Alastair Crooke, Valdai Discussion Club, 19 January 2016
This year, 2016, will be the year energy and raw material producers face bitter reality, and it is likely to be bloody.
We might say that 2015 was the year that western ‘models’, or its well-entrenched modes of conceptualizing the world, saw their credibility implode. Western ‘interventions’ no longer seemed to have brought their anticipated results– they seemed to have achieved perverse, and largely adverse outcomes, to those expected of them. It is not just to the series of military incursions, or to ‘US Treasury’ interventions (aggressive, pressurizing, sanctioning, or currency and bond rate political manipulations) to which we refer. Rather, it is to the unprecedented decades long Central Banks’ ‘interventions’ into western economies (QE and zero, or zero/negative interest rate policies, and market ‘strokings’) that we allude, too. Interventionism, per se, whether military excursions externally, or economic intervention domestically, has not fared well, and increasingly, is being disparaged.

No wonder: In spite of having witnessed the sixth consecutive year of rising stockmarket prices — the longest such stretch since 1999 — rather than seeing any trickle-down of wealth, and a concomitant sense of general popular well-being, we have seen the opposite: not national adhesion, but economic bifurcation. Median real incomes have been falling and economic disparities have widened. The rich have become richer, the poor poorer, and the western middle-classslidingunder the waves.

The result has been a political polarization towards extreme Right and Left in Europe and America, and a growing petulance toward the governing elites, combined with rising anti-system sentiment. Both in Europe and America, intra-societal, class and ethnic antagonisms, violence and terrorism, are on the rise. These are all indicators of a western sphere sliding deeper into unease and distress, and not, as most politicians, the Central Bankers and the main-stream media would have us believe, into recovery and renewed prosperity for all, in a re-anchored American-led, global order.

What seems to be happening, we think, is that three longstanding ‘verities’ of how the world ‘can be controlled and shaped’ (through decisive interventions of diverse types), are eroding simultaneously: The failure of the geo-political model of ‘liberal’ military interventions (Afghanistan, Iraq, Libya, Sudan, Syria etc.,) needs no elaboration – beyond noting that although almost wholly discredited, it is never renounced, its failures never openly admitted, nor its lessons learned – witness Libya, where today western military intervention is being contemplated, anew. In 2016 we expect that the consequences of this will come home to roost (particularly in a disordered Middle East, and North Africa).

The second conventional conceptualisation now more widely understood to have imploded is that of Central Bank omnipotence to blow bubbles (to stimulate the appearance of growing prosperity, and then safely to deflate them again) in the attempt to control and eliminate the credit and trade cycle. Increasingly, it is becoming realized that ultra low or negative interest rates drive economies into deflation, and investors into a fantasy that risk (geo-political or financial) has been eliminated simply because the Central Banks were thought to ‘have the traders’ backs’. 2016 will see the return of the linkage of geo-political risk with asset prices – with the realization that risk was never somehow ‘washed away’ through the simple injection of massive liquidity. In short, the thirty-year model of easy monetary policy has foundered, but Central Banks find themselves cornered into a cul-de-sac of low interest rates and QE from which they are unable to withdraw. What does remain however, is the massive overhang of debt that is unsustainable, save at near zero interest rates.

David Stockman, President Reagan’s Director of the Office of Management and Budget has warned that we are entering an epic deflation, and that the world economy will shrink for the first time since the 1930s. The collapse of the oil price and the astonishing rout in commodity prices must surely tell us that something significant is afoot in the global economy – and that whatever it is, it will have huge geo-political implications for 2016. This year, 2016, will be the year energy and raw material producers face bitter reality, and it is likely to be bloody.

What then, may have happened? One economic commentator has long noted that since 2008, the world economy largely has been kept afloat by the $25 trillion-equivalent that China has printed to build an over-leveraged, over-capacity. And now that that hallucinant has been withdrawn, commodities are experiencing the resultant ‘hangover’: “Everyone counted on China to take them down the ‘yellow brick road’ to la-la-land, forever. And then it didn’t happen.” In short, China’s switch to a consumer-driven economy is proving as elusive as the western ‘turn’ towards a supposed ‘knowledge-based economy’ has proved to be.

The Chinese export model represents the third pillar of conventional wisdom that seems to be imploding. As oil, gas and raw material prices plummet, we seem to be seeing the tail-end of a commodity ‘super-cycle’ coincide with the end of an artificially postponed (through QE) trade and credit cycle. Indeed, the whole model of wages and salaries sliding as a proportion of GDP (thus limiting consumers’ power to consume) being offset by encouraging growing debt-financed consumption, well may have reached its natural limits. Of course, we should not be surprised to be told by the elites that deflation is actually a good thing: ‘dropping prices frees up more money for spending on other goods”. Sure, for those who have not lost their job, or whose incomes are not falling faster than prices. (In the US, despite the predictions for a surge in consumer spending – due to falling automobile ‘gas’ prices – in practical terms, personal expenditures did not rise, but rather declined, and America’s GDP declined with them, too).

