Wednesday , March 21, 2018

U.S. Strength Amidst Current Global Crises

U.S. Strength Amidst Current Global Crises

Our Geopolitical Future Relative to the Global Hotspots

There a very few speakers who can provide a comprehensive overview of what is happening in the world at any given time. George Friedman of Geopolitical Futures, an expert on explaining and predicting the future of international affairs, is one of them. In his remarks at The Chicago Council on Global Affairs, he looked at several of the growing global crises. His presentation helps to provide some insight into the collective global experiences and how we are affected by them.

At the very beginning of his discussion, he rejects the opinion that “free trade is a necessary boon” and the “best economies are exporting economies.” He then provides his outlook from Europe, to the Baltics, to the Middle East, Russia, China and North and South America. He presents his case in six arenas: The Global Export Crisis, The Refugee Crisis, The European Crisis, The German Export Crisis, The China Crisis, and The Russian Crisis.

He examines the extent of U.S. exporting and, contrary to the currently abounding rhetoric about America’s decreasing power/influence in global affairs and deleterious engagement in foreign trade, he highlights how the relatively diminutive engagement of the U.S. in foreign trade actually immunizes it from the current fundamental systemic world crises and will allow it to pursue its “imperial” power as the most stable world economy. Good news! The world is rotating…there is a fundamental destabilization of the Eurasian hemisphere while ours remains relatively immune. The full transcript of his remarks are included below.

UPDATE: George Friedman spoke to the World Affairs Council of Charlotte in 2015. He has been invited back for 2017.

George Friedman is founder and chairman of Geopolitical Futures, focused on explaining and predicting the future of international affairs for the public. Previously, he founded geopolitical intelligence firm Stratfor (Strategic Forecasting). Friedman is a regular contributor to discussions on international intelligence issues for major news and radio networks including CNN, Fox News, and NPR. He is the author of numerous books on warfare and intelligence, including The Next Decade; The Next 100 Years; America’s Secret War; and The Intelligence Edge.

The following is a transcript of George Friedman’s remarks at The Chicago Council on Global Affairs concerning Global Crises:

The Global Crises

The European crisis has intensified, and has been joined by a series of crises across the Eurasian land mass. When I say Eurasia, I mean Europe and Asia, from the Atlantic to the Pacific, from the Arctic Ocean to the Indian Ocean. It’s noteworthy that every significant part of that land mass, with the exception of India, is in fundamental systemic crisis. We have not seen a model like this really since World War II. This does not mean that I’m saying that we’re going to have a war, or anything else. I’m simply saying that the pattern is ominous.

It is not yet deep—in the sense of intractable—but it is broad. We need to understand why it’s that way, because the world has now taken an interesting shape. Eurasia—in chaos, or close to it, in Europe, in Russia, in China, in Central Asia, in the Middle East certainly. While north America, and the western hemisphere in general, is stable. Relatively stable, not perfectly stable. The great contrast that is developing in the world is the massive distinction between the two hemispheres, in the way, including Latin America, is behaving, and the massive distinction that particularly exists, between North America—NAFTA—and the various trade zones and alliance blocks in the eastern hemisphere.

Globe_FriedmanThis is a pattern that will not emerge and then go away in three years. It is a fundamental shift, and an understandable and predictable one I’ll try to make, that really ushers in a new phase of human history. In my book I published back in 2009, The Next Hundred Years, I spoke about the movement of history from Europe to North America. That North America was becoming the center of gravity of the international system, the stable pivot. This is part of that process, and as such, is extremely important.

When we look at this crisis, we need to understand the engines. Many of the engines are simply local. I’ll go through them later, but the EU is poorly founded, the Russians are vulnerable to the price of oil, the Chinese are going through a cyclical downturn as Japan did before it, and the Middle East is the Middle East. Each of them have reasons.

There is an underlying reason that this is intensifying, which I call the crisis of the exporters. For over a century, it has been assumed that free trade is a necessary boon and efficient exporters are in some way economically, and perhaps even morally superior, to poor exporters. What has happened, really since 2008, is a reversal in which heavy exporters have found themselves extremely vulnerable to shifts in the market, while those who are inefficient exporters are relatively immune.

