invasion of Afghanistan (where Washington had previously tried to pair with the Taliban and encourage the building of another of those avoid-Iran, avoid-Russia pipelines), followed by the invasion of Iraq (that country of vast oil reserves), and finally the recent clash in Georgia (that crucial energy transportation junction) as straightforward wars for Pipelineistan?
Though seldom imagined this way in our mainstream media, the Russian and Chinese leaderships saw a stark "continuity" of policy stretching from Bill Clinton's humanitarian imperialism to Bush's "global war on terror". Blowback, as then Russian President Vladimir Putin himself warned publicly, was inevitable - but that's another magic-carpet story, another cave to enter another time.
Rainy night in Georgia
If you want to understand Washington's version of Pipelineistan, you have to start with Mafia-ridden Georgia. Though its army was crushed in its recent war with Russia, Georgia remains crucial to Washington's energy policy in what, by now, has become a genuine arc of instability - in part because of a continuing obsession with cutting Iran out of the energy flow.
It was around the Baku-Tblisi-Ceyhan (BTC) pipeline, as I pointed out in my book Globalistan in 2007, that American policy congealed. Zbig Brzezinski himself flew into Baku in 1995 as an "energy consultant", less than four years after Azerbaijan became independent, and sold the idea to the Azerbaijani elite. The BTC was to run from the Sangachal Terminal, half-an-hour south of Baku, across neighboring Georgia to the Marine Terminal in the Turkish port of Ceyhan on the Mediterranean.
Now operational, that 1,767-kilometer-long, 44-meter-wide steel serpent straddles no less than six war zones, ongoing or potential: Nagorno-Karabakh (an Armenian enclave in Azerbaijan), Chechnya and Dagestan (both embattled regions of Russia), South Ossetia and Abkhazia (on which the 2008 Russia-Georgia war pivoted), and Turkish Kurdistan.
From a purely economic point of view, the BTC made no sense. A "BTK" pipeline, running from Baku through Tehran to Iran's Kharg Island, could have been built for, relatively speaking, next to nothing - and it would have had the added advantage of bypassing both mafia-corroded Georgia and wobbly Kurdish-populated Eastern Anatolia. That would have been the really cheap way to bring Caspian oil and gas to Europe.
The New Great Game ensured that that was not to be, and much followed from that decision. Even though Moscow never planned to occupy Georgia long-term in its 2008 war, or take over the BTC pipeline that now runs through its territory, Alfa Bank oil and gas analyst Konstantin Batunin pointed out the obvious: by briefly cutting off the BTC oil flow, Russian troops made it all too clear to global investors that Georgia wasn't a reliable energy transit country. In other words, the Russians made a mockery of Zbig's world.
For its part, Azerbaijan was, until recently, the real success story in the US version of Pipelineistan. Advised by Zbig, Bill Clinton literally "stole" Baku from Russia's "near abroad" by promoting the BTC and the wealth that would flow from it. Now, however, with the message of the Russia-Georgia War sinking in, Baku is again allowing itself to be seduced by Russia. To top it off, Azerbaijan President Ilham Aliyev can't stand Georgia's brash President Mikhail Saakashvili. That's hardly surprising. After all, Saakashvili's rash military moves caused Azerbaijan to lose at least $500 million when the BTC was shut down during the war.
Russia's energy seduction blitzkrieg is focused like a laser on Central Asia as well. (We'll talk about it more in the next Pipelineistan installment.) It revolves around offering to buy Kazakh, Uzbek, and Turkmen gas at European prices instead of previous, much lower Russian prices. The Russians, in fact, have offered the same deal to the Azeris: so now, Baku is negotiating a deal involving more capacity for the Baku-Novorossiysk pipeline, which makes its way to the Russian borders of the Black Sea, while considering pumping less oil for the BTC.
Obama needs to understand the dire implications of this. Less Azeri oil on the BTC - its full capacity is 1 million barrels a day, mostly shipped to Europe - means the pipeline may go broke, which is exactly what Russia wants.
In Central Asia, some of the biggest stakes revolve around the monster Kashagan oil field in "snow leopard" Kazakhstan, the absolute jewel in the Caspian crown with reserves of as many as 9 billion barrels. As usual in Pipelineistan, it all comes down to which routes will deliver Kashagan's oil to the world after production starts in 2013. This spells, of course, Liquid War. Wily Kazakh President Nursultan Nazarbayev would like to use the Russian-controlled Caspian Pipeline Consortium (CPC) to pump Kashagan crude to the Black Sea.
In this case, the Kazakhs hold all the cards. How oil will flow from Kashagan will decide whether the BTC - once hyped by Washington as the ultimate Western escape route from dependence on Persian Gulf oil - lives or dies.
Welcome, then, to Pipelineistan! Whether we like it or not, in good times and bad, it's a reasonable bet that we're all going to be Pipeline tourists. So, go with the flow. Learn the crucial acronyms, keep an eye out for what happens to all those US bases across the oil heartlands of the planet, watch where the pipelines are being built, and do your best to keep tabs on the next set of monster Chinese energy deals and fabulous coups by Russia's Gazprom.
And, while you're at it, consider this just the first postcard sent off from our tour of Pipelineistan. We'll be back (to slightly adapt a quote from Terminator). Think of this as a door opening onto a future in which what flows where and to whom may turn out to be the most important question on the planet.
Pepe Escobar is the roving correspondent for Asia Times Online and an analyst for the Real News. This article draws from his new book, Obama does Globalistan. He is also the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007) and Red Zone Blues: a snapshot of Baghdad during the surge. Pepe may be reached at pepeasia@yahoo.com.
(Copyright 2009 Pepe Escobar.)
link
Our good ol' friend the nonsensical "global war on terror", which the Pentagon has slyly rebranded "the Long War", sports a far more important, if half-hidden, twin - a global energy war. I like to think of it as the Liquid War, because its bloodstream is the pipelines that crisscross the potential imperial battlefields of the planet. Put another way, if its crucial embattled frontier these days is the Caspian Basin, the whole of Eurasia is its chessboard. Think of it, geographically, as Pipelineistan.
