Wednesday, January 29, 2014

The World According to Spengler

David Goldman, aka Spengler surveys the world and is not happy at what he sees.

Just as they have for decades now, pundits and commentators are predicting that China will implode. China has not imploded and is not imploding. And yet, while these sages have been predicting doom for China, many other countries are in serious trouble.

In Spengler’s words:

I wish I had a nickel for every prediction of social unrest in China that I’ve read in the past year. Apart from the risk of stampedes at shopping malls before the Lunar New Year, China is tranquil. Meanwhile there are several dozen dead in Cairo overnight, central Bangkok remains under lockdown, street protests are out of control in Ukraine, Argentines are looting stores during power outages, and the stink of tear gas still overhangs the public squares of Istanbul from last year’s demonstrations.

There is social unrest in a lot of places other than China, and it goes together with the collapse of local currencies. The Chinese aren’t rioting because they are gainfully occupied and their wages are rising 15% to 20% a year. Other so-called emerging markets are in trouble because they are teeming with people who have nothing remunerative to do.

How to explain the disparity? Spengler argues that the Chinese are so busy working and earning a living that they don’t have the time, the energy or the inclination to riot.

In other parts of the world, places where people do not have a strong a work ethic, the armies of the unemployed have nothing to do but protest.

In many of these other countries, work has been devalued. The nations tried to vote themselves rich and have tried to manipulate the financial markets to fulfill their wishes.

Take Turkey:

Turkey was supposed to be the poster-boy for prosperity through Muslim democracy. Instead, it has become an object lesson in emerging market mediocrity, and its currency is collapsing because it pretended to be something better than that.

The Turks can spin polyester into sweaters for the Russian market, build washing machines for Southern Europe, and assemble cars for the Koreans. They can’t build a smart phone, let alone a modern aircraft, although their military has put some down-market drones in the air. There are a handful of fine universities that produce good engineers and financial types, but not enough to make a dent in the country’s overall economic backwardness.

He continues:

Turkey is in trouble because the Turks aren’t very good at anything in particular, but acted as if they were the next China. They borrowed vast sums from the international market against a glorious future that was never to be. Among all of the world’s big economies Turkey has the worst current account deficit, at nearly 8% of economic output, roughly where Greece was before its national bankruptcy. Investors reckoned that with high economic growth, Turkey would have no problem carrying its debt; what they did not take into account is that the growth itself was largely an illusion, a carnival of consumption and construction that depended on increasing debt in the first place.

As for the Ukraine:

Unrest, to be sure, has different proximate causes in different places. The Ukrainians want to join the European Community so that they can leave Ukraine and go to places where they can earn money. The Turks object to the ruling party’s stealth construction of an Islamic dictatorship with its attendant cronyism and corruption. But the common thread in all the financial and social crises which broke out during the past several months is this: the world economy has left behind large parts of the world’s people.

And Egypt:

The Egyptians, with 40% illiteracy and a more than 90% rate of female genital mutilation, dependent on imports for half their food while 70% of the population languishes in rural poverty, are the worst off. The Turks have a future, but it is a humbler and poorer one than their leaders have promised them. The adjustment of expectations will be wrenching, perhaps violent.

And then there is Argentina:

Argentina, whose currency collapsed last week, is another case in point. Blessed with great natural wealth, the Argentines have resented the oligopolies who control their resources, and try to vote themselves rich with depressing regularity. One government after another offers handouts to the querulous voters, who have learned that this practice breeds inflation and currency devaluation. The Argentine game is to be first in line at the public trough, and first in line at the foreign exchange counter to get out of local currency before it collapses yet again.

Such policies are failing around the world. For some strange reason, they are now coming to America. Spengler believes that the problem is an inequality of knowledge and even technical skills. How many American jobs are going unfilled because too few of those who were educated in American schools know enough to perform them?

Spengler fears that nations promoting “a merciless meritocracy,” will out-compete democracies. Or better, that democratic nations no longer know how to make democracy work.

In Spengler’s words:

The risk is that the unproductive, unskilled and unemployable portions of the industrial world’s people will decide to vote themselves rich. Their leaders encourage this by focusing on income inequality. That is President Obama’s message as well as the consensus at the World Economic Forum last week at Davos, and it is nonsense.

The problem isn’t inequality of income, but inequality of knowledge. One pilot flying a modern military aircraft could destroy the whole of an ancient civilization. One farmer from Nebraska can replace a hundred in Egypt. A thousand years ago, everyone knew how a watermill worked; 200 years ago, most people knew how a steam engine works; how many people today know how a computer works?

East Asia is faring better than the rest of the world in this great transformation because its culture imposes a merciless meritocracy. The West should be able to do better than this. If we can’t, we can see our future in Argentina.


Anonymous said...

Nothing in Goldman's analysis seems to consider bubbles, I wonder why, and people will submit to "merciless meritocracy" as long as they have faith it'll work out for them. So what we have learned is that if you create the illusion that the future will be better than the past, better than the present, if you work hard, that's a winning strategy for government.

The problem is you have to keep up the illusion. 157 billionaires is worth bragging about, but does anyone really believe they made it to the top merely by integrity and hard work, or by the right connections and padding the pockets of the "deciders". Only they know, and I doubt they're telling.

I see no reason not to assume China is in a monster bubble along with the world, and monster bubbles can keep growing a long time, so I accept instability will happen in the smaller economies first.

I don't claim I understand, but I understand all bets on who's stable and who's not is a fool's errand.

Unknown said...

This is Spengler.
I didn't "propose a merciless meritocracy." I believe in mercy as a religious doctrine. I deplore the prospective success of merciless meritocracy at the expense of dysfunctional democracy. I want democracy to succeed. Tragically, it has not in many parts of the world.

Stuart Schneiderman said...

Thank you for the correction. I have revised my paragraph to reflect your views more accurately.