Kindness of Creditors
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:
Rest of the World
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.
Changes in cross-border capital flows are important. Since the turn of the century, the West has to varying degrees relied on German, Japanese, East Asian and Middle-East savings for external funding. Today, these current account surpluses are shrinking, outside of commodity, especially energy, producers, as a result of export slowdowns and higher energy costs.
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.
For decades, eschewing structural adjustment, western policies have consisted primarily of 'shock and awe' monetary finance -- government deficit spending, ever lower interest rates and injections of liquidity. Borrowed money became equated to earnt income.Accommodating markets seemingly placed no limit on debt levels. Policymakers believed that 'quantity has its own quality' (allegedly said by Stalin in reference to how Russia was forced to fight in World War II using large numbers of under-equipped and less-well-trained soldiers).
'Botox economics' and 'extend-and-pretend' was used repeatedly to cover up problems or defer unpopular decisions. In an extension of Goodhart's law, bad policies and complicit leaders crowded out good ideas and reforms were neglected. Denial and cognitive dissonance masqueraded as mission statements and plans. Now, as the old saying goes: "You can't get there from here."
Similarities and Differences
Deep-seated societal failures complicate the West's position.
Ostensibly participative Western political systems are nearing anarchy. The value of suffrage is reduced by routine gerrymandering, choices between unpalatable, incompetent and absurd candidates, lack of understanding of key issues, the absence of substantive policies, civic disengagement, result denial and promotion of insurrection.
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.
The complex challenges and lack of easy solutions underlies the rising culture wars in Western democracies. Worthy causes -- liberty, gender, sexuality, history, indigenous rights, multi-culturalism -- are largely matters of belief and values. Positions are fundamentally irreconcilable but politically useful in manipulating a fissiparous electorate.
Power is concentrated in the hands of celebrity leaders. Elected representatives, many unknown to voters, serve merely as Lenin's 'parliamentary cretins' rubber stamping the party's will or ensuring permanent deadlock.
Leaders themselves are an uninspiring lot, long on cunning and media savvy but little else. Constant media scrutiny of private lives and better financial rewards on offer elsewhere mean politics attracts in the main uniquely unqualified aspirants whose highest potential is mediocrity. 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.
Outside election periods, it is the preserve of professional politicians, operatives and a breathless media providing low-cost, constant entertainment for political addicts.
There is parallel institutional decay. State bureaucracies, once capable of providing objective and independent advice, have been decapitated. Career specialist public servants have been replaced with malleable political appointees. Law enforcement and the judiciary are increasingly politicised. Justice requires deep pockets or ability to garner fickle public or media support.
Focused on viral news and trending items, the mainstream press, for the most part, now cannot distinguish between facts, analysis and opinion. The power of the Internet to cheaply disseminate has seen the rise of independent bloggers and websites of variable quality. Over time, a process of self-selection ensures that tribes congregate in cyber echo-chambers. 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.
US founding father John Adams was correct in thinking that democracy wastes, exhausts and murders itself without the right conditions.
The position outside the West is different but not better. Democracy means nothing to people who live for the most part in abject poverty without life's basics. You can't eat the right to vote although you might get a few cents for selling the right.
Most non-Western countries pay lip-service to democratic formulas or more wisely save money and energy by dispensing with plebiscites. There is no pretence at citizen participation, independent institutions or toleration of dissent. But these top-down systems have the advantage of forcing through necessary unpopular adjustments. It is difficult to imagine China's zero Covid policy being implemented elsewhere. Autocracies are also able and willing to inflict greater suffering on subjects than under more democratic systems.
Underlying these differences are individual expectations. Citizens of the West are used to or aspire to high living standards and personal freedoms. 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.
Today, stagnant incomes, the rising costs of middle-class life -- food, energy, health, education -- and uncertainty mean that prospects are lower then what they believe to be their due. This creates dissatisfaction and anger which can easily spill over into social unrest, similar to that of the1930s.
Outside the West, there are lesser expectations. In a world of lower living standards, the social contract entails different trade-offs between more rudimentary needs on the Maslow hierarchy and personal freedoms or political enfranchisement.
However, non-Western prospects will not be immune to the adverse effects of the changes under way. Trade restrictions, sanctions, climate change and resource scarcity will affect their progress and ability to reach full potential. Deglobalisation is exactly the opposite of the traditional process of improvement in living standards. No one has ever tried to implement import-substitution policies with the objective of going backwards development and technological modernization.
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. For example, the effect of Western sanctions on Russia have fallen disproportionately on wealthier, more cosmopolitan urban citizens and oligarchs. Being denied access to Apple-Pay, French cheese or a luxury yacht are not immediate concerns to the vast majority of Russians.
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.
Satyajit Das is a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022). His columns have appeared in the Financial Times, Bloomberg,WSJ Marketwatch, The Guardian, The Independent,Nikkei Asia and other publications. This is part of the web-only series of columns on newindianexpress.com.
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