Recession, Refugees and the wreaking of political destruction in Europe

Conflicts Forum Weekly Comment, 12 February 2016

At the outset of this year, we suggested that an economic era somehow was drawing to a close – or to be more precise, several components to an era were reaching exhaustion coincidentally. One was that the ‘faith’ in QE (money printing) and NIRP (zero, or negative interest rates) increasingly was being questioned: the ‘faithful’ simply were turning ‘unbelievers’; market psychology effectively was inverting – and this, because quite visibly, the Central Bankers plainly were ‘out of ammunition’, and were having to resort to improbable new ‘snake oils’, such as negative interest rates.  After nearly three decades, the utopian model of endless growth, with trade or credit cycles simply washed away with fresh bursts of printed money, has passed its sell-by date; its ‘passing’ was signalled when markets reacted in precisely the contrarian way to Japan’s venture into negative interest rates.  In its wake, however, it has left a monster: distorted markets, zombie industries sucking on the teat of zero interest loans – and an overhang of outsized debt, everywhere.  It is not clear whether this noxious legacy is in the process now of unravelling, or not.  But perhaps we are, at least, moving out from a state of denial, and beginning to realise how hard it will be to back out from this corner – into which we have painted ourselves.

Secondly, in that earlier Weekly, we suggested that the rout in the oil price would cause huge secondary ripples through the financial debt structures, cause currency turmoil, as well as force major liquidations in Sovereign Wealth funds (in order to fill holes in national budgets): ‘Squeeze oil and you squeeze the entire economic system’ was the gist.

And thirdly, we suggested that China’s ‘old economy’ (of industrial manufacture) in an orgy of building, over-investment, over-capacity and over-borrowing, had finally run out of breath. Hardly surprising: “The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1 [times] its rickety GDP. Today that number is $30 trillion, or even more … There is nothing like that in the history of central banking — nor even in economists’ most febrile imaginings about its possibilities” comments David Stockman.

Now we can see that the oil price rout has indeed leeched into equities, which have been falling to new lows. Fears about European bank exposure over oil (the extent to which European banks have made proper provisions in terms of reserves) have spilled into wider concerns concerning the size of bad debts (about all those zombie loans kept on life-support by near free finance); about Deutsche Bank particularly, with is derivative exposure 22 times the value of the German GDP, but also, more generally about the workings (or not, more likely ) of the EU’s new ‘bail in’ rules.

There is, as we see, more than a whiff of looming recession in the air, and recession – should it materialise - on top of an oil and commodity rout,  will aggravate existing instability in the Middle East; and Europe will catch a much worse ‘cold’ than it is presently imagining.  As we have noted before, the MENA region is crucially dependent on energy and commodity sales (and the now vanished tourist trade).

It is not difficult to see that if the ‘bear’ is truly pawing at the markets to signal the onset of recession, then crude oil supply would have to contract even further – in the face of falling global economic activity (i.e. recession) – than it would otherwise, in order to balance the market in terms of supply and demand. Indeed, falling production (were such a policy ever to be co-ordinated), might find itself always lagging behind a faster falling demand.  Low oil prices would be around for longer.  In short, all prospects for production cuts will be like sailing against the wind.  They will not catch up with falling demand (viz the 18% YoY drop in distillate demand (including diesel fuels and fuel oils)).  Sovereign Wealth Funds also will have to sell more – and into falling markets, with shrinking liquidity.

We have already suggested that the current global geo-financial situation alone will completely eclipse all European plans to create ‘islands of stability’ in the Middle East, and to halt the refugee influx into Europe. For most, living in a region where basic human security has vanished across great swathes of its land mass, the oil price rout (and the hint of looming recession), effectively obliterates them seeing any prospect of economic light at the end of the tunnel.  Combine economic chaos with collapsing security and the refugee exodus becomes turbo-charged.  The instability that this will cause will bring down governments, set tribes and sects against one another in the scramble to survive, and to grab whatever economic resources remain.  This represents the type of instability in which only the Mafia and the Warlords predominate.

For the EU to contemplate throwing money and weapons into Libya, or perhaps to bomb it, or invade it again, in the interests of creating stability in Libya, and in the surrounding states of Algeria, Tunisia and Morocco, seems curious indeed. It will, as usual in such circumstances, be the gangsters and warlords who will profit. The Libyan ‘state’, such as it was, (and its limited institutions, were all destroyed in the last invasion) is dead.  Only anarchy remains.  In any event, military intervention there, will likely radiate instability to neighbouring countries, and swell the ranks of refugees heading to Europe.  And just look at the stunning acceleration of refugee migration to Europe (and these figures are for the winter months — wait for the summer).