All geopolitical junkies need a fix. Since the second half of the1990s, I've been hooked on pipelines. I've crossed the Caspian in an Azeri cargo ship just to follow the $4 billion Baku-Tblisi-Ceyhan pipeline, better known in this chess game by its acronym, BTC, through the Caucasus. (Oh, by the way, the map of Pipelineistan is chicken-scratched with acronyms, so get used to them!)
I've also trekked various of the overlapping modern Silk Roads, or perhaps Silk Pipelines, of possible future energy flows from Shanghai to Istanbul, annotating my own do-it-yourself routes for LNG (liquefied natural gas). I used to avidly follow the adventures of that once-but-not-future Sun-King of Central Asia, the now deceased Turkmenbashi or "leader of the Turkmen", Saparmurat Niyazov, head of the immensely gas-rich Republic of Turkmenistan, as if he were a Conradian hero.
In Almaty, the former capital of Kazakhstan (before it was moved to Astana, in the middle of the middle of nowhere) the locals were puzzled when I expressed an overwhelming urge to drive to that country's oil boomtown Aktau. ("Why? There's nothing there.") Entering the Space Odyssey-style map room at the Russian energy giant Gazprom's headquarters in Moscow - which digitally details every single pipeline in Eurasia - or the National Iranian Oil Company (NIOC)'s corporate HQ in Tehran, with its neat rows of female experts in full chador, was my equivalent of entering Aladdin's cave. And never reading the words "Afghanistan" and "oil" in the same sentence is still a source of endless amusement for me.
Last year, oil cost a king's ransom. This year, it's relatively cheap. But don't be fooled. Price isn't the point here. Like it or not, energy is still what everyone who's anyone wants to get their hands on. So consider this dispatch just the first installment in a long, long tale of some of the moves that have been, or will be, made in the maddeningly complex New Great Game, which goes on unceasingly, no matter what else muscles into the headlines this week.
Forget the mainstream media's obsession with al-Qaeda, Osama "dead or alive" bin Laden, the Taliban - neo, light or classic - or that "war on terror", whatever name it goes by. These are diversions compared to the high-stakes, hardcore geopolitical game that follows what flows along the pipelines of the planet.
Who said Pipelineistan couldn't be fun?
Calling Dr Zbig In his 1997 magnum opus The Grand Chessboard, Zbigniew Brzezinski - realpolitik practitioner extraordinaire and former national security advisor to Jimmy Carter, the president who launched the US on its modern energy wars - laid out in some detail just how to hang on to American "global primacy". Later, his master plan would be duly copied by that lethal bunch of Dr No's congregated at Bill Kristol's Project for a New American Century (PNAC, in case you'd forgotten the acronym since its website and its followers went down).
For Dr Zbig, who, like me, gets his fix from Eurasia - from, that is, thinking big - it all boils down to fostering the emergence of just the right set of "strategically compatible partners" for Washington in places where energy flows are strongest. This, as he so politely put it back then, should be done to shape "a more cooperative trans-Eurasian security system".
By now, Dr Zbig - among whose fans is evidently President Barack Obama - must have noticed that the Eurasian train which was to deliver the energy goods has been slightly derailed. The Asian part of Eurasia, it seems, begs to differ.
Global financial crisis or not, oil and natural gas are the long-term keys to an inexorable transfer of economic power from the West to Asia. Those who control Pipelineistan - and despite all the dreaming and planning that's gone on there, it's unlikely to be Washington - will have the upper hand in whatever is to come, and there's not a terrorist in the world, or even a "long war", that can change that.
Energy expert Michael Klare has been instrumental in identifying the key vectors in the wild, ongoing global scramble for power over Pipelineistan. These range from the increasing scarcity (and difficulty of reaching) primary energy supplies to "the painfully slow development of energy alternatives". Though you may not have noticed, the first skirmishes in Pipelineistan's Liquid War are already on, and even in the worst of economic times, the risk mounts constantly, given the relentless competition between the West and Asia, be it in the Middle East, in the Caspian theater, or in African oil-rich states like Angola, Nigeria and Sudan.
In these early skirmishes of the 21st century, China reacted swiftly indeed. Even before the attacks of September 11, 2001, its leaders were formulating a response to what they saw as the reptilian encroachment of the West on the oil and gas lands of Central Asia, especially in the Caspian Sea region. To be specific, in June 2001, its leaders joined with Russia's to form the Shanghai Cooperation Organization. It's known as the SCO and that's an acronym you should memorize. It's going to be around for a while.
Back then, the SCO's junior members were, tellingly enough, the Stans, the energy-rich former SSRs of the Soviet Union - Kyrgyzstan, Uzbekistan, Kazakhstan and Tajikistan - which the Bill Clinton administration and then the new George W Bush administration, run by those former energy men, had been eyeing covetously. The organization was to be a multi-layered economic and military regional cooperation society that, as both the Chinese and the Russians saw it, would function as a kind of security blanket around the upper rim of Afghanistan.
Iran is, of course, a crucial energy node of West Asia and that country's leaders, too, would prove no slouches when it came to the New Great Game. It needs at least $200 billion in foreign investment to truly modernize its fabulous oil and gas reserves - and thus sell much more to the West than US-imposed sanctions now allow.
No wonder Iran soon became a target in Washington. No wonder an air assault on that country remains the ultimate wet dream of assorted Likudniks as well as former vice president Dick ("Angler") Cheney and his neo-conservative chamberlains and comrades-in-arms. As seen by the elite from Tehran and Delhi to Beijing and Moscow, such a US attack, now likely off the radar screen until at least 2012, would be a war not only against Russia and China, but against the whole project of Asian integration that the SCO is coming to represent.
