Bulls and bears alike wonder when the next market bubble will emerge and pop. In recent years, major stock market downturns have come from bursting bubbles. Recessions, threats of war, terrorist attacks and other disturbances have caused market ripples. But the big gut wrenchers--the nosedives that wrecked your retirement--have come from the popping of asset bubbles. The gross over-valuation of tech stocks in 2000, the ridiculous real estate lending of 2005-07, those are the events that clobbered equities. What does the future portend?
Today, the mess in the Middle East grips our attention. Medieval atrocities by the Islamic State, a mosh pit with weapons in Gaza, mind-numbing slaughter in Syria and sectarian strife in Iraq appall and fascinate. But none of them will significantly drive down stock valuations. They just don't have the economic impact. The Ebola epidemic is now raging out of control in West Africa. But America's economic exposure to West Africa is miniscule. And the disease isn't likely to present a major threat to the industrialized world.
Is there an impending market bubble that could burst and dynamite the world's financial system? The answer is maybe, in Europe. The European economy is slowing. Growth is seen only on alternating Sundays. The EU stays afloat on a cushion of sovereign and bank debt--a lot of it. With Europe's slowing economy, it will be tough to pay down this debt and expedient to refinance by issuing even greater amounts of debt. Risks to larger members like Italy and France are rising. The EU is a financial and currency union without a unitary government. Thus, it is tailor made to borrow in bulk without governmental controls to interfere. We in America know from the 2007-08 mortgage crisis what happens when you bulk up on debt that can't be easily repaid. The vast amount of European debt presents potential systemic risk, just like the vast amount of American mortgage debt outstanding in 2007.
Exacerbating Europe's problems is the war between Ukraine and Russia. As Russia's direct involvement in combat is becoming increasingly clear, the war is likely to have ever greater impact on Europe. Sanctions by the West will probably be heightened, and Russia's retaliation will likely hit Europe harder than America. Europe's financial system could begin to totter as the EU is pushed into recession and capital flees the Old World. (Indeed, part of the buoyancy of U.S. stocks can be attributed to the arrival of capital now fleeing Europe.) A run on the Euro could be the straw that breaks the bubble's back.
The European Central Bank, as always, does a fan dance about how accommodative it will be. While it's become much more interventionist in the past couple of years, it remains constrained by its anti-inflation charter and the stolid, ever-frowning Germans. Maybe the ECB will save the day. Or maybe not.
Europe's economy, as a whole, is larger than America's. A tummy ache there could affect the rest of the world. if you're worried about where the next bursting asset bubble could come from, keep your eye on Europe.
Showing posts with label Ukraine. Show all posts
Showing posts with label Ukraine. Show all posts
Saturday, August 30, 2014
Tuesday, August 19, 2014
Vladimir Putin and the Art of War
Sun Tzu, the Chinese military strategist, wrote in The Art of War: "[T]hose skilled in war subdue the enemy's army without battle. They capture his cities without assaulting them and overthrow his state without protracted operations."* This would seem to have been Putin's approach from the beginning of Ukrainian crisis. Without a shot fired, Russian troops seized Crimea. Crimea was low hanging fruit, since Russian military personnel were already there on a base that Ukraine had allowed Russia to maintain. Vlad the Invader was no doubt emboldened by the ease and bloodlessness of this victory to seek control of eastern Ukraine. And he probably hoped to use his success in Crimea to bluff and bully Ukraine into surrendering without Russia having to fight a hot war.
But things haven't gone Putin's way. After initial ineffectiveness, the Ukrainian military has rallied and is now on the way to retaking all of eastern Ukraine (except perhaps for Crimea). Only two major cities (Donetsk and Luhansk) remain in rebel hands, and both are surrounded by the Ukrainians. While a substantial news blackout seems to exist with respect to combat operations, it's clear that the Ukrainian military has suddenly attained the ability to use heavy weapons effectively against the more lightly armed separatist forces. The success of Ukraine's air force is unclear; the separatists tout shootdowns, but the Ukrainian military is mum on successes. If Ukraine's air force can now effectively support its ground forces, the separatists haven't got much of a chance. Air power, as the Islamic State learned the hard way in Iraq, is still the trump card on the battlefield.
How has Ukraine so suddenly become so capable in battle? One wonders if there aren't advisers in Ukraine, who speak the language with non-native accents and can offer the benefit of experiences from other wars. No military in the world has as much experience as the U.S. military. And the Iraq War, fought on flat terrain in and around towns and cities, would have been similar in many ways to the fighting in Ukraine, It is hard to imagine that there aren't U.S. Special Ops personnel and CIA agents working with the Ukrainians. Recent claims by Ukraine that its artillery pummeled a Russian armored column entering Ukraine at night, if true, would strongly indicate an American role. How could Ukrainian artillery smack the yogurt out of a Russian column at night without precise targeting information, such as might be provided by American satellites and drone aircraft?
