Sunday, June 28, 2015

The myth of stagflation

Oil prices rose fast in the 1973 and 1979 oil shocks. As oil cost more some prices in the Western world rose and this was registered as “inflation” and the Western central banks jumped to the conclusion that they had to raise the interest rates to fight this inflation.

Inflation itself is not as bad as is often claimed. Sure, Weimar type inflation where the money that you receive in the morning has lost most of its value in the evening is destabilizing. But people can very well live with a stable inflation of around 10%. Countries like Italy have industrialized and become wealthy in such circumstances.

The main job of the central banks is not to fight inflation: it is to maintain a stable environment and to prevent bubbles and the resulting disastrous boom and bust economic cycles. And there is no question of bubbles in those circumstances: the driver of those rising prices is not excessive demand but the fact that the prices of some imports are rising due to circumstances that are not related to the national economy.

One could still make the argument that the prices are rising and that those rises will result in other rises and could so cause a standard inflationary cycle: workers are demanding wage increases to correct the inflation and companies are increasing the prices of their products because their raw materials and workers cost more.

Yet there is also another mechanism at work: the terms of exchange have worsened and now the country needs to export more to pay for its imports. This will take time: new trade relations have to be established and new markets have to be conquered. It may also take some time before the newly rich countries - like the oil sheikhs in the 1970s - start spending their new wealth. Over time internal consumption may have to fall to release production capacity for the new exports. However, that will only work once the new export links have been established. Reducing demand before that time by "inflation fighting" will only drive companies into bankruptcy and reduce the capacity of the economy to make those exports.

However, it is very questionable whether rising interest rates to fight inflation is the best way to achieve those results. In the 1970s and 1980s they caused stagflation. The Western economics seemed stuck in stagflation until the mass spending of Reagonomics got it out of the swamp. It looks like the best way to address this kind of situation is to let the price hikes have their course without taking anti-inflationary measures. Initially the government might even spend more to make up for the extra money flowing over the borders - while simultaneously redirecting the economy to export more.

Interestingly we see the same discussion now in oil exporting countries and specially in Russia that immediately following the sinking oil prices saw its currency fall. As a result imports cost more in terms of the local currency and the central bank is signalling rising inflation and taking "appropriate measures" that may well be very inappropriate.

Thursday, June 25, 2015

When friends commit crimes

In its ambition to be world ruler the US always has had its share of misbehaving friends. Mobutu was probably the most famous among them, but there have been many others. Out of fear of losing their support the West tended to ignore their misbehavior.

Nowadays Israel and Saudi Arabia are among the misbehaving friends. And we see the US bending backwards in order not to lose their friendship.

Doing so the US is showing itself a false friend. Good friends occasionally tell each other the truth. Forcing Israel to behave better towards the Palestinians could in the long run be better for Israel's future.

In the case of Saudi Arabia this issue is even more clear. By starting a war against Yemen the royal family has painted itself into a corner. The main initiator of the war is crown prince Muhammad, king Salman favorite nephew. Stopping the war would be a major defeat for Muhammad. This is by excellence an opportunity for the US to show itself a true friend: by stopping all support for the war and starting humanitarian support for Yemen it could force Saudi Arabia to end its war. On the short term the Saudi's certainly would blame Obama - also in an effort to save Muhammad's face. But in the long term they would have to admit that it was the best option.

Yet this kind of behavior takes courage. And until now that has been missing.

Friday, June 19, 2015

The limits of international justice

In traditional societies conflict resolution is done by usually older men who are respected for their wisdom. As their respected status shows they are deeply rooted in their society and subscribe to its values.

In modern society judges are supposed to follow the written law. Judges have become rather anonymous people whose main accomplishment is often just finishing the right education. Yet it is not difficult to see that their verdicts are still highly influenced by the surrounding society. In racist societies verdicts of the discriminated minority tend to be harsher. And when society becomes more tolerant on issues like abortion this is reflected in the verdicts - even when the law doesn't change. Yet one thing has changed: there is now a bureaucracy behind those judges that determines who gets appointed and who gets promoted and this bureaucracy has considerable influence too.

But nowhere are judges less connected to society than in international justice. International judges are very dependent on those who appoint them and that makes their allegiance to neutral justice questionable. Recently this became apparent in two cases: the release of Sudan's president Bashir by South Africa - in spite of an extradition request by the ICC - and the 50 billion dollar verdict against Russia in the case brought by the Yukos shareholders.