Global BRIC-a-brac
Meanwhile, as the Obama administration tries to sort out its Iranian, Afghan, and Central Asian policies, Beijing continues to dream of a secure, fast-flowing, energy version of the old Silk Road, extending from the Caspian Basin (the energy-rich Stans plus Iran and Russia) to Xinjiang province, its Far West.
The SCO has expanded its aims and scope since 2001. Today, Iran, India, and Pakistan enjoy "observer status" in an organization that increasingly aims to control and protect not just regional energy supplies, but Pipelineistan in every direction. This is, of course, the role the Washington ruling elite would like the North Atlantic Treaty Organization (NATO) to play across Eurasia. Given that Russia and China expect the SCO to play a similar role across Asia, clashes of various sorts are inevitable.
Ask any relevant expert at the Chinese Academy of Social Sciences in Beijing and he will tell you that the SCO should be understood as a historically unique alliance of five non-Western civilizations - Russian, Chinese, Muslim, Hindu, and Buddhist - and, because of that, capable of evolving into the basis for a collective security system in Eurasia. That's a thought sure to discomfort classic inside-the-Beltway global strategists like Dr Zbig and president George H W Bush's national security advisor Brent Scowcroft.
According to the view from Beijing, the rising world order of the 21st century will be significantly determined by a quadrangle of BRIC countries - for those of you by now collecting New Great Game acronyms, that stands for Brazil, Russia, India and China - plus the future Islamic triangle of Iran, Saudi Arabia and Turkey. Add in a unified South America, no longer in thrall to Washington, and you have a global SCO-plus. On the drawing boards, at least, it's a high-octane dream.
The key to any of this is a continuing Sino-Russian entente cordiale.
Already in 1999, watching NATO and the United States aggressively expand into the distant Balkans, Beijing identified this new game for what it was: a developing energy war. And at stake were the oil and natural gas reserves of what Americans would soon be calling the "arc of instability," a vast span of lands extending from North Africa to the Chinese border.
No less important would be the routes pipelines would take in bringing the energy buried in those lands to the West. Where they would be built, the countries they would cross, would determine much in the world to come. And this was where the empire of US military bases (think, for instance, Camp Bondsteel in Kosovo) met Pipelineistan (represented, way back in 1999, by the AMBO pipeline).
AMBO, short for Albanian Macedonian Bulgarian Oil Corporation, an entity registered in the US, is building a $1.1 billion pipeline, aka "the Trans-Balkan", slated to be finished by 2011. It will bring Caspian oil to the West without taking it through either Russia or Iran. As a pipeline, AMBO fit well into a geopolitical strategy of creating a US-controlled energy-security grid that was first developed by president Bill Clinton's energy secretary Bill
Richardson and later by Cheney.
Behind the idea of that "grid" lay a go-for-broke militarization of an energy corridor that would stretch from the Caspian Sea in Central Asia through a series of now independent former SSRs of the Soviet Union to Turkey, and from there into the Balkans (from thence onto Europe). It was meant to sabotage the larger energy plans of both Russia and Iran. AMBO itself would bring oil from the Caspian basin to a terminal in the former SSR of Georgia in the Caucasus, and then transport it by tanker through the Black Sea to the Bulgarian port of Burgas, where another pipeline would connect to Macedonia and then to the Albanian port of Vlora.
As for Camp Bondsteel, it was the "enduring" military base that Washington gained from the wars for the remains of Yugoslavia. It would be the largest overseas base the US had built since the Vietnam War. Halliburton's subsidiary Kellogg Brown & Root would, with the Army Corps of Engineers, put it up on 400 hectares of farmland near the Macedonian border in southern Kosovo.
Think of it as a user-friendly, five-star version of Guantanamo with perks for those stationed there that included Thai massage and loads of junk food. Bondsteel is the Balkan equivalent of a giant immobile aircraft carrier, capable of exercising surveillance not only over the Balkans but also over Turkey and the Black Sea region (considered in the neo-con-speak of the Bush years "the new interface" between the "Euro-Atlantic community" and the "Greater Middle East").
How could Russia, China, and Iran not interpret the war in Kosovo, then the invasion of Afghanistan (where Washington had previously tried to pair with the Taliban and encourage the building of another of those avoid-Iran, avoid-Russia pipelines), followed by the invasion of Iraq (that country of vast oil reserves), and finally the recent clash in Georgia (that crucial energy transportation junction) as straightforward wars for Pipelineistan?
Though seldom imagined this way in our mainstream media, the Russian and Chinese leaderships saw a stark "continuity" of policy stretching from Bill Clinton's humanitarian imperialism to Bush's "global war on terror". Blowback, as then Russian President Vladimir Putin himself warned publicly, was inevitable - but that's another magic-carpet story, another cave to enter another time.
Rainy night in Georgia
If you want to understand Washington's version of Pipelineistan, you have to start with Mafia-ridden Georgia. Though its army was crushed in its recent war with Russia, Georgia remains crucial to Washington's energy policy in what, by now, has become a genuine arc of instability - in part because of a continuing obsession with cutting Iran out of the energy flow.
It was around the Baku-Tblisi-Ceyhan (BTC) pipeline, as I pointed out in my book Globalistan in 2007, that American policy congealed. Zbig Brzezinski himself flew into Baku in 1995 as an "energy consultant", less than four years after Azerbaijan became independent, and sold the idea to the Azerbaijani elite. The BTC was to run from the Sangachal Terminal, half-an-hour south of Baku, across neighboring Georgia to the Marine Terminal in the Turkish port of Ceyhan on the Mediterranean.
Now operational, that 1,767-kilometer-long, 44-meter-wide steel serpent straddles no less than six war zones, ongoing or potential: Nagorno-Karabakh (an Armenian enclave in Azerbaijan), Chechnya and Dagestan (both embattled regions of Russia), South Ossetia and Abkhazia (on which the 2008 Russia-Georgia war pivoted), and Turkish Kurdistan.
