“The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems — the problems of life and of human relations, of creation and behaviour and religion.” - John Maynard Keynes, 1945
The main events of recent weeks are of course the Greek crisis and China’s stock market free fall. While these are not directly correlated, both are in fact born out of the imbalances created in the early part of the 21st century. The severity of these situations is to be put in a greater macro-economic and political context, as these crisis are only part of a deeper and potentially more disruptive re-balancing.
In Europe, unsustainable debt increases in peripheral countries are born from a currency union without fiscal harmonization. Germany used financial repression to make its manufacturing more attractive and flood other countries with relatively cheaper goods, leaving them no choice but massive unemployment or increases in debt. But beyond this facts, the Greek crisis is actually a deeper and more existential threat to the EU than just a country leaving the Euro: it is about the role and the position of creditors inside our societies.
On the other side of the world, in China, the sudden stock market bubble is routed in a different history: after 30 years of rapid growth driven by increasingly severe macro-economic imbalances, the country must change its paradigm. This policy is well known and wants to rely more on domestic household consumption, but this implies that many industries, especially government related companies, will have to experience deep and very disrupting reorganizations.
While of course this is the goal of the Chinese government, the problem is that this process requires introducing more market forces, which are by definition outside the control of the government. In fact, we could argue that the problem of the Chinese government has always been to manage the balance between market and state forces, even before its opening up and reform: Deng Xiaoping was purged several times while trying to make up for the increasingly disastrous policies of Chairman Mao.
The issue of foreign competition only compounds the problem since it introduces companies with strong comparative advantages against relatively new structures, thus the never ending debates about market access, government fairness etc. While these are legitimate concerns, we should also remember that the only countries who managed to actually rise economically are those with strong domestic protections and state led initiative.
For these countries, growing fast thanks to an imbalanced model was the easy part; it is managing the gradual lifting of state control to continue growing that has always been the most delicate task of governments.
On the other side of the world, in the West, the free markets ideology is now strongly anchored into people’s mindset, transpiring through various media and day to day analysis of societal issues. Even if it does bring benefits (for example: increased competition bringing innovation and lower costs to consumers), there are many draw backs and socially harmful side effects. It is thus very important not to dismantle the economic and political structure that allows social fabric and inequalities to remain at stable levels.
Many people claims that China needs to learn from the West. It certainly does. But the West, for all its grand rhetoric, has serious flaws that are legitimately decried by emerging countries and perceived as double standards. For example, the obsession of political stability in China makes the government very sensitive about managing unemployment. On the other hand, the Western world has seen these concerns overridden by ‘price stability’, a disastrous, myopic focus on consumer prices at the expense of employment, financial bubbles, inequalities, and eventually political stability.
If the world is really globalized and increasingly so, both sides should probably work together and learn the best from each others. Unfortunately, this remains to be seen.
Science, General Knowledge & Environment
The Myth of Big, Bad Gluten – (Hat tip Lao Ho) – “Here’s the lesson: Adaptation to a new food stuff can occur quickly — in a few millenniums in this case. So if it happened with milk, why not with wheat?“
Seattle on the Mediterranean – “The current heat is a precursor, an early peek at a scary tomorrow.“
History & Geopolitics
The Greek Vote and the EU Miscalculation – “The European leaders have therefore backed themselves into the corner they didn’t want. If they hold their position, then they open the door to the idea that there is life after the European Union, and that is the one thought the EU leaders do not want validated.“
Germans Forget Postwar History Lesson on Debt Relief in Greece Crisis – (Hat tip Lao Ho) – “Yet from the World War I defaults of more than a dozen countries in the 1930s to the Brady write-downs of the early 1990s, which ended a decade of high debt and no growth in Latin America and other developing countries, it is a lesson that has to be relearned again and again.“
Tsipras Never Wanted to Win Referendum, is “Trapped” and “Depressed,” Syriza in “Turmoil” – “If the two sides are unable to pull out of their current trajectories, the end game looks to be a Grexit and a Greece not free but dependent on its creditors for key imports like food (Greece is not self sufficient in food), petroleum and pharmaceuticals.“
La conscience musulmane traverse une crise très profonde – (Hat tip Lao Ho) – “La spécificité de l’histoire européenne a consisté à rompre avec cela au profit de l’individualisme, de l’autonomie, de l’égalité en droit et de la démocratie. Cette évolution – qui a mis cinq siècles à s’imposer – est désormais un acquis que nous ne questionnons plus. Mais on peut comprendre que ce mode d’organisation déstabilise d’autres sociétés.“
ISIS Threatens To Topple Hamas In Gaza – “Islamic State insurgents threatened on Tuesday to turn the Gaza Strip into another of their Middle East fiefdoms, accusing Hamas, the organization that rules the Palestinian territory, of being insufficiently stringent about religious enforcement.“
Conversation: The Political Consequences of China’s Stock Market Collapse – [Video] – “Stratfor East Asia Analysts Rodger Baker and John Minnich discuss the political implications of China’s declining stock market.”
Finance & Economics
Old Economic Thinking is the Problem, Says BIS – “Thus the boats we are using to combat the shark of financial fragility are the macroeconomic policies (and especially the monetary policies) of individual countries, each looking for what seems best for their own domestic economy. The problem is spillover to the rest of the world, and from there spillback to the source.“
Why China’s Stock Markets Matter – “Barring a radical lifting of restrictions on overseas investment or a sharp increase in deposit rates, China effectively lacks channels for ordinary citizens to generate wealth beyond investment in real estate and stocks.“
Beijing meets its match in the markets – (Hat tip Lao Ho) – “For all the talk of allowing a greater role for markets, when the going gets rough the government’s instincts are to step in. That is understandable. But China is far from having a well-functioning capital market. And true reform will have to wait for another day.“
China households are not exposed to shares – “Consumption growth in China is largely driven by income growth rather than changes in wealth and Chinese households still park most of their wealth in cash and deposits. Less than 15% of their financial assets are invested in stocks.“
Picture of the day: Greece rejects austerity
About Carlito Riego
"Great perfection may appear imperfect, but its usefulness is inexhaustible. Great abundance may appear empty, but its usefulness cannot be exhausted. Great correctness may appear twisted, great skills appear crude, great eloquence appear awkward. Activity conquers cold; inactivity conquers heat. Clear serenity governs the world." - Lao Zi