Many African leaders face a similar problem that Bashir faces: insurgent regions. They may not like Bashir's bloody approach, but at the same time they know that it is not always possible to solve such problems bloodless. And so they consider that if they consent to Bashir's extradition now they might be targeted next - when Western politicians might find it useful. At the same time they have little trust in the judicial process at the ICC: they have seen the murky process in which judges are selected and they have seen judges schmoozing with Western diplomats. They also see that the US is supporting Ukraine in its use of scorched earth tactics and random shelling against the insurgence in its Eastern regions.

We see similar problems in the Yukos case. The excuse for submitting the subject to international judges and not leaving it to local judges in Russia is that some holding was stationed in Cyprus. But what would happen if the US banks and other financial companies that got a haircut in the financial crisis used their foreign subsidiaries as an excuse to take the US government to an international court? It is well known that many of the judges in those commercial cases previously worked for lawyer firms representing companies in similar cases. And when they quit as a judge these same firms may offer them a well paid consultancy job. Given this context these judges may know their laws well, but their neutrality is questionable.

Traditionally this impossibility of justice was solved by diplomacy. This approach certainly had its defects too. But one has to wonder whether the new approach is better.

Wednesday, May 13, 2015

Will Israel help ISIS to victory?

The New York Times has a strange article today: Israel Says Hezbollah Positions Put Lebanese at Risk:

As Israel prepares for what it sees as an almost inevitable next battle with Hezbollah, the Shiite Lebanese organization that fought a monthlong war against Israel in 2006, Israeli military officials and experts are warning that the group has done more than significantly build up its firepower since then.
Effectively, the Israelis are warning that in the event of another conflict with Hezbollah, many Lebanese civilians will probably be killed, and that it should not be considered Israel’s fault.

The big question is: why now? Hezbollah is very busy in Syria and would be plainly foolish to open a second front with the Israeli's.

Israel's former ambassador Oren has several times that he prefers Al Qaeda over Assad.

So the big question is: is Israel contemplating to attack Hezbollah in order to help AL Qaeda win in Syria. These sudden threats may point in that direction and may be meant to prepare the public opinion for it.

Sunday, May 03, 2015

Saudi's and Israeli's are reaping what they sowed

Israel and Saudi Arabia are making a lot of noise these days about the fact that an American agreement with Iran would make that country the local superpower. What they forget to mention is that twenty years ago that wouldn't have been the case. At that time Iraq and Syria were the natural counterweights against Iran. Unfortunately both countries were destroyed by the US - thanks to much lobbying from ... Israel and Saudi Arabia.

So they are just facing the internal inconsistencies of their foreign policies. Now they want the US to destroy Iran. And if that is finished they will bring up the next candidate for destruction - very probably Turkey - that will then be the regional hegemonist.

Maybe it is time that Israel learns to live with its neighbors in peace. Maybe it is time that Saudi Arabia stops exporting its extremism and learns to accept that it isn't the regional superpower that some of its leaders want it to be but that it never will be as it is too divided internally.

Friday, April 24, 2015

John Brennan - key figure in the Obama administration

Buzzfeed has a portrait ("The Untouchable John Brennan") of John Brennan, the director of the CIA.

Brennan defended torture, played a very important role in the drone killings and managed to get away with spying on the Senate. The key: he has a very close relationship with Obama.

The article also mentions that he spent two periods of several years in Saudi Arabia. It doesn't elaborate on that, but it may very well be the explanation why the Obama administration is so eager to do what the Saudi's want: a.o. in Syria, and now in Yemen.

The Yemen play

Iran advised the Houthi's not to take Sanaa. The Houthi's took it anyway when they found that it was virtually undefended. But for a long time they prefered to stay there and didn't make much effort to conquer the rest of the country.

The main focus of the Houthi's has always been Al Qaeda. One of their motives for their uprising was their perception that Hadi was supporting Al Qaeda and its hate campaign against the Zaydi's. The Houthi's only started their offensive towards the south after the murderous bombing of two Zaydi mosques in Sanaa.

The Zaydi's are "fiver" Shiites and in many ways closer to the Sunni than the Iranian branch of Shiism. They are estimated to constitute around 40% of the Yemeni population. Zaydi kings ruled over northern Yemen for over 1000 years. The Houthi movement consists mostly of Zaydi's but contains also some Sunni's.

Unfortunately for Yemen foreign interventions - always done with money rather than soldiers - are very popular in Saudi Arabia. And after the problematic outcomes in Syria and Iraq they are longing for a success story. Yemen looked like an easy target - and so the new king sought to raise his popularity by targeting it. It doesn't matter that the storyline of Iran-fueled Shiite aggression is fake: the Saudi public opinion loves it.