From a purely economic point of view, the BTC made no sense. A "BTK" pipeline, running from Baku through Tehran to Iran's Kharg Island, could have been built for, relatively speaking, next to nothing - and it would have had the added advantage of bypassing both mafia-corroded Georgia and wobbly Kurdish-populated Eastern Anatolia. That would have been the really cheap way to bring Caspian oil and gas to Europe.
The New Great Game ensured that that was not to be, and much followed from that decision. Even though Moscow never planned to occupy Georgia long-term in its 2008 war, or take over the BTC pipeline that now runs through its territory, Alfa Bank oil and gas analyst Konstantin Batunin pointed out the obvious: by briefly cutting off the BTC oil flow, Russian troops made it all too clear to global investors that Georgia wasn't a reliable energy transit country. In other words, the Russians made a mockery of Zbig's world.
For its part, Azerbaijan was, until recently, the real success story in the US version of Pipelineistan. Advised by Zbig, Bill Clinton literally "stole" Baku from Russia's "near abroad" by promoting the BTC and the wealth that would flow from it. Now, however, with the message of the Russia-Georgia War sinking in, Baku is again allowing itself to be seduced by Russia. To top it off, Azerbaijan President Ilham Aliyev can't stand Georgia's brash President Mikhail Saakashvili. That's hardly surprising. After all, Saakashvili's rash military moves caused Azerbaijan to lose at least $500 million when the BTC was shut down during the war.
Russia's energy seduction blitzkrieg is focused like a laser on Central Asia as well. (We'll talk about it more in the next Pipelineistan installment.) It revolves around offering to buy Kazakh, Uzbek, and Turkmen gas at European prices instead of previous, much lower Russian prices. The Russians, in fact, have offered the same deal to the Azeris: so now, Baku is negotiating a deal involving more capacity for the Baku-Novorossiysk pipeline, which makes its way to the Russian borders of the Black Sea, while considering pumping less oil for the BTC.
Obama needs to understand the dire implications of this. Less Azeri oil on the BTC - its full capacity is 1 million barrels a day, mostly shipped to Europe - means the pipeline may go broke, which is exactly what Russia wants.
In Central Asia, some of the biggest stakes revolve around the monster Kashagan oil field in "snow leopard" Kazakhstan, the absolute jewel in the Caspian crown with reserves of as many as 9 billion barrels. As usual in Pipelineistan, it all comes down to which routes will deliver Kashagan's oil to the world after production starts in 2013. This spells, of course, Liquid War. Wily Kazakh President Nursultan Nazarbayev would like to use the Russian-controlled Caspian Pipeline Consortium (CPC) to pump Kashagan crude to the Black Sea.
In this case, the Kazakhs hold all the cards. How oil will flow from Kashagan will decide whether the BTC - once hyped by Washington as the ultimate Western escape route from dependence on Persian Gulf oil - lives or dies.
Welcome, then, to Pipelineistan! Whether we like it or not, in good times and bad, it's a reasonable bet that we're all going to be Pipeline tourists. So, go with the flow. Learn the crucial acronyms, keep an eye out for what happens to all those US bases across the oil heartlands of the planet, watch where the pipelines are being built, and do your best to keep tabs on the next set of monster Chinese energy deals and fabulous coups by Russia's Gazprom.
And, while you're at it, consider this just the first postcard sent off from our tour of Pipelineistan. We'll be back (to slightly adapt a quote from Terminator). Think of this as a door opening onto a future in which what flows where and to whom may turn out to be the most important question on the planet.
Pepe Escobar is the roving correspondent for Asia Times Online and an analyst for the Real News. This article draws from his new book, Obama does Globalistan. He is also the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007) and Red Zone Blues: a snapshot of Baghdad during the surge. Pepe may be reached at pepeasia@yahoo.com.
(Copyright 2009 Pepe Escobar.)
link
22 October 2008
An Alternate Proposal
For that reason, the countries that had been shut out of the creation of the IMF-WB built their own project and their own institutions. The main organization was the UN Conference on Trade and Development, UNCTAD, created in 1961 by the bulk of the UN nations, newly freed from colonial dominion of one kind or another (these are countries that wedded themselves to the Third World project, as I outline in The Darker Nations). In the 1980s, the IMF and the WB began to use the debt crisis as leverage to transform the politics and economics of the poorer world. Structural adjustment policies weakened whatever mild gains had been made over the course of the past fifty years. The lack of effective democracy in the IMF-WB and their promiscuous relationship with Europe’s capitals and with Washington, DC, allowed them to skew their policies against the needs of those who make what is so acquisitively enjoyed by those in power.
When Tremonti says that he is thinking of an agreement “among large nations” I’m sure he doesn’t mean “large” in terms of demography. Otherwise China, India, Indonesia, Brazil and Pakistan would join the United States in setting up the new rules (Tremonti’s Italy only has .9% of the world’s population, while China and India house over 36% of the world’s population). Gordon Brown’s opinion piece in the Washington Post, “Out of the Ashes” (October 17) is populated with the royal “We.” “We must deal with more than the symptoms of the current crisis,” he writes, and then hastens to add, “European leaders came together to propose the guiding principles that we believe should underpin this new Bretton Woods.” The ideas are fairly straightforward, including transparency, sound banking, responsibility, integrity, and global governance. But these could mean anything: responsibility of whom, and toward whom? The same with integrity. There is similar hoopla about global this and global that (“the global problems we face require global solutions”) except the only ones who seem to count in the drafting of the project are the Europeans and the U. S. (with Japan). No-one proposes to call a genuine world-wide conference, to revive the project of the UNCTAD, to ask Beijing and New Delhi, N’Djamena and Quito. Brown quotes Dean Acheson who said of Bretton Woods that he was “present at the creation.” India and China might have been there, but they were absent: their input was minimal, and it remains marginal.