But now is not the time for Ukraine and the U.S. to celebrate. Putin cannot afford to be seen as a loser in this war. If he were, he'd lose his job, and maybe more. He'll lash out like a cornered rat if forced to face definitive defeat. Even as we write, there are reports of rebel reinforcements being sent from Russia into Ukraine--some 1,200 men with 150 armored vehicles, including 30 tanks. (There we go with U.S aerial surveillance again.) Putin won't stop fighting.
Yet, the Ukrainian military is holding its own and more. If Putin overtly sends Russian troops into Ukraine, he'll probably sustain more casualties than the war weary Russian people will tolerate. (Russia took painful losses in Afghanistan and in the wars in the Caucasus.) Western sanctions would escalate sharply and capital flight from Russia, already a torrent, would become a flood that would impress Noah. The Russian economy could crater, threatening to take Putin down with it. So an overt invasion of Ukraine by Russian troops entails tremendous risk.
Putin is for practical purposes limited to using the separatists rebels, who are now outnumbered and outgunned. As a result, he has violated one of Sun Tzu's principles: "If weaker numerically, be capable of withdrawing." He cannot commit the forces needed to win, but he cannot withdraw. He is trapped.
What will Putin do? Most likely, he'll continue and perhaps increase the covert assistance and support he's been giving the separatists. The more success the Ukrainian military enjoys, the more desperate Putin will become, and the more covert action he will take. Since there seems to be a ready supply of separatist rebels, Putin could keep the war going at least for a while. If the Ukrainian military defeats the separatist forces on the battlefield, the rebels could go underground and fall back on terrorist tactics that have become all too familiar in today's world. And Putin could apply the economic weapons he's used in the past, such as shutting off the natural gas Russia exports to Ukraine and Europe. Ukraine may well be on the way to battlefield victory. But instability and disruption will continue.
*Sun Tzu, The Art of War, translated by Samuel B. Griffith, Oxford University Press, 1963.
But things haven't gone Putin's way. After initial ineffectiveness, the Ukrainian military has rallied and is now on the way to retaking all of eastern Ukraine (except perhaps for Crimea). Only two major cities (Donetsk and Luhansk) remain in rebel hands, and both are surrounded by the Ukrainians. While a substantial news blackout seems to exist with respect to combat operations, it's clear that the Ukrainian military has suddenly attained the ability to use heavy weapons effectively against the more lightly armed separatist forces. The success of Ukraine's air force is unclear; the separatists tout shootdowns, but the Ukrainian military is mum on successes. If Ukraine's air force can now effectively support its ground forces, the separatists haven't got much of a chance. Air power, as the Islamic State learned the hard way in Iraq, is still the trump card on the battlefield.
How has Ukraine so suddenly become so capable in battle? One wonders if there aren't advisers in Ukraine, who speak the language with non-native accents and can offer the benefit of experiences from other wars. No military in the world has as much experience as the U.S. military. And the Iraq War, fought on flat terrain in and around towns and cities, would have been similar in many ways to the fighting in Ukraine, It is hard to imagine that there aren't U.S. Special Ops personnel and CIA agents working with the Ukrainians. Recent claims by Ukraine that its artillery pummeled a Russian armored column entering Ukraine at night, if true, would strongly indicate an American role. How could Ukrainian artillery smack the yogurt out of a Russian column at night without precise targeting information, such as might be provided by American satellites and drone aircraft?
But now is not the time for Ukraine and the U.S. to celebrate. Putin cannot afford to be seen as a loser in this war. If he were, he'd lose his job, and maybe more. He'll lash out like a cornered rat if forced to face definitive defeat. Even as we write, there are reports of rebel reinforcements being sent from Russia into Ukraine--some 1,200 men with 150 armored vehicles, including 30 tanks. (There we go with U.S aerial surveillance again.) Putin won't stop fighting.
Yet, the Ukrainian military is holding its own and more. If Putin overtly sends Russian troops into Ukraine, he'll probably sustain more casualties than the war weary Russian people will tolerate. (Russia took painful losses in Afghanistan and in the wars in the Caucasus.) Western sanctions would escalate sharply and capital flight from Russia, already a torrent, would become a flood that would impress Noah. The Russian economy could crater, threatening to take Putin down with it. So an overt invasion of Ukraine by Russian troops entails tremendous risk.