Source: Zerohedge

The outlook for the region is grim, but the ‘play’ is moving to Europe for its next performance. For ‘liberal’ Europe, the refugees are generally portrayed as desperate civilians escaping “Assad’s barrel bombs” and “Russia’s bombing campaign”. Many genuinely are families trying to escape being caught in the cross-fire between opposing armed forces, and are grateful for being given refuge in Europe; and others are simply seeking better economic prospects in Europe. But this an insufficient understanding of aspects of this migration and what is likely to unfold in Europe in its wake, or for understanding Turkey’s role – as the principal despatcher of refugees to Europe.

The Syrian refugee exodus needs its sociological roots to be understood too. Syria has a long history of social and class divides – between its rural and urban population – including an armed uprising in the early 1960s by the rural countryside against urban landowners.  The feelings of grievance against the urban elite date back (at least) to the 1920s with a first episode of draught, and the nationalisation of grazing lands – and, more latterly, to the severe draught of 2002-2008 in north-eastern Syria, which dispossessed thousands of (predominantly poor Sunni) Syrians of their livelihood.  Many villages were abandoned, and the rural, dispossessed (predominantly Sunni) poor became ‘exiles’ in the ‘misery belt’ of Aleppo.

Aleppo was not alone in having its ‘misery belt’.  Beirut had had its ‘misery belt’ (now located more in Tripoli), and it was Amman’s own ‘misery belt’ of displaced rural migrants in the grim industrial zone of Zarqa, that gave its name to Abu Musab al-Zarqawi — and birth to a movement that was ultimately to become ISIS.  This same phenomenon is true of many cities of the Middle East and is especially characteristic of North Africa now.

As in Amman, these migrants to the margins of urban centres didn’t really assimilate – they never even tried.  They pursued their rural way of life and its mores in wilful antagonism to their surroundings. They felt aggrieved, usurped by the urban elite, and despised their contemporary, cosmopolitan, intellectual lifestyle.  Their bitterness was the flaw on which Zarqawi and others have so effectively capitalised. Narrow, reductionist, often-bigoted, aggrieved Salafist discourse found fertile ground here — increasing this marginalised population’s sense of usurpation and resentment. Ditto across North Africa.

It was from this constituency of angry, poorly-educated, Salafist-leaning, aggrieved, resentful underclass in Syria that An-Nusra and ISIS have found their main recruits.  And many of these angry, sometimes violent, dogmatic, predominantly Sunnis are on the way to Europe. They will not be grateful to Europeans for giving them refuge: the Salafists among them will despise everything about the European way of being.  Their very being in Europe – a matter of force majeure, rather than of choice – will give them no comfort: they will resent it, and hate themselves for being in this alien place.

Europe may well face gang violence, and contempt towards its way of life and its social mores. There may well be localised warfare, even pogroms – and many, many innocent refugees will be tarred by the brutish behaviour of the now-degraded exemplars of the crisis of Sunni Islam, in wake of the collapsing of the Sunni jihadist project. As numbers increase this summer, the (European) nationalist backlash will likely grow and become more salient in European politics.  Right-wing populist parties will strengthen – and European states will likely experience drastic changes in their leadership at elections, putting the European project in peril.

To rely on President Erdogan to save Europeans from this fate is, perhaps, a little fanciful. It was Turkey that began erecting refugee camps for Syrians on its soil even as the Syrian conflict had barely begun, and before any refugee flows even had commenced (recall the images at the time, of huge empty camps).  We have outlined, here, how Turkey plainly has been trying to ‘settle’ Idlib and Aleppo province with Turkomen and ethnically Turkic Uhigars, just as these insurgent proxies were cleansing the non-Turkic populations out – and into the waiting Turkish refugee camps.

Turkey has long claimed the old Ottoman Vilayet of Aleppo and Mosul to be rightfully Turkish, and what has been afoot in Idlib and Aleppo may be understood as no more than a repetition of what Ataturk did when he demographically gerrymandered the old-established Syrian province of Iksandar (by transplanting Turkmen there).  And having raised a fuss to the League of Nations that Iksandar was ethnically Turkic (and therefore should be a part of Turkey), Ataturk’s gerrymander allowed him to win a League of Nations initiated referendum, thus achieving the transfer of its sovereignty to Turkey. It is known today as Hatay Province.  With Turkish insurgent proxies surrounding Aleppo, and embedded in Idlib, Erdogan would have been in a strong position at any peace conference to insist on a Turkish sphere of influence over Aleppo Province.

Turkey presumably has no particular use for the non-Turkic residents of Idlib and Aleppo cleansed into the Turkish camps, but would not want them to return to the provinces where it has a long-term aim of trying to build a bigger Turkic presence. (There has always been a Turkmen presence in Syria).  The obvious answer is to despatch this unwanted population to Europe’s beaches – whilst pocketing the three billion-plus, backhander from the EU.

Is it going to be this bad for Europe?  Certainly, there will be some outflow from Syria of angry, resentful, potentially violent young men from Syria into Europe, via Turkey, as the 4+1 coalition vice tightens; but how big will be the full refugee flow to Europe, how great will be the instability and chaos, will hang more on the geo-financial situation, and whether the financial markets are indeed signalling a coming recession or not.

