#End of #Empire – 2: #Fall for #Western #economies will be harder and further https://t.co/jw19rcdFME via @NewIndianXpress #SATYAJITDAS
— Guillermo Ruiz Zapatero (@ruiz_zapatero) October 5, 2022
Politics is now "panem et circenses" (bread and circuses) as Juvenal wrote in Satire X.
The West, which today dominates the world, exhibits fundamental financial vulnerabilities.
Applying the metrics of emerging market resilience -- internal (budget) and external (current account) deficits and debt levels, especially amounts owed externally -- yields interesting results:
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While point-of-time data has limits, the West appears to be running substantial twin deficits (budget and current account). Canada's and Australia's strong current account performance is driven by high commodity prices and volumes. Germany's and Japan's current account is vulnerable to falls in exports, such as to China, and elevated energy prices. Western budget positions are precarious. Germany and the UK alone are spending €65 billion ($65 billion or 1.8 percent of GDP) and more than £100 billion ($115 billion, or 4.3 percent of GDP) respectively to subsidise household and business energy costs.
The higher aggregate and public debt of the West as well as significant external indebtedness is noteworthy. Borrowing to meet future needs may prove more difficult in a period of higher interest rates, the shift from quantitative easing to tightening and restrictive monetary conditions
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Western actions against Russia -- seizure of reserves, exclusion from SWIFT and international financial markets -- has undermined the willingness of many surplus countries to hold reserves in US dollars and to a lesser extent Euros, Yen and Anglosphere currencies.The US confiscation of Russian central bank reserves is difficult to distinguish from a selective currency default.
A related development is de-dollarisation -- the reduction of the US dollar's privileged reserve currency status. This has two components: payments (most trade is currently transacted in US dollars) and currency reserves. China, Russia and the non-West are moving to settle trade in Roubles and Yuan through alternatives to SWIFT. They will also opportunistically shift reserves into other currencies or real assets to reduce confiscation risk. China has been moving away for some time from US Treasuries and has invested in its Bricks and Road Initiative, which has created different problems.
The switch will take time because of the need for liquid and large currency and money markets. But any shift away from the US dollar and Western currencies will make funding of ongoing deficits and refinancing external borrowings more challenging. Reliance on the kindness of foreign creditors was always a risky long-term strategy.
The weaknesses are founded in underlying toxic pathologies. The West's predominant consumption and debt-driven growth model is waning. Unfavourable demographics, especially an aging population, and rising commodity prices act as retardants. Financialisation, a major driver of activity, is less effective with high debt levels, overvalued assets and higher costs of capital.
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Now, as the old saying goes: "You can't get there from here."
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Governments mainly serve well-funded or vocal special interests. As Mancur Olson forecast in The Logic of Collective Action and The Rise and Decline of Nations, well-funded coalitions now influence policies ensuring benefits to narrow interest groups leaving large costs to be borne by the rest of the population. Alternatively, countervailing forces create paralysis.
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Aesop's observation that "we hang the petty thieves and appoint the great ones to public office" is accurate.
Politics is now "panem et circenses" (bread and circuses) as Juvenal wrote in Satire X. The focus is superficial appeasement in form of glib announcements which will remain largely unimplemented. The objective is to distract and divert while maintaining electability.
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Western coverage of the Ukraine conflict -- a combination Pravda-esque reporting and Goebbels-inspired propaganda -- highlights the fact that shared objective facts necessary for an informed debate are no longer accessible.
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The position outside the West is different but not better.
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Western societies, evolutionary biologist Peter Turchin argues, overproduce overeducated elites who demand that governments shield their lifestyles, irrespective of practicality or cost, from the effects of economic downturns, extreme weather events, terrorism, influx of immigrants, a virus or bad personal choices. They assume that bad things happen only to others but not to them.
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Ironically, countries such as Russia, China and India, traditionally more insular, may find it easier to adapt but at the cost of reduced living standards. Inequality, which is high in the non-West, can be an advantage as rulers can shift the cost of adjustments onto the small group of the wealthy which would be popular.
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The fall for West will be harder and further, heightening discontent which will manifest publicly. Elsewhere, it can and will be suppressed quickly and brutally.
As the old saw goes, universal blindness is the inevitable destination in an eye-for-an-eye world.
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