Putin is for practical purposes limited to using the separatists rebels, who are now outnumbered and outgunned. As a result, he has violated one of Sun Tzu's principles: "If weaker numerically, be capable of withdrawing." He cannot commit the forces needed to win, but he cannot withdraw. He is trapped.
What will Putin do? Most likely, he'll continue and perhaps increase the covert assistance and support he's been giving the separatists. The more success the Ukrainian military enjoys, the more desperate Putin will become, and the more covert action he will take. Since there seems to be a ready supply of separatist rebels, Putin could keep the war going at least for a while. If the Ukrainian military defeats the separatist forces on the battlefield, the rebels could go underground and fall back on terrorist tactics that have become all too familiar in today's world. And Putin could apply the economic weapons he's used in the past, such as shutting off the natural gas Russia exports to Ukraine and Europe. Ukraine may well be on the way to battlefield victory. But instability and disruption will continue.
*Sun Tzu, The Art of War, translated by Samuel B. Griffith, Oxford University Press, 1963.
Monday, July 28, 2014
The Failure of European Economic Integration
Economic integration--intertwining the economies of nations--was supposed to promote economic efficiency, prosperity and ultimately peace. The idea was that if nations need each other to keep their economies humming, they wouldn't start a shooting war. Continental Europeans, having suffered tens of millions of deaths in two world wars, were particularly impassioned with this idea. Who can blame them? Arms races and wars hadn't solved their problems. The League of Nations didn't solved their problems. Why not give mutual dependence on each other for cheese, wine, sardines, sausage, and pasta a chance?
At first the idea seemed to work. The EU prospered in its early years. We now know those salad days resulted to a large degree from inexpensive borrowing by poorer EU nations, who snarfed up too much easy money and now struggle to avoid the death of a thousand budget cuts. But optimism held sway in the early days of the EU, and economic kumbaya was extended to the nations of the former Soviet Union, including the big brown bear itself.
Economic integration provides leverage. The proponents of the EU thought that the leverage would be used to restrain aggression. But leverage by itself is morally neutral, and can be used for good or evil. Give leverage to a son of a ditch (sp), and he'll use it for evil. This is what we see in Ukraine today, where Vlad the Invader has seized Crimea, and is sponsoring a "rebellion" in eastern Ukraine against the Kiev government, a war that is increasingly being conducted by Russian soldiers and Russian operatives. As Russian personnel take over the fighting, the war is morphing into a clash between nations. This is exactly what economic integration was supposed to prevent.
Europe's response to Vlad's invasions has hardly gone beyond a tepid wrist slap, and talk of stronger sanctions is matched by behind the scenes maneuvering to prevent any economic consequences from the sanctions. The horror of the shoot down of Malaysia Airlines Flight MH 17 was quickly followed by France reaffirming its intention to deliver a Mistral class helicopter carrier to Russia, a substantial warship that Russia apparently could not itself build. Economic integration, it would appear, trumps moral rectitude.
Putin is using economic integration as a weapon, and in his insidious hands, it's devilishly effective. Europe is dependent on Russia for gas and oil, and can't easily substitute other suppliers for Russia. Putin has apparently increased his support for the rebels in Ukraine since the Flight MH 17 atrocity. He has much to gain by doubling down. His increased aggressiveness forces the U.S. and Europe to struggle to respond, and this struggle heightens the divisions between the New World and the Old. He renders NATO a hollow shell, something the Poles have publicly admitted. Putin doesn't have to conquer Ukraine, or even eastern Ukraine. All he has to do is keep stirring the pot, and in so doing highlights Europe's dependence on Russia and America's weakness.
Economic integration doesn't turn a monster into a nice kitty. When done with a dastard (sp), he remains dastardly, and will look for opportunities to slip the knife between the ribs of his trading partners. The Europeans have, through economic integration, delivered themselves unto evil, and they are now paying the price.
At first the idea seemed to work. The EU prospered in its early years. We now know those salad days resulted to a large degree from inexpensive borrowing by poorer EU nations, who snarfed up too much easy money and now struggle to avoid the death of a thousand budget cuts. But optimism held sway in the early days of the EU, and economic kumbaya was extended to the nations of the former Soviet Union, including the big brown bear itself.
Economic integration provides leverage. The proponents of the EU thought that the leverage would be used to restrain aggression. But leverage by itself is morally neutral, and can be used for good or evil. Give leverage to a son of a ditch (sp), and he'll use it for evil. This is what we see in Ukraine today, where Vlad the Invader has seized Crimea, and is sponsoring a "rebellion" in eastern Ukraine against the Kiev government, a war that is increasingly being conducted by Russian soldiers and Russian operatives. As Russian personnel take over the fighting, the war is morphing into a clash between nations. This is exactly what economic integration was supposed to prevent.