Since NAFTA is a fairly inward-facing institution, it has an immunity which the outward facing entities, like the EU or China, don’t have.

The problem came about in 2008, with a massive downturn economically in the United States and Europe. For the United States it was a relatively temporary affair. For Europe it became a systemic crisis. The crisis’ prior problem was that Europe was China’s largest customer. Not Wal Mart, although close, it was Europe. China was at a particular delicate moment historically when this struck. It had dedicated itself to full employment. It maintained full employment by promiscuously lending money, so the companies wouldn’t go out of business. This lead to inflation, until goods manufactured in Mexico were cheaper than the goods manufactured in China. This was the beginning of this moment.

Its exports situation was already under deep pressure. When the appetite of the Europeans and the Americans for Chinese good contracted, what was a serious problem became a destabilizing problem. The Chinese economy depended on exports for cash flow to pay debts in a debt-based economy. People borrowed money not with equity, and don’t have to pay it back. Deeper than that, with that destabilization that was happening, you found a fundamental political one, that I’ll talk about.

One of the more interesting things is that the China myth, what I call the China bubble, really began exploding in 2010, 2011. But the lag between the time the global markets understood that this was the new normal of China—that China was not going back to that unique 20-30 years of extraordinary growth—when that was understood, everything would change.

I remember that Business Week, in 1993 published an issue on the Japanese economic miracle. 1993. Which is to say, not just the media, but the markets, and I don’t understand this, but I want to understand it someday, continue to believe, against all evidence, that China would maintain its consumption of raw materials, in spite of the downturn of exports.

There was a belief, when you questioned people, that this was a passing phase, and that China would return to what it was—an inability to understand this was not a passing phase, it was a secular shift in the way China worked.

A year ago it became obvious that this was not a passing phase. A number of statistics were published by the Chinese. On one occasion it was actually true. It emerged that they were in serious trouble. Suddenly the global commodity markets, all of them, absorbed the fact that China was not going to be pulling the engine, was not going to be pulling the train, and prices fell down. This had a staggering effect on, for example, Russia.

Russia, for various reasons I’ll talk about, is heavily dependent on energy exports to maintain its political system. Its entire domestic budget is built on oil prices. When oil prices fell down, they were smashed. We just published yesterday, a study on Saudi Arabia, and the decision to sell part of Aramco, to give the sense of how badly this smashed the Saudi economy. But it was not just them, it was also Australia and all of those that were heavy exporters. You had, in the past, mineral exports under pressure, but the industrial goods in good shape. Industrial good in good shape, mineral prices rising with them. You’ve never had a situation, that I recall, in which both mineral prices and industrial prices are under pressure, especially in exporting countries.

You have mineral exporters getting hammered, industrial exporters getting hammered. Everybody who exports is getting hammered. When we look around the world, and we see the export levels, we see that Russia exports 30 percent of its GDP, mostly in energy, China about 22 percent, Germany 46 percent, and that remains a story, and the United States 13 percent, of which 40 percent go to Mexico and Canada. Now we see the basic divergence. The United States is, relative to GDP, an inefficient exporter, and therefore, not subject to the appetites of its customers. Those who are heavy exporters are subject to those appetites.

You must always understand that when you are selling something, you have to have customers. If your customers can’t buy, and you’ve built your economy on the assumption of rising consumption, you’ll stagger. If you’ve built your economy around the idea that it will constantly sell minerals to exporting industrial countries, and they don’t have customers, it all cascades backwards. Let’s now take it each individually, and not look at this broader picture of destabilization, but let’s take a look at each country, at each region that’s in trouble.

The European Crisis

The fundamental problem of Europe is an attempt to take a country like Greece, and a country like Germany, and give them the same currency. Moreover, to leave in the hands of each individual country fiscal policy, while a central bank controls monetary policy, so there’s no coherence between the two, and have one country so overwhelmingly powerful—Germany—that it has the ability to set the regulations in Brussels, and the behavior of the European Central Bank, not because it’s a conspiracy, because if you don’t support the German economy, then it all comes tumbling down. You don’t have Europe. There’s no such thing, except as a geopolitical geographical expression.