If Brown asked those involved in the Bolivarian experiment, he’d get a set of concrete proposals that would be just the tonic needed for a tired planet: their principles, derived from the Third World project, would call for capital controls over hot money, firm obligations for foreign direct investment to remain for the long-term, better ability for states and regions to protect the value of their currency, construction of trade policies consonant with the needs of the population and not the imperatives of transnational corporations, and finally the revival of the United Nations Centre on Transnational Corporations (which led a much abused life from 1973 to 1993). These and more would be the kind of proposals that would come from the South. But Brown’s ear is turned toward Paulson, and he can’t hear what Chavez is saying.
While in the White Mountains last week I casually asked someone if he knew anything about the Abenaki Indians. He didn’t. Nor are their any signs to indicate that they were ever alive. Except a ski resort named for them. The Abenaki were exterminated by the plague of 1616-1618, then the slow, painful encroachment of the Massachusetts settlers up the Merrimack River (including a series of wars that devastated the Abenaki and other peoples: King Philip’s War, 1675-78, Lovewell’s War, 1723-25 and the French and Indian War, 1754-63, during which Major Robert Rogers conducted his bloody raid of the village of St. Francis), and by finally by the long cultural war that fully cleansed the landscape of them. Bretton Woods was built on the homeland of the Abenaki, taken by the colonialists for its resources (the trees became raw material for the ships) and for the land. It is fitting then that Bretton Woods, built on colonial amnesia, is the name of a conference that the G7 wants to revive, once more forgetting the silenced billions.
By all means a conference, but not one that shuts out the many. Chavez gets this. After meeting Sarkozy in Paris in late September, Chavez told the press that such a meeting must “not be confined to the Group of Eight.” He’s having a good laugh. Reflecting on the equity stake in the banks, Chavez said, “Comrade Bush is to the left of me now.”
Vijay Prashad is the George and Martha Kellner Chair of South Asian History and Director of International Studies at Trinity College, Hartford, CT His new book is The Darker Nations: A People's History of the Third World, New York: The New Press, 2007. He can be reached at: vijay.prashad@trincoll.edu
When Tremonti says that he is thinking of an agreement “among large nations” I’m sure he doesn’t mean “large” in terms of demography. Otherwise China, India, Indonesia, Brazil and Pakistan would join the United States in setting up the new rules (Tremonti’s Italy only has .9% of the world’s population, while China and India house over 36% of the world’s population). Gordon Brown’s opinion piece in the Washington Post, “Out of the Ashes” (October 17) is populated with the royal “We.” “We must deal with more than the symptoms of the current crisis,” he writes, and then hastens to add, “European leaders came together to propose the guiding principles that we believe should underpin this new Bretton Woods.” The ideas are fairly straightforward, including transparency, sound banking, responsibility, integrity, and global governance. But these could mean anything: responsibility of whom, and toward whom? The same with integrity. There is similar hoopla about global this and global that (“the global problems we face require global solutions”) except the only ones who seem to count in the drafting of the project are the Europeans and the U. S. (with Japan). No-one proposes to call a genuine world-wide conference, to revive the project of the UNCTAD, to ask Beijing and New Delhi, N’Djamena and Quito. Brown quotes Dean Acheson who said of Bretton Woods that he was “present at the creation.” India and China might have been there, but they were absent: their input was minimal, and it remains marginal.
If Brown asked those involved in the Bolivarian experiment, he’d get a set of concrete proposals that would be just the tonic needed for a tired planet: their principles, derived from the Third World project, would call for capital controls over hot money, firm obligations for foreign direct investment to remain for the long-term, better ability for states and regions to protect the value of their currency, construction of trade policies consonant with the needs of the population and not the imperatives of transnational corporations, and finally the revival of the United Nations Centre on Transnational Corporations (which led a much abused life from 1973 to 1993). These and more would be the kind of proposals that would come from the South. But Brown’s ear is turned toward Paulson, and he can’t hear what Chavez is saying.
While in the White Mountains last week I casually asked someone if he knew anything about the Abenaki Indians. He didn’t. Nor are their any signs to indicate that they were ever alive. Except a ski resort named for them. The Abenaki were exterminated by the plague of 1616-1618, then the slow, painful encroachment of the Massachusetts settlers up the Merrimack River (including a series of wars that devastated the Abenaki and other peoples: King Philip’s War, 1675-78, Lovewell’s War, 1723-25 and the French and Indian War, 1754-63, during which Major Robert Rogers conducted his bloody raid of the village of St. Francis), and by finally by the long cultural war that fully cleansed the landscape of them. Bretton Woods was built on the homeland of the Abenaki, taken by the colonialists for its resources (the trees became raw material for the ships) and for the land. It is fitting then that Bretton Woods, built on colonial amnesia, is the name of a conference that the G7 wants to revive, once more forgetting the silenced billions.
By all means a conference, but not one that shuts out the many. Chavez gets this. After meeting Sarkozy in Paris in late September, Chavez told the press that such a meeting must “not be confined to the Group of Eight.” He’s having a good laugh. Reflecting on the equity stake in the banks, Chavez said, “Comrade Bush is to the left of me now.”
Vijay Prashad is the George and Martha Kellner Chair of South Asian History and Director of International Studies at Trinity College, Hartford, CT His new book is The Darker Nations: A People's History of the Third World, New York: The New Press, 2007. He can be reached at: vijay.prashad@trincoll.edu
31 July 2008
Give Brazil's managers the management prize
The return of global inflation
July 28, 2008
Global inflation is back, and it is shuffling the kaleidoscope of world economic development. Some countries that had appeared to be thriving are coping poorly with inflation while others, including at least one chronic inflation recidivist, are showing a level of monetary maturity worthy of the Fed’s 1980s Chairman Paul Volcker and far ahead of his feckless successors Alan Greenspan and Ben Bernanke.