Europe's response to Vlad's invasions has hardly gone beyond a tepid wrist slap, and talk of stronger sanctions is matched by behind the scenes maneuvering to prevent any economic consequences from the sanctions. The horror of the shoot down of Malaysia Airlines Flight MH 17 was quickly followed by France reaffirming its intention to deliver a Mistral class helicopter carrier to Russia, a substantial warship that Russia apparently could not itself build. Economic integration, it would appear, trumps moral rectitude.
Putin is using economic integration as a weapon, and in his insidious hands, it's devilishly effective. Europe is dependent on Russia for gas and oil, and can't easily substitute other suppliers for Russia. Putin has apparently increased his support for the rebels in Ukraine since the Flight MH 17 atrocity. He has much to gain by doubling down. His increased aggressiveness forces the U.S. and Europe to struggle to respond, and this struggle heightens the divisions between the New World and the Old. He renders NATO a hollow shell, something the Poles have publicly admitted. Putin doesn't have to conquer Ukraine, or even eastern Ukraine. All he has to do is keep stirring the pot, and in so doing highlights Europe's dependence on Russia and America's weakness.
Economic integration doesn't turn a monster into a nice kitty. When done with a dastard (sp), he remains dastardly, and will look for opportunities to slip the knife between the ribs of his trading partners. The Europeans have, through economic integration, delivered themselves unto evil, and they are now paying the price.
Saturday, June 7, 2014
Going Negative in Europe
"Going negative" is a political term of art, usually meaning that one candidate campaigns primarily by throwing mud at the other candidate(s). In our jaded times, going negative has come to predominate. Trash talking, if nothing else, captures attention.
These days, Europe is going negative for political reasons, although not in the usual sense. The European Central Bank announced recently that it was cutting the interest rate it pays on deposits from banks to -0.1%. In other words, banks that deposit funds with the ECB will pay a 0.1% fee for the privilege of having the ECB hold their money. The ECB claims to be concerned with a low nominal interest rate of 0.5%, and supposedly cut rates below zero to spur bank lending. Whether more lending will be done is unclear, as banks in the EU have been awfully finicky about extending credit in recent years (except to sovereign nations that sometimes aren't creditworthy). Banks could cover the costs of the ECB's negative move by lowering interest rates paid on deposits (i.e., on longer term deposits that still have a positive rate) and increasing lending rates for existing borrowers. There's no necessary reason for them to make new loans.
The 0.5% inflation rate that supposedly led the ECB to go negative isn't strikingly different from the low inflation that already prevailed in Europe. One can't help wondering how much the EU was motivated by politics, as opposed to monetary policy. The EU's badly conceived structure--a monetary union without true fiscal controls--encouraged overly enthusiastic borrowing by sovereign members, particularly those that were economically weaker. The resulting debt crisis was met with the EU's BYOB (bring your own bailout) policy that meant austerity for those least able to cope, and economic recession (or, in some EU member nations, depression). It's hardly surprising that political extremism flourished.
Nationalistic parties in Europe have recently made striking gains in EU parliamentary elections (yes, in the election of delegates to the EU Parliament, a quarter of whom now would favor the dissolution of the EU). It must scare the mudcakes out of the ECB's bureaucrats that a quarter of the EU's governing body would be pleased to defenestrate the ECB.
Moreover, nationalistic impulses in Russia led to its seizure of Crimea from Ukraine. Even though Russia formally transferred Crimea in political marriage to Ukraine in the 1950s, Vladimir Putin (Vlad the Invader, one might call him) seems to believe that Russia nevertheless holds a droit du seigneur to take Crimea for itself. In addition, Russian nationalism (plus surreptitious Russian military intervention) has fueled unrest in eastern Ukraine, leading to civil warfare. It now looks like Ukraine may go the way of Syria. Neither side is strong enough to win, and both sides are supported by outside interests that cannot afford to lose. Russia can protect its interests by keeping the insurgency going at a low boil, just enough that Ukraine is afraid to cozy up too closely to NATO. America has to do something to help Ukraine, but can't offer enough military assistance to decisively defeat the insurgents. (Given the pathetic performance of the Ukrainian military, the only way the insurgents can be defeated is if we send in the Marines, and that ain't happening). So, the nastiness of irregular warfare and flight of civilians from war zones, so familiar to observers of the Syrian civil war, is now being replayed in Ukraine.
