Do the Western Emperors Wear Clothes?

Saturday, January 19, 2008

Excuse my very lazy blogging lately, I start catching up with this truly global economic and political analysis. But searching for a new residence in my hometown took all my energies and very often my breath when I saw what is on offer for what prices. (And I spent dark winter evenings reading about crises and the history of money along with more general history.) Having overcome this most important hurdle I am in a sticker shock ever since. Daily trips (with record price gas) to the DIY market for renovation supplies remind me painfully how cheap it all was - before the Euro. Visits to designer furniture stores made me feel like 20 years ago too: As then price tags can only be described as outlandish. Bedside lamps for 350 Euros! Inflation in Austria surged to a record 3.6% annual rate in December.
A higher inflation rate is circumvented by funny weightings in the price basket with an emphasis on consumer electronics but little to eat and almost no commuting. A back of the envelope calculation indeed put my new TV below prices of the 1980s - the last time I bought one. Then came the internet, offering so much more information and saving me thousands in information costs. Let alone the possibility to follow the world from my couch. Biased TV is no competition for this wealth of information.
But I am straying off my original topic: The coming rapid decline of the Western world, brought upon us by
  • the imperial hubris of both the EU and the USA
  • the bursting of the biggest debt bubble, private, public and commercial
  • weapons of financial mass destruction, as Warren Buffett calls derivatives
  • a developing global food and energy crisis and
  • a complete misunderstanding of the different attitudes around the world towards those nations that once saw the globe as their god-given playground.
Developments since the beginning of the current crisis have largely followed the path I have described in this blog since 2005, pointing readers to the safety of precious metals in a turbulent age.
As in all crises the root problem is a rapid monetary expansion fuelled by the lowest interest rates any living member of the financial community can remember.
Rates are still low in a historical comparison, at least for sovereign borrowers. Commercial borrowings have come to a virtual halt already in the USA and the situation does not look much better in most parts of Europe.
Unemployment is on the rise due to orgies of outsourcing in the past that have not left much productive capacity on both sides of the Atlantic.
We Pay You Later
As all big powers the EU and the USA have followed the traditional path: From agriculture to industry to service and trade. An obsession with the concept of the virtual corporation and unrealistic yield expectations led the West into the fatal trap of believing that pushing papers alone would make everybody eternally rich while the poorhouses of the world be happy to dig up their resources and energy and send it refined and packaged to the (former) first world in exchange for papers that essentially say "we pay you later."
Economic growth was not based on higher productivity (do we know how this gets calculated?) but on more credit.
Credit by the Truckload
Americans and Europeans did not get richer in the last decade. In a modern version of the Tulipmania people started to believe that condo flipping was an easy ticket to capitalism for everybody. I never understood why a house for 500k plus 50k renovations turned suddenly into a 650k house. I mean, for wooden houses? A bubble that was based on Ninja loans (No income, no job or assets) in the extreme end.
While the conomy is currently falling off the cliff - as predicted here since 2005 - the West still displays an arrogance towards the rest of the world that could cost it dearly in the near term.
Having travelled more than 70 countries since 30 years and been on 4 continents in the past 18 months only I have noticed a growing resentment towards those colonialist nations that invaded Africa, Asia, Australia and Latin America in the last 5 centuries.
While we are still admired for our living standards the rest of the world does very clearly see the deficiencies in our system and the weak points.
And weak points we do have in the West. Our dependence on raw materials and energy, coupled with the highest labour costs in the world make the West hardly an attractive location for investments. Add catastrophic demographic projections and you wonder who is left to do the work when most of us retire soon and there are simply not enough children conceived since 40 years.
International visitation politics since the beginning of the crisis demonstrate clearly that the global centre of power has shifted from Washington to Beijing. US Treasury secretary Hank Paulson to ECB president Trichet, Germany's Angela Merkel and countless other Western dignitaries have been polishing door handles in China which has what the West needs most: Money and goods. It's like with every debtor: When the bank is worried about your financial status better get your best tie out and pay them a visit.
Golden Rule: He Who Has the Gold Makes the Rules
China and the Arab countries sit on the receiving end these days. Sovereign wealth funds holding trillions of Federal Reserve Notes, a private unbacked currency, muscled their way into the western financial system, taking stakes in battered financial institutions when only 3 years ago the USA tried to shield itself from any foreign influence. Now they have no more choice. The long term implications of the fire sale of shares in US banks is yet to be seen. But I cannot remember one instance where a major shareholder kept quiet when his billions were at stake. The Chinese will be no exception, honoring the golden rule: He who has the gold makes the rules. If one were to apply this rule strictly the West could one day get its orders from Indian housewives who are estimated to hold already 10% of all the world's gold.