First, a brief monetary primer. It was established pretty convincingly by Milton Friedman, and proved beyond all doubt in the inflationary episodes of the 1970s and 1980s that if you want to bring inflation under control, you must set interest rates at a margin above the current inflation level. That may not be sufficient to do the job – sometimes, as today, countries may be affected by a global inflation about which they can do little – but it is undoubtedly a necessary condition for success, except in those few cases where global inflation disappears magically without significant action by an individual country. Even in such cases, exceptional monetary sloppiness may have cemented inflation so firmly into the system that monetary heavy artillery is later needed to remove it. In Britain after 1973, for example, the effect of the first oil price shock was moderate, and tempered by Britain’s own growing oil production. However monetary policy was so sloppy in 1971-75, with highly negative real interest rates, that by the time oil prices had stopped rising, in 1975-76, inflation had embedded itself deep in the British economy. At that point sterner methods were needed – which Margaret Thatcher’s government duly provided, with much pain of bankruptcies and unemployment, in 1979-82.
It is often believed that only the United States of the three major developed economies has inflation problems, but this is not entirely the case. The US certainly is in a difficult and worsening position, with inflation of 5%, even on the fudged Bureau of Labor Statistics figures, short term interest rates held down artificially to around 2% and huge amounts of liquidity being pumped into the banking system to rescue Bear Stearns, Fannie Mae and Freddie Mac and any other financial institution currently suffering a hangnail. In the Eurozone, inflation hit a record 4.0% in June in spite of the strength of the currency, and can be expected to get worse in the months ahead thanks to the European Central Bank, which has been expanding euro M3 at 10% or more for the past two years, approximately double the growth rate of Eurozone GDP.
Even in Japan, where policymakers and Western analysts have been bleating about deflation for a decade, inflation has now reared its head, being 2% in the year to June, well above the Bank of Japan’s target interest rate of 0.5%. This is unsurprising; the Bank of Japan under its previous Governor Toshihiko Fukui, appointed in 2003 by the admirable reformist prime minister Junichiro Koizumi, had been attempting to raise Japan’s target interest rate to a more normal 2-3% range for some years. After a rise to 0.5% in February 2007 Fukui was prevented from further rises for several months by the political uncertainty surrounding elections, and then in August the subprime crisis broke, depriving him of further support for tightening. Now he has been replaced by the politically acceptable and therefore inflationist Masaaki Shirakawa, and there is little sign of Japan’s interest rates being increased to deal with a rapidly increasing inflation problem.
It is a great pity the rate-increasing opportunity was missed. Japan’s economy is dominated by its legions of aging savers, who have been receiving nugatory returns on their money for over a decade, and who deserve to cushion their impending retirements with savings returns approaching a normal level of 3% plus inflation. Raising rates to 2-3% last year would thus have been economically stimulative, not restrictive, and would have prevented Japan from falling into the same inflationary bog in which the world is now wallowing.
In emerging markets, inflation has generally risen to rather higher levels. This is not because emerging markets have sloppier monetary management than developed countries (outside Zimbabwe it is difficult to imagine sloppier monetary management than that of the Greenspan/Bernanke duo, though I shall shortly present an example thereof.) However emerging markets are more exposed to commodity and energy price rises, because more of their citizens are impoverished and spend a high proportion of their incomes on commodity-related items. The price of gasoline is a more important factor in the lives of last year’s 8 million Chinese automobile buyers than in those of the 16 million US buyers.
Looking first at the four BRIC countries anointed by Goldman Sachs in 2003 as the pillars of future global growth, we find one monetary failure, two countries struggling with the problem and one surprising success.
The failure is Russia, a country blessed in this decade with every advantage, and managing even so to forge an economic trajectory leading directly back into poverty. Russian inflation is currently 14%, while its benchmark interest rate is only 11%. Needless to say, that inflation rate is heavily understated. Furthermore, Russia pursues policies of property confiscation and arbitrary state action worthy of the worst be-medaled Latin American caudillo. Once oil prices fall back it’s likely Russia will fall into a combination of high inflation and deep recession that will enrage even the battered Russian populace.
Neither India nor China are tackling inflation effectively. In India, inflation is running at 12% compared with a benchmark interest rate of only 8.5%. Furthermore, India is attacking the problem with price controls and government subsidies, which are having their usual effect of distorting the economy (making Indian oil refining, for example, an economically suicidal business). The government is also running a huge budget deficit, even at a time of massive economic boom. Fortunately in 2009 the Indian electorate will be given the chance to undo their terrible mistake of 2004, when they threw out the BJP government of Atal Bihari Vajpayee, the only truly free-market government India has ever had. Vajpayee has retired; whether the new BJP leaders are as committed to the free market and as economically competent only time will tell, but re-election of the Congress Party coalition would almost certainly prove disastrous, particularly as the mildly reformist prime minister Manmohan Singh is already 76.
In China, if you don’t like the government, tough. Inflation is nominally 7.1%, but that figure is distorted by subsidies and almost certainly artificially suppressed pending next month’s Olympics. In any case interest rates at 7.47% are far too low to have any beneficial effect, particularly as returns for savers are only around half this level. In both India and China therefore, while property rights are safer than they are in Russia, savers are losing ground all the time even before tax, not the recipe for a healthy economy .
Before turning to the last and well-governed BRIC, a couple of other examples which may be illuminating. Vietnam has inflation of 27%, but that is almost entirely imported. Its benchmark interest rate is only 14%, but its economy is highly unstable; it runs a trade deficit of 30% of GDP, balanced by a foreign direct investment inflow of 65% of GDP. While theoretically Vietnam is not doing enough to stem inflation, in practice its economic position is so singular it may find inflation an inevitable price of improving rapidly the living standards of its people. The country has a real estate boom, as one would expect given its negative real interest rates, but overall its problems are mostly those of success, and it seems likely that an end to the world commodities bubble will also cool inflation in Vietnam.