Policy makers at the ECB undoubtedly noticed the rising manifestations of nationalism around them, and surely understand that the fiscal austerity imposed by the doyennes of the EU isn't doing a bang up job of fostering economic growth. That leaves the central bank as the only actor in this drama who can administer the antidote to extremism: the promotion of economic prosperity. So, the ECB surely is going negative for political reasons. And that's a problem. Central banks were created to foster financial stability, not political stability. But, with political processes in Europe (as well as in America) moribund on their best days, the ECB is trying to bail out a life raft with a tea cup. And it's not hard to figure out its chances of success.
These days, Europe is going negative for political reasons, although not in the usual sense. The European Central Bank announced recently that it was cutting the interest rate it pays on deposits from banks to -0.1%. In other words, banks that deposit funds with the ECB will pay a 0.1% fee for the privilege of having the ECB hold their money. The ECB claims to be concerned with a low nominal interest rate of 0.5%, and supposedly cut rates below zero to spur bank lending. Whether more lending will be done is unclear, as banks in the EU have been awfully finicky about extending credit in recent years (except to sovereign nations that sometimes aren't creditworthy). Banks could cover the costs of the ECB's negative move by lowering interest rates paid on deposits (i.e., on longer term deposits that still have a positive rate) and increasing lending rates for existing borrowers. There's no necessary reason for them to make new loans.
The 0.5% inflation rate that supposedly led the ECB to go negative isn't strikingly different from the low inflation that already prevailed in Europe. One can't help wondering how much the EU was motivated by politics, as opposed to monetary policy. The EU's badly conceived structure--a monetary union without true fiscal controls--encouraged overly enthusiastic borrowing by sovereign members, particularly those that were economically weaker. The resulting debt crisis was met with the EU's BYOB (bring your own bailout) policy that meant austerity for those least able to cope, and economic recession (or, in some EU member nations, depression). It's hardly surprising that political extremism flourished.
Nationalistic parties in Europe have recently made striking gains in EU parliamentary elections (yes, in the election of delegates to the EU Parliament, a quarter of whom now would favor the dissolution of the EU). It must scare the mudcakes out of the ECB's bureaucrats that a quarter of the EU's governing body would be pleased to defenestrate the ECB.
Moreover, nationalistic impulses in Russia led to its seizure of Crimea from Ukraine. Even though Russia formally transferred Crimea in political marriage to Ukraine in the 1950s, Vladimir Putin (Vlad the Invader, one might call him) seems to believe that Russia nevertheless holds a droit du seigneur to take Crimea for itself. In addition, Russian nationalism (plus surreptitious Russian military intervention) has fueled unrest in eastern Ukraine, leading to civil warfare. It now looks like Ukraine may go the way of Syria. Neither side is strong enough to win, and both sides are supported by outside interests that cannot afford to lose. Russia can protect its interests by keeping the insurgency going at a low boil, just enough that Ukraine is afraid to cozy up too closely to NATO. America has to do something to help Ukraine, but can't offer enough military assistance to decisively defeat the insurgents. (Given the pathetic performance of the Ukrainian military, the only way the insurgents can be defeated is if we send in the Marines, and that ain't happening). So, the nastiness of irregular warfare and flight of civilians from war zones, so familiar to observers of the Syrian civil war, is now being replayed in Ukraine.
Policy makers at the ECB undoubtedly noticed the rising manifestations of nationalism around them, and surely understand that the fiscal austerity imposed by the doyennes of the EU isn't doing a bang up job of fostering economic growth. That leaves the central bank as the only actor in this drama who can administer the antidote to extremism: the promotion of economic prosperity. So, the ECB surely is going negative for political reasons. And that's a problem. Central banks were created to foster financial stability, not political stability. But, with political processes in Europe (as well as in America) moribund on their best days, the ECB is trying to bail out a life raft with a tea cup. And it's not hard to figure out its chances of success.
Thursday, May 29, 2014
The Lucky, Lucky Fed
Soldiers want their generals to be lucky. As capable and knowledgeable as generals may be, they still need luck to win. And citizens want their central banks to be lucky, because central bankers often fail even if they are capable and knowledgeable.
The Federal Reserve has been very, very lucky. Unrest in Ukraine, territorial disputes in East Asia, the usual morass in the Middle East, and now nationalist parties winning European elections, have all combined to push U.S. Treasury yields down even as the Fed steadily withdraws its quantitative easing. Financial markets mavens who confidently predicted that this would be the year of rising interest rates and falling stock prices have had to substitute excuses and explanations for predictions.