All signs are that the Houthi's are open to dialogue. But it is much less clear whether the Saudi's are.

Thursday, April 23, 2015

The doomed discussion on the Armenian genocide

It is a very human trait not to want to admit your mistakes - especially not when there might be consequences.

Part of the ease with which Germany excused itself for the war crimes in World War II can be explained by the fact that there wouldn't be consequences: the West needed Germany much too much as an ally in the Cold War. It didn't make up with the countries to its east until much later but nobody expected that in the heat of the Cold War.

Japan on the other hand had a more vulnerable position. In its region the Cold War was much less important. And many countries demanded excuses and indemnifications. Taking a humble approach would only result in more demands. So Japan had to adopt a rather strict approach. Sure, they might have been more forthcoming. But there is no way they could have satisfied their former victims.

That brings me to Turkey and the Armenians. Nobody knows what the legal consequences will be when Turkey finally admits that it was built on mass murder. And so one sees that even people who advocate a more open attitude become more reticent when they are in a position of power where they could make a real difference.

In my opinion it is better not to pay too much attention to this genocide question. Normal relations between Turkey and Armenia are much more important. Turkey keeps holding its border with Armenia closed - even though it has promised the EU to open it. Instead of scoring cheap points with the genocide question the EU politicians should put serious effort in pressuring Turkey to finally normalize its relations with Armenia.

Once the two sides agree to treat each other like normal human beings an important barrier has been taken. It may still take decades before they formally agree on what happened during World War I but the discussion will be less tense and more open.

Don't get me wrong: it is important that Turkey one day recognizes what happened. However, I believe that there is very little that pressure can achieve in this respect: a favorable international situation (no tensions with Armenia) and a leader who feels himself strong enough to make such a move are much more important.

Saturday, April 18, 2015

Putin's nuclear remarks in the Crimea documentary

There are several fully (2 1/2 hours) subtitled versions of the documentary "Crimea: the way back home" on the internet: This seems to be the official version.

Putin made some comments about nuclear readiness at about 1:30:00 in the documentary and its context is a report about the US destroyer that set course towards Crimea, had the whole of Crimea within the firing range of its Tomahawks and reversed its course when Russia installed their Bastion anti-ship missiles on the Crimea coast as defenses. What the documentary doesn't say is that the Donald Cook only entered the Black Sea on 10 april - long after Russian control over the peninsula had been established. However, the context is still relevant as this was the point where the threat of a confrontation between the US and Russia was most acute. Further in the documentary it is also mentioned that when the Donald Cook was withdrawing from the neighborhood of Crimea some Russian fighter planes flew closely over it. This may well have been a warning that - even outside the range of the Bastion system - it shouldn't do foolish things on Crimea.

Here a transcript of the relevant section. This is from the Liveleak version and not the official translation so it may be wrong on some details:

Q: When you talked with Western leaders was it clear to you right away that there wouldn't be any military interference from their side?
A: Of course not. This couldn't be clear right away. That's why, at the first stage, I had to give certain directions to our armed forces - not only directions but direct orders - about the possible actions of Russia and our armed forces in any possible events.
Q: Do your words imply that our nuclear forces were also put on standby?
A: We were prepared to do that. I talked to the colleagues, and I was open with them, as I am with you now. This is our historic territory. There live Russian people. They are in danger now. We can't leave them alone. It was not us who staged the coup.It was done by the nationalist and the people with far-right views.
You supported them. But where do you live. Thousands of miles away.
But we live here - this is our land. What do want to fight for there? You don't know, do you? But we do know, and we are ready for it. This is an honest and open position. That's the way it is.
So I don't believe anyone wanted to fan some world conflict out of it. But we were not looking for a fight. There simply forced us to take these actions. And I repeat, we were ready for the worst case scenario. But I presumed that it wouldn't happen. It was unnecessary to aggravate the situation too much.

Commentator: Later, in the Ministry of Defense, we were told that at that time some military experts has suggested Vladimir Putin as Commander-in-Chief to use all available means to demonstrate that Russia was ready to protect its national interests. The president replied: although the situation is complex and dramatic, the Cold War is over, and we don't need international crises like Caribbean. Moreover, the circumstances do not require such actions and it would run contrary to our own interests.
As for our nuclear deterrence forces - added the president - they are always on standby anyway.