Finally, the Idle Apprentice, to contrast with Brazil’s Industrious Apprentice. Dubai has enjoyed a construction and tourism boom on the back of record revenues to the Gulf region and the oil-rich United Arab Emirates of which it is a part. It has used the money to build ever more extravagant prestige construction projects, including the world’s only 7-star hotel, its tallest building, an $82 billion aerospace project to include the world’s largest airport and a recreation of a world map in the harbor. With only 0.02% of the world’s population, and expatriates representing 80% of its workforce, it employs 10% of the world’s tower construction cranes. Its inflation rate is 22%, while long term mortgages are available there for 7%. Needless to say, the construction boom is proceeding without hope of restraint – after all the country has combined the monetary policy of Ben Bernanke on steroids with the building frenzy of the 2006 Florida condo market. Once oil prices drop back to any kind of long term equilibrium, probably much higher than their historical level but below $100, Dubai should be in for the mother of all construction crashes. By 2010 one can expect it to be a forest of half-completed concrete, with 10% residential and commercial occupancy rates. GE has just announced an investment of $40 billion in Dubai infrastructure; it is most unlikely to see its money back.
Finally Brazil, which in the past has indulged in the typical Latin American follies of excessive government spending, wild borrowing sprees, hopelessly sloppy monetary policy leading to hyperinflation and inadequate protection of property rights, particularly foreign property rights. Now things are different. Foreign debt has halved as a percentage of GDP since 2002, while the government’s finances are in only modest deficit. Foreign investment is encouraged and its rights protected. Most impressive, while inflation is around 6%, because of high commodity prices, the benchmark Selic interest rate has just been raised to 13%. At that level, inflation will be squeezed out of the system and excessive borrowing will be discouraged. Thus when the commodities boom from which Brazil has benefited deflates, Brazil will be able to lower interest rates and continue domestic expansion without fear of running out of money. The Nobel Committee really needs to give a prize for monetary policy; from the above survey of mild or extreme inflation-producing sloppiness there can be no question that Brazil would win it and deservedly so.
It is unclear why Brazil has since 2002 deviated from the usual Latin American track, exemplified by the basket-cases of Argentina, Venezuela and Bolivia. One can speculate that the honor of being termed a “BRIC” super growth market – quite undeservedly so, in 2003 – caused Brazil to attempt to live up to its new billing – like the wayward teenager who is straightened out by a teacher who values his achievements.
The overall lesson from the above review is as usual bearish. Almost all the world has abandoned proper anti-inflationary discipline and is destined to suffer a period of high inflation and recession in the coming years. Some countries, like Dubai, will become true basket-cases, others like China and Vietnam may muddle through fairly satisfactorily. Only a few countries like Brazil have taken the inflationary threat sufficiently seriously and will thus be in a position to continue expanding even while the rest of the world endures recession.
The monetary Idle Apprentices are about to get their comeuppance.
July 28, 2008
Global inflation is back, and it is shuffling the kaleidoscope of world economic development. Some countries that had appeared to be thriving are coping poorly with inflation while others, including at least one chronic inflation recidivist, are showing a level of monetary maturity worthy of the Fed’s 1980s Chairman Paul Volcker and far ahead of his feckless successors Alan Greenspan and Ben Bernanke.
First, a brief monetary primer. It was established pretty convincingly by Milton Friedman, and proved beyond all doubt in the inflationary episodes of the 1970s and 1980s that if you want to bring inflation under control, you must set interest rates at a margin above the current inflation level. That may not be sufficient to do the job – sometimes, as today, countries may be affected by a global inflation about which they can do little – but it is undoubtedly a necessary condition for success, except in those few cases where global inflation disappears magically without significant action by an individual country. Even in such cases, exceptional monetary sloppiness may have cemented inflation so firmly into the system that monetary heavy artillery is later needed to remove it. In Britain after 1973, for example, the effect of the first oil price shock was moderate, and tempered by Britain’s own growing oil production. However monetary policy was so sloppy in 1971-75, with highly negative real interest rates, that by the time oil prices had stopped rising, in 1975-76, inflation had embedded itself deep in the British economy. At that point sterner methods were needed – which Margaret Thatcher’s government duly provided, with much pain of bankruptcies and unemployment, in 1979-82.
It is often believed that only the United States of the three major developed economies has inflation problems, but this is not entirely the case. The US certainly is in a difficult and worsening position, with inflation of 5%, even on the fudged Bureau of Labor Statistics figures, short term interest rates held down artificially to around 2% and huge amounts of liquidity being pumped into the banking system to rescue Bear Stearns, Fannie Mae and Freddie Mac and any other financial institution currently suffering a hangnail. In the Eurozone, inflation hit a record 4.0% in June in spite of the strength of the currency, and can be expected to get worse in the months ahead thanks to the European Central Bank, which has been expanding euro M3 at 10% or more for the past two years, approximately double the growth rate of Eurozone GDP.
Even in Japan, where policymakers and Western analysts have been bleating about deflation for a decade, inflation has now reared its head, being 2% in the year to June, well above the Bank of Japan’s target interest rate of 0.5%. This is unsurprising; the Bank of Japan under its previous Governor Toshihiko Fukui, appointed in 2003 by the admirable reformist prime minister Junichiro Koizumi, had been attempting to raise Japan’s target interest rate to a more normal 2-3% range for some years. After a rise to 0.5% in February 2007 Fukui was prevented from further rises for several months by the political uncertainty surrounding elections, and then in August the subprime crisis broke, depriving him of further support for tightening. Now he has been replaced by the politically acceptable and therefore inflationist Masaaki Shirakawa, and there is little sign of Japan’s interest rates being increased to deal with a rapidly increasing inflation problem.
It is a great pity the rate-increasing opportunity was missed. Japan’s economy is dominated by its legions of aging savers, who have been receiving nugatory returns on their money for over a decade, and who deserve to cushion their impending retirements with savings returns approaching a normal level of 3% plus inflation. Raising rates to 2-3% last year would thus have been economically stimulative, not restrictive, and would have prevented Japan from falling into the same inflationary bog in which the world is now wallowing.