Some still persist in forecasting rising rates and falling stocks. Perhaps they will be proven correct. But if you're betting your money on these predictions, remember that you're, at least in part, betting on the Fed's luck running out. A bet on bad luck is still a bet on luck. If you wouldn't play the lottery or patronize a casino, why bet on (or against) the central bank's luck? The smart thing to do is stay diversified, and be patient. (See http://blogger.uncleleosden.com/2014/05/why-you-should-invest-like-smart-money.html.) The tortoise tends to be a better investor than the hare.
The Federal Reserve has been very, very lucky. Unrest in Ukraine, territorial disputes in East Asia, the usual morass in the Middle East, and now nationalist parties winning European elections, have all combined to push U.S. Treasury yields down even as the Fed steadily withdraws its quantitative easing. Financial markets mavens who confidently predicted that this would be the year of rising interest rates and falling stock prices have had to substitute excuses and explanations for predictions.
Some still persist in forecasting rising rates and falling stocks. Perhaps they will be proven correct. But if you're betting your money on these predictions, remember that you're, at least in part, betting on the Fed's luck running out. A bet on bad luck is still a bet on luck. If you wouldn't play the lottery or patronize a casino, why bet on (or against) the central bank's luck? The smart thing to do is stay diversified, and be patient. (See http://blogger.uncleleosden.com/2014/05/why-you-should-invest-like-smart-money.html.) The tortoise tends to be a better investor than the hare.
Monday, March 24, 2014
The Limits of Globalization
Russia's seizure of Crimea reminds us that globalization isn't all it's cracked up to be. The fall of the Soviet Union led to self-satisfied proclamations in the West about the triumph of capitalism and history ending in a glowing halo of liberal democracies. Economic globalization would supposedly lead to worldwide reallocation of capital and resources to ever more efficient applications, with the result that economic tides would rise everywhere and prosperity would simmer in every pot. Nations and peoples worldwide would become increasingly interdependent and interlinked, making mutual tolerance in everyone's pecuniary interest. Pots would melt around the world, diversity would be embraced, and preschoolers everywhere would learn the lyrics of Kumbaya.
Russia is interlinked with the rest of the world today: economically in the energy markets and the financial markets, and securitywise with America and Western Europe in terms of dealing with Islamic radicals. But none of that made a difference when Ukraine moved toward closer links with the West. The centuries old Russian imperial imperative--that the Eurasian heartland be controlled from Moscow--howled. Russia endeavored to maintain strategic geographic advantage by snatching control of Crimea's ports and naval bases, securing military and trade access to warm water. Political machinations inside Ukraine have increased, in an effort to impede its Westward shift. Russian troops in large numbers coincidentally gather for exercises within spitting distance of Ukraine's borders. The economic sanctions imposed and threatened by the West have had no discernible impact on Russian policy.
Globalization was an illusion fancied by people who fancied themselves elites. This fancy illusion could be maintained as long as one cultivated ignorance of history. But globalization is nothing new. Europe in 1913 had extensive cross-border economic and financial relationships. The European elites of the day were multilingual, cosmopolitan and cultured. Somehow, none of that prevented the ignition of World War I over . . . well, nothing. The most ridiculous war ever fought, World War I resulted in 20 million dead and peace terms imposed on Germany that were so harsh they practically guaranteed another war. And that war--the Second World War--would require only 21 years before exploding in a frenzy of land grabs disturbing similar to what Vladimir Putin is doing now. Whatever economic, financial, cultural and other ties are fostered by globalization, they don't trump the tribalism that characterizes almost all peoples in Europe, Asia and Africa.
Tribalism is difficult for Americans to grasp. Having built a remarkably successful, diverse nation, Americans struggle with the idea that narrow concepts of group, based on cultural and historical ties, could somehow be so important as to justify conquering and killing. Surrounded by the enormous economic benefits of the Melting Pot, Americans don't understand why other peoples can't embrace tolerance when tolerance will allow them bigger shopping sprees at the mall. But history tells us that you have to understand and deal with other peoples' irrationalities. War, after all, is essentially always irrational. But there are plenty of wars, all the time. A smart foreign policy incorporates the need to consider and address other peoples' motivations, whatever they may be.
Economic sanctions have a role in America's and Europe's response to Russia. But it would be a mistake to think they will be enough. The sheer exertion of power will also have a place. This doesn't mean triggers need to be pulled. Strengthening NATO would get through to Putin, whose attention you get only if you exert power. A pragmatic alliance with China should be sought (recall that Russia and China fought brief shooting wars in 1929, 1934, 1937 and 1969, so the Chinese have no illusions about Russian intentions). The Japanese, who fought two wars with Russia in the 20th Century, should get a fist bump and more. Unavoidably, America's Cold War coalition will have to be rebuilt. And that's okay. What's not okay is to believe that reason, plus maybe a few trade deals, will bring Putin around.