Recent aquisitions of luxury car brands Jaguar and Rover by the Indian Tata dynasty show how quick the positions on the table can change. Only 60 years ago Britain fled its responsibility in India, exiting what is now the world's biggest democracy in only 90 chaotic days after which a blood bath between Muslims and Hindus cost millions of lives.
I also wonder how much of a friend China wants to be with the West: After all it was Britain that started a drug war of its own kind. The British Army guaranteed the sales of opium from its colony India, filling the coffers of British trading houses in the process. Before this opium was literally unknown in China. The politics of the British empire led to the addiction of millions of Chinese. So how friendly, exactly, can we expect the Chinese to be?
Regarding opium I am also looking for a logical explanation for the surging opium record production in Afghanistan. While under Taliban rule the opium crop had been reduced to less than 100 tons annually. Only a few years of Western occupation and the country produces more than 3,500 tons. I mean, how does all this heroin find its way to Western cities under the technology-assisted eyes of the Western occupators?
Do not think the West has friends in Africa. Africa rejects both the installation of planned US army Africom bases as the West's efforts to secure itself a supply of vital resources in the last huge continent not yet fully exploited. The latest EU-African summit ended with nothing but polite words. China, not really welcome in Africa due to cultural differences, has a much better hand, offering African potentates a life in luxury in exchange for mining and drilling rights. And China has no history of enslaving Africans to work the tobacco fields in Virginia. Would you welcome the ancestors of those cultures that robbed Africa for more than 5 centuries from its commodity and human resources. Africa is not backward because it is poor. It was made poor by the warring West.
The situation in Latin America is well known too. Venezuela's Chavez and Bolivia's Morales frequently criticize the US double standard on issues like torture, human rights and political intervention and one cannot blame them.
And Russia's Putin can suffocate Europe simply by turning off our gas tap. Europe imports most of its natural gas which heats probably 40% of European households.
Arab countries currently suffer from inflation because of their dollar pegs. OPEC mulls to reject Federal Reserve Notes. This currency is backed by nothing and Arabs wonder why they should accept "we pay you later" paper from a nation that will only use the oil to keep a warmachione running that could any day turn against themselves.
What all these countries have in common now is a growing skepticism towards two economic super powers that are by all objective means in a rapid decline, while still patronizing the rest of the world. While the West talks a lot about freedom and democracy, civil liberties have never been more curtailed under the guise of the "war on terror" hoax. Our human rights record is no better than that of countries that get blamed for it by the West.  The president of Austria's constituional court recently said that surveillance in Austria has surpassed the intrusionary levels that were the norm in former communist East Germany. So how was that about the free market economy and a reduction of government?
Running huge budget deficits it is interesting to see that all social spending proposals get under immediate fire while no word is ever spent on the limitless spending for security that is increasingly seen as what ist is for real: An intrusion of privacy by governments who know how unpopulatr they are and who probably erect all these security layers to quell any social unrest that is certain to come with a depression.
How do you expect me to travel to the USA when the goons at immigration can force me to reveal the password of my computer, whose hard disk is an extension of my memory? Or otherwise put me in detention when not complying with their "rules" that are all intimidating to the normal tourist? Brazil has reacted correctly by giving US travellers a lengthy security check on arrival.
This patronizing attitude towards the coloured world will not go down well much longer. While most history books paint a Western perspective every people that has once been oppressed will not exactly hold out its hands to be exploited all over again. And this is the experience of the world outside Europe and North America (why has there never been a discussion of the holocaust of American Indians?)
Add in the frightening estimate that we will need two globes by 2050 in order to maintain our current living standards and I think it is clear that the world is probably steering towards the biggest humanitarian catastrophe in history.
In the current growing tensions about global resources we will have 2 alternatives:
  1. Either the world learns for the first time in history to live together in peace or
  2. it will be as always: One half tries to kill the other half.
A sad perspective indeed. It does not get better by the ignorant arrogance of Western leaders who still think they rule the world. Sorry, nobody has ever ruled the world with empty pockets. Western leaders wear no more clothes. Read history before you are doomed to repeat it.

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