In emerging markets, inflation has generally risen to rather higher levels. This is not because emerging markets have sloppier monetary management than developed countries (outside Zimbabwe it is difficult to imagine sloppier monetary management than that of the Greenspan/Bernanke duo, though I shall shortly present an example thereof.) However emerging markets are more exposed to commodity and energy price rises, because more of their citizens are impoverished and spend a high proportion of their incomes on commodity-related items. The price of gasoline is a more important factor in the lives of last year’s 8 million Chinese automobile buyers than in those of the 16 million US buyers.
Looking first at the four BRIC countries anointed by Goldman Sachs in 2003 as the pillars of future global growth, we find one monetary failure, two countries struggling with the problem and one surprising success.
The failure is Russia, a country blessed in this decade with every advantage, and managing even so to forge an economic trajectory leading directly back into poverty. Russian inflation is currently 14%, while its benchmark interest rate is only 11%. Needless to say, that inflation rate is heavily understated. Furthermore, Russia pursues policies of property confiscation and arbitrary state action worthy of the worst be-medaled Latin American caudillo. Once oil prices fall back it’s likely Russia will fall into a combination of high inflation and deep recession that will enrage even the battered Russian populace.
Neither India nor China are tackling inflation effectively. In India, inflation is running at 12% compared with a benchmark interest rate of only 8.5%. Furthermore, India is attacking the problem with price controls and government subsidies, which are having their usual effect of distorting the economy (making Indian oil refining, for example, an economically suicidal business). The government is also running a huge budget deficit, even at a time of massive economic boom. Fortunately in 2009 the Indian electorate will be given the chance to undo their terrible mistake of 2004, when they threw out the BJP government of Atal Bihari Vajpayee, the only truly free-market government India has ever had. Vajpayee has retired; whether the new BJP leaders are as committed to the free market and as economically competent only time will tell, but re-election of the Congress Party coalition would almost certainly prove disastrous, particularly as the mildly reformist prime minister Manmohan Singh is already 76.
In China, if you don’t like the government, tough. Inflation is nominally 7.1%, but that figure is distorted by subsidies and almost certainly artificially suppressed pending next month’s Olympics. In any case interest rates at 7.47% are far too low to have any beneficial effect, particularly as returns for savers are only around half this level. In both India and China therefore, while property rights are safer than they are in Russia, savers are losing ground all the time even before tax, not the recipe for a healthy economy .
Before turning to the last and well-governed BRIC, a couple of other examples which may be illuminating. Vietnam has inflation of 27%, but that is almost entirely imported. Its benchmark interest rate is only 14%, but its economy is highly unstable; it runs a trade deficit of 30% of GDP, balanced by a foreign direct investment inflow of 65% of GDP. While theoretically Vietnam is not doing enough to stem inflation, in practice its economic position is so singular it may find inflation an inevitable price of improving rapidly the living standards of its people. The country has a real estate boom, as one would expect given its negative real interest rates, but overall its problems are mostly those of success, and it seems likely that an end to the world commodities bubble will also cool inflation in Vietnam.
Finally, the Idle Apprentice, to contrast with Brazil’s Industrious Apprentice. Dubai has enjoyed a construction and tourism boom on the back of record revenues to the Gulf region and the oil-rich United Arab Emirates of which it is a part. It has used the money to build ever more extravagant prestige construction projects, including the world’s only 7-star hotel, its tallest building, an $82 billion aerospace project to include the world’s largest airport and a recreation of a world map in the harbor. With only 0.02% of the world’s population, and expatriates representing 80% of its workforce, it employs 10% of the world’s tower construction cranes. Its inflation rate is 22%, while long term mortgages are available there for 7%. Needless to say, the construction boom is proceeding without hope of restraint – after all the country has combined the monetary policy of Ben Bernanke on steroids with the building frenzy of the 2006 Florida condo market. Once oil prices drop back to any kind of long term equilibrium, probably much higher than their historical level but below $100, Dubai should be in for the mother of all construction crashes. By 2010 one can expect it to be a forest of half-completed concrete, with 10% residential and commercial occupancy rates. GE has just announced an investment of $40 billion in Dubai infrastructure; it is most unlikely to see its money back.
Finally Brazil, which in the past has indulged in the typical Latin American follies of excessive government spending, wild borrowing sprees, hopelessly sloppy monetary policy leading to hyperinflation and inadequate protection of property rights, particularly foreign property rights. Now things are different. Foreign debt has halved as a percentage of GDP since 2002, while the government’s finances are in only modest deficit. Foreign investment is encouraged and its rights protected. Most impressive, while inflation is around 6%, because of high commodity prices, the benchmark Selic interest rate has just been raised to 13%. At that level, inflation will be squeezed out of the system and excessive borrowing will be discouraged. Thus when the commodities boom from which Brazil has benefited deflates, Brazil will be able to lower interest rates and continue domestic expansion without fear of running out of money. The Nobel Committee really needs to give a prize for monetary policy; from the above survey of mild or extreme inflation-producing sloppiness there can be no question that Brazil would win it and deservedly so.
It is unclear why Brazil has since 2002 deviated from the usual Latin American track, exemplified by the basket-cases of Argentina, Venezuela and Bolivia. One can speculate that the honor of being termed a “BRIC” super growth market – quite undeservedly so, in 2003 – caused Brazil to attempt to live up to its new billing – like the wayward teenager who is straightened out by a teacher who values his achievements.
The overall lesson from the above review is as usual bearish. Almost all the world has abandoned proper anti-inflationary discipline and is destined to suffer a period of high inflation and recession in the coming years. Some countries, like Dubai, will become true basket-cases, others like China and Vietnam may muddle through fairly satisfactorily. Only a few countries like Brazil have taken the inflationary threat sufficiently seriously and will thus be in a position to continue expanding even while the rest of the world endures recession.
The monetary Idle Apprentices are about to get their comeuppance.
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