Russia is interlinked with the rest of the world today: economically in the energy markets and the financial markets, and securitywise with America and Western Europe in terms of dealing with Islamic radicals. But none of that made a difference when Ukraine moved toward closer links with the West. The centuries old Russian imperial imperative--that the Eurasian heartland be controlled from Moscow--howled. Russia endeavored to maintain strategic geographic advantage by snatching control of Crimea's ports and naval bases, securing military and trade access to warm water. Political machinations inside Ukraine have increased, in an effort to impede its Westward shift. Russian troops in large numbers coincidentally gather for exercises within spitting distance of Ukraine's borders. The economic sanctions imposed and threatened by the West have had no discernible impact on Russian policy.
Globalization was an illusion fancied by people who fancied themselves elites. This fancy illusion could be maintained as long as one cultivated ignorance of history. But globalization is nothing new. Europe in 1913 had extensive cross-border economic and financial relationships. The European elites of the day were multilingual, cosmopolitan and cultured. Somehow, none of that prevented the ignition of World War I over . . . well, nothing. The most ridiculous war ever fought, World War I resulted in 20 million dead and peace terms imposed on Germany that were so harsh they practically guaranteed another war. And that war--the Second World War--would require only 21 years before exploding in a frenzy of land grabs disturbing similar to what Vladimir Putin is doing now. Whatever economic, financial, cultural and other ties are fostered by globalization, they don't trump the tribalism that characterizes almost all peoples in Europe, Asia and Africa.
Tribalism is difficult for Americans to grasp. Having built a remarkably successful, diverse nation, Americans struggle with the idea that narrow concepts of group, based on cultural and historical ties, could somehow be so important as to justify conquering and killing. Surrounded by the enormous economic benefits of the Melting Pot, Americans don't understand why other peoples can't embrace tolerance when tolerance will allow them bigger shopping sprees at the mall. But history tells us that you have to understand and deal with other peoples' irrationalities. War, after all, is essentially always irrational. But there are plenty of wars, all the time. A smart foreign policy incorporates the need to consider and address other peoples' motivations, whatever they may be.
Economic sanctions have a role in America's and Europe's response to Russia. But it would be a mistake to think they will be enough. The sheer exertion of power will also have a place. This doesn't mean triggers need to be pulled. Strengthening NATO would get through to Putin, whose attention you get only if you exert power. A pragmatic alliance with China should be sought (recall that Russia and China fought brief shooting wars in 1929, 1934, 1937 and 1969, so the Chinese have no illusions about Russian intentions). The Japanese, who fought two wars with Russia in the 20th Century, should get a fist bump and more. Unavoidably, America's Cold War coalition will have to be rebuilt. And that's okay. What's not okay is to believe that reason, plus maybe a few trade deals, will bring Putin around.
Sunday, March 16, 2014
How Putin Makes America Look Good
Not long ago, America was having a lot of bad hair days in foreign affairs. The war in Iraq ended without stirring speeches or victory parades. The war in Afghanistan is winding down, but won't have a prettier conclusion. America led from behind in Libya and messed up in Benghazi. Then, America led from even farther behind in Syria and, not surprisingly, got an aviary flip from the Assad regime when President Obama objected to the use of poisonous gas. To avoid being totally blown off by a two-bit tin pot dictator, the Obama Administration had to work with Vladimir Putin's autocracy for a face-saving compromise that still isn't near full implementation. America's grand strategy of pivoting toward Asia has floundered as extremism of numerous varieties keeps provoking eruptions in the Middle East and Europe.
Now comes Vladimir Putin--let's call him Vlad the Invader--who puts the shine on the United States. Using the most transparently farcical of pretexts, Putin seized Crimea from Ukraine. Okay, so there was a referendum in Crimea as to whether or not to "validate" the Russian land grab. But with thousands of Russian troops "guarding" the polls to ensure "integrity" to the voting process, we knew how the vote would turn out before the polls opened. There is nothing America can do to prevent Russia's annexation of Crimea, just as there was nothing America could do to stop Putin's 2008 land kleptomania in Georgia.
But America can and will react. The EU will talk a lot--and then talk some more. It will issue a few condemnations and maybe even an excoriation. But sanctions? Well, let's talk some more.