We do not apologise for straying so much into the geo-economic sphere, because we believe that for 2016, the geo-financial will very much affect the geo-political. The loss of producer state revenues on the elites of North Africa and the Middle East ability to stay aloft, with the ‘lift’ delivered from the financial largesse of the energy and raw material internationals suddenly missing from their pockets, remains to be seen. We shall see much of the underlying Gulf States’ wealth evaporate (i.e. literally vanish as expectations are adjusted). It is already happening. Middle Eastern energy producers in aggregate are withdrawing more wealth from western markets and funds, than they are imputing into them.

We have described 2015 as the year of denial. It has been the year in which the European Scientific Enlightenment laws of ‘rational’ behavior (in respect to ‘pressures’ exerted on others), our economic so-called ‘laws’, and our supposed historic market ‘correlates’ all came unstuck; yet political leaders continued to pretend that all was well, and to extend — that is, they just kept carrying on as before, (in denial). It is clear however that underlying the keeping up of appearances is fear. This fear has been all too manifest in the elites’ reaction to populist anti-system manifestations in European politics (i.e. Syriza in Greece, the election of an anti-austerity government in Portugal, and the election of Corbyn in the UK).

In spite of the shifting geo-political context, the US has continued with its cold war ‘cornering’ of Russia and Putin, both in Ukraine and in Syria (despite Mr Kerry’s ambivalence over President Assad’s future). And the US establishment continues to try to contain and hobble China in Asia, and despite the P5+1 accord with Iran, it toys too, with new sanctions on Iran. It seems that the US juggernaut will lurch on, trying to prevent either a Putin or Xi taking America’s ‘seat’ (or even sharing a seat at ‘the table’) so long as the ‘deep state’ regards itself as ‘captain of the ship’ (i.e. of the global order). America as the ‘benign hegemon’ meme remains deep in the American unconscious (despite mounting internal questioning from former US officials).

The US President can still manoeuver to prevent decisive military intervention; he can walk things back a bit here and there (i.e. in Syria), but the cold war and neo-con induced, Pavlovian, American goading of Putin, Xi and Iran is likely to continue. It is therefore likely that the Russian-Iranian-led P4+1 alliance will extend beyond Syria, and will be obliged to take a more adversarial posture towards America than any of its constituent members seek, or would want. 2016 is likely to be a year in which the US may sail close to military escalation (even war) with Russia, China or Iran – despite neither Obama nor others in the US Administration wanting such; or the P4+1 seeking it. In short, US policy will continue to have a significant element of dysfunctionality about it.

It is clear that the al-Saud leadership in Saudi Arabia is in severe crisis, and so is the leadership inTurkey. President Erdogan is becoming ever more desperate and erratic. There is a risk that Turkey will edge closer to civil conflict – as unrest from the South East spreadsto the west of Turkey. It seems Erdogan may have in fact provoked the PKK to war. He may try to turn the adverse domestic dynamic on its head, through taking some unexpected, and dramatic (i.e. ‘heroic’ action, in his eyes) that could change his fortunes. It could end badly. The war in Syria may spiral down, and elections may take place (more likely in 2017) – a rare positive element, but the war in Yemen could well assume Syria’s place as the role of the ‘conflict that will re-shape the region’ (by threatening the viability of the al-Saud dynasty).

How will America and Europe manage – if two major western allies (Saudi Arabia and Turkey) become distressed assets? Will they overreact – especially if the outcome in Syria works out in a way that favours Russia and its allies? Already, one hears western diplomats saying that if al-Saud were to fall, we (that is to say the West) will be deeply repenting the al-Saud departure, before six months. It is ironic, is it not, that after complaining so bitterly that Syria was being framed as a binary choice between President Assad and ISIS, these same diplomats are – for their own purposes – framing Saudi Arabia as a choice between al-Saud and anarchy. In Syria, jihadism and chaos was ok, but in Saudi Arabia, apparently, for a western ally, it is not.

All in all, the possibility for the Middle East is of a major shift in the centres of power, of deepening financial distress, and of western attempts to arrest these changes through interventions. It is not that all interventions, per se, are counter-productive, but that interventions that are grounded in a one-sided reading of the region, and in the premise that the West cannot allow any power to emerge that challenges its leadership of the global order, or which asserts its right to be ‘non-western’ in its way of being, is unlikely to yield lasting stability.

Lastly, the refugees. Anyone who doubts the impact of disorder in the Middle East on European politics may wish to contemplate the following: there is not a single nation in western Europe with a birth rate sufficient to keep its population alive, aside from Muslim Albania. Between 2000 and 2050, Asia, Africa and Latin America are expected to add 3 – 4 billion to the global population (i.e. 30 – 40 Mexicos equivalent), whilst Europe is expected to loose the equivalent of the entire population of Belgium, Holland, Denmark, Norway, Sweden and Germany. By 2050, the median age in Europe will be 50, and 1 in 10 Europeans will be over 80 years old. Migrants reaching Germany in 2015 reached 1 million. If this tide continues (and in a sense Europe cannot survive economically without it), do not be surprised if refugees escaping from the Middle East disorder (for which European interventions bear considerable responsibility) becomes the rock on which the European project founders;, or be surprised by the rise of anti-immigrant, right-wing, nationalist sentiment, either.

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