In some respects, the financial world seems have been moving along a path analogous to the foreign policy world.  In a piece entitled America at Bay, American academic, Michael Brenner, has written:

“Fading prowess is one of the most difficult things for humans to cope with – whether it be an individual or a nation.  By nature, we prize our strength and competence; we dread decline and its intimations of extinction. This is especially so in the United States where for many the individual and the collective are inseparable. Today, events are occurring that contradict the national narrative of a nation with a unique destiny. That creates cognitive dissonance.

“Our thoughts and actions in response to that deeply unsettling reality conform to the classic behavioral pattern of those suffering from acute cognitive dissonance. Denial is its cardinal feature. That is to say, denial of those things that cause stress and anxiety. Sublimation methods of various kinds are deployed to keep them below the threshold of conscious awareness. We all do that, to some degree, on a personal level. Collectivities can do it as well. In the latter case, the mechanisms are more numerous and diverse. Even truths that touch on the essence of the collectivity personality can be sublimated because normally they are not experienced immediately and directly by the individual. We are speaking of military actions, abusive state behavior like the conduct of torture, diplomatic deals that are permissive of unsavory actions by others, or studied misrepresentations by government and media which hide unpleasant truths from the populace. At a more abstract level, we repress or minimize perceptions of us by other peoples, relative well-being compared to other societies (medical care, maternity leave, pensions), or national competence as demonstrated by accomplishment in comparison with other societies (constructing mass transportation systems).”

In the economic and financial sphere, does that phrase “studied misrepresentations by government and media, which hide unpleasant truths from the populace” not ring bells (“fading prowess is one of the most difficult things for humans to cope with”)?  Upholding the narrative that “the fundamentals of the financial system are sound, and that recovery is on track”, seem to have trumped the desire to face unpleasant realities.  However events turn out in the immediate future, it is unquestionable that Central Bank policy has given rise to serious, even systematic, problems in the financial sphere, just as foreign policy has given rise to serious problems in the global order – and yet both narratives seem immune to more critical appraisal: the narrative must be maintained.

To take one example only: many of the leading mainstream banks are all saying that there can be no recession looming, since jobs figures are positive, and wages are growing.  This too, was the gist of Yellen’s written testimony to Congress last Wednesday. And it represents “the Narrative”; and mainstream banks still simply recite US employment figures without qualification, as reason why ‘all is well’ — just as we are expected to take the EU’s assurances about Turkish action on refugees at face value. But, how is it, if employment (in the US) is growing so steadily, that we see the participation rates falling:


Source: Zero Hedge:


And hourly earnings falling:

Source: Zero Hedge:


And as an expert commentator, David Stockman, notes:

“This [month] the BLS (Bureau of Labor Statistics) report actually showed the US economy lost 2.989 million jobs between December and January. Yes, the BLS always uses a big seasonal adjustment (SA) in January——so that’s how they got the positive headline number. But the point is that the seasonal adjustment factor for the month is so huge that the resulting month-over-month delta is inherently just plain noise.  To wit, the seasonal adjustment factor for the month was 2.165 million. That means the headline jobs gain of 151k reported on Friday [5 February] amounted to only7% of the adjustment amount!  Any economist with a modicum of common sense would recognize that even a tiny change in the seasonal adjustment factor would mean a giant variance in the headline figure. So the January SA jobs number cannot possibly reveal any kind of trend whatsoever—-good, bad or indifferent.

But that didn’t stop Beth Ann Bovino, US chief economist at Standard & Poor’s Rating Services, from dispatching the usual all is swell hopium:

“Today’s numbers are about momentum, so while 151,000 new jobs in January is below expectations and off pace from prior months, the data shows America’s recovery is continuing. Amid all the global economic turmoil and domestic market gyrations, positive job growth, the drop in the unemployment rate to 4.9%, and the uptick in wages show the U.S. is heading in the right direction.”

Actually, it proves none of those things. For one thing, the January NSA (non-seasonally adjusted) job loss this year of just under 3 million was 173,000 bigger than last January—-suggesting that things are getting worse, not better. In fact, this was the largest January job decline since the 3.69 million job loss in January 2009 during the very bottom months of the Great Recession.”

This is not intended to indicate that we, CF, have a view on what the true state of unemployment is (we don’t; but for those interested in that argument, see here). The point is that we cannot understand our reality in a world of ‘sustained narratives [intended] to hide unpleasant truths’.  The practice just creates too much noise and pointless argument.  No doubt our Central Bankers believe that it is important to keep our economic ‘animal spirits’ high, just as the foreign policy establishment wish to keep the spirit of American ‘leadership’ high. But would we really go ahead with bombing or invading Libya, if these two narratives were not pursued in order to ward off our “dread of decline, and its intimations of extinction”?  Would we demonise Putin so?  Would we be satisfied with the line that the US Federal Reserve has ‘America’s back’? Probably not.


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