America's sanctions will be primarily economic. And Russia will respond in kind. America's economic interests will suffer. But Russia's economic interests will suffer more. Not necessarily in terms measured by dollars (or rubles), but in terms of relative pain. Russia has a much smaller and weaker economy than America. And Russia's economy is growing slower, with continued prospects for slow growth. Crimea requires significant subsidies, which will further drain Russia's resources, along with the added cost of all the military "exercises" the Russian Army is staging with walking distance of the Ukrainian border. From a strategic standpoint, Russia's nuclear arsenal is a match for America's. But Russia's economic arsenal is far weaker. And Russia's energy customers and trade partners will look elsewhere for supplies and opportunities, not wanting to give leverage to a bully with a powerful military.
The Cold War was primarily an economic struggle. America and the Soviet Union engaged in a 50-year competition to build to the most advanced and powerful military. Arsenals cost money, and America's vastly greater wealth left the Soviet Union moribund, unable to deliver prosperity or even anything approaching a First World standard of living for its citizens.
As America and Russia swap sanctions, it is important to keep in mind that, realistically, the goal isn't to force Russia out of Crimea. That won't happen. The goal is to turn the crisis into an opportunity to make America once again the world's shining beacon of freedom and democracy. America's sanctions, although likely to be ineffectual in terms of sending Russian troops back to the barracks, will contrast sharply with the EU's decrepitude, and the near silence from the Asia. As an ironic consequence, America's influence around the world, and especially in the periphery of Russia's borders with many former members of the Soviet Union and former Soviet satellite states, will likely grow. After all, no one likes a bully. The bottom line is Putin has made America stronger.
The outcome of the looming war of sanctions is difficult to predict with precision. But the advantage lies with America and its great economic strength. Germany and Japan won the early rounds of World War II. The Soviet Union won most of the early rounds of the Cold War. But we know how those stories ended. Even if Putin will be able to feel like a studly fellow for a while, time isn't on his side. Keep the faith.
Now comes Vladimir Putin--let's call him Vlad the Invader--who puts the shine on the United States. Using the most transparently farcical of pretexts, Putin seized Crimea from Ukraine. Okay, so there was a referendum in Crimea as to whether or not to "validate" the Russian land grab. But with thousands of Russian troops "guarding" the polls to ensure "integrity" to the voting process, we knew how the vote would turn out before the polls opened. There is nothing America can do to prevent Russia's annexation of Crimea, just as there was nothing America could do to stop Putin's 2008 land kleptomania in Georgia.
But America can and will react. The EU will talk a lot--and then talk some more. It will issue a few condemnations and maybe even an excoriation. But sanctions? Well, let's talk some more.
America's sanctions will be primarily economic. And Russia will respond in kind. America's economic interests will suffer. But Russia's economic interests will suffer more. Not necessarily in terms measured by dollars (or rubles), but in terms of relative pain. Russia has a much smaller and weaker economy than America. And Russia's economy is growing slower, with continued prospects for slow growth. Crimea requires significant subsidies, which will further drain Russia's resources, along with the added cost of all the military "exercises" the Russian Army is staging with walking distance of the Ukrainian border. From a strategic standpoint, Russia's nuclear arsenal is a match for America's. But Russia's economic arsenal is far weaker. And Russia's energy customers and trade partners will look elsewhere for supplies and opportunities, not wanting to give leverage to a bully with a powerful military.
The Cold War was primarily an economic struggle. America and the Soviet Union engaged in a 50-year competition to build to the most advanced and powerful military. Arsenals cost money, and America's vastly greater wealth left the Soviet Union moribund, unable to deliver prosperity or even anything approaching a First World standard of living for its citizens.
As America and Russia swap sanctions, it is important to keep in mind that, realistically, the goal isn't to force Russia out of Crimea. That won't happen. The goal is to turn the crisis into an opportunity to make America once again the world's shining beacon of freedom and democracy. America's sanctions, although likely to be ineffectual in terms of sending Russian troops back to the barracks, will contrast sharply with the EU's decrepitude, and the near silence from the Asia. As an ironic consequence, America's influence around the world, and especially in the periphery of Russia's borders with many former members of the Soviet Union and former Soviet satellite states, will likely grow. After all, no one likes a bully. The bottom line is Putin has made America stronger.
The outcome of the looming war of sanctions is difficult to predict with precision. But the advantage lies with America and its great economic strength. Germany and Japan won the early rounds of World War II. The Soviet Union won most of the early rounds of the Cold War. But we know how those stories ended. Even if Putin will be able to feel like a studly fellow for a while, time isn't on his side. Keep the faith.
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