The unemployment rate south of the Alps is over 20 percent, somewhere 25 percent. That is the same rate of unemployment the United States had during the great depression. The unemployment rate in Germany is four and a half percent. The harmonization of these economies is not possible. Therefore, on virtually every other issue, they are unable to act.

One of the funniest things I saw was, a decision on the part of the EU. I can’t figure out which commission, because there are so many. They would send help to the Greeks, to patrol their shores to keep people out—in June. Think on this. This is a paralysis. This is a paralysis built in by the system.

Bear in mind two things. There is a major crisis coming in the Italian banks, it’s actually here. Italian banks—and you have to desegregate region and everything like that—have non-performing rates of seventeen to 18 percent. I believe it is higher. You do not have 20 percent unemployment without a consumer debt crisis. This can’t be. The Europeans have not had a consumer debt crisis, which means they’re rolling over the debts in various ways so that they don’t have to register it. How can you possibly have that sort of unemployment without massive mortgage defaults?

Behind all this is the great bubble, Germany. Germany exports 47 percent of its GDP. I’m not good at arithmetic, so give me 50 percent, which means that every time it loses five percent in exports, it loses two and a half in GDP. Now losing two and a half of your GDP matters, but if you lose 15 percent of your exports, you’ve lost seven and a half percent. The point I’m making is Germany is on the edge of the volcano. It is a massive exporting power that has built its economy on the assumption of expanding demand for its goods, basically in the European free trade zone, and that can’t happen now. Its entire structure is based on that because domestic consumption can only be raised so much, when you have that much out there.

Other countries in this position, South Korea for example. Only Germany is the fourth largest economy in the world. So the size of the imbalance, relative to the global system, is massive. In a world, in which you have an exporters’ crisis, and one of the greatest exporters in the world, Germany, with a larger dependence on exports than China or any other country that you might name—the global exporter if you will, from a percentage point of view—has not yet had a decline, a significant decline of exports. When the absolute numbers of significant decline don’t fall, you have Japan in 1989. The margins have to be falling. They have to be, in some cases, negative. There’s only so long that Deutsche Bank can keep underwriting this, and it’s pretty much, I suspect, out of time.

In the meantime, what you have rising in Europe is the right. By the right, I do not mean brown shirts, but nationalists, people who are saying, “This doesn’t work,” while the Financial Times swears its working, because the northern European banks are in good shape. If you read the Financial Times, you read the voice of the European elite. The European elite still believes they’re having a banking crisis, rather than a systemic social failure, and that that systemic social failure is going to result in massive changes in regimes, and in the way regimes change. The tension that we see now between France and Germany is with a proEuropean government, which will not stay in power unless it does this. A Cameron is forced, if he’s going to stay in power, to call a referendum.

Even the moderate regimes that you see, have to tack away from the European Union. I don’t believe the European Union will fail. I believe somewhere, in some building, the League of Nations still has an office somewhere in Geneva. European institutions don’t fail, they just become gentile in their poverty. You already see precisely how Europe will fail. People will simply ignore what it says.

There is no immigration crisis. Europe is five hundred million people. We’re talking about one million, I can’t do the arithmetic, but it’s less than one percent. There is no reason the Europeans can’t handle it; they just can’t decide on what to do. What this distinction has done has paralyzed the European institutional systems. It has also lead to recriminations between government. Everybody knows that this whole thing is Hungary’s fault. Blame it on Hungarians this week. This is a crisis of such fundamental proportions at the heart of the world, Europe.

The Russian Crisis

The Russian crisis is much simpler. Putin was unable to transform the wealth of a hundred-dollar barrel of oil into a viable economy. He wasn’t able to because the forces that bought him the power, the FSB and the oligarchs, had to be satisfied in various ways. That money had to be diverted to support enterprises that—Rosneft for example—that had to be maintained. He never had the room to maneuver to divert that money to build something more substantial.

It now faces a catastrophic situation where the expectation of the Russians was $70 a barrel of oil at the bottom, and I don’t know what it closed at today, but it’s below that. The Russian federation works with money being transferred to the central government, the central government distributing it to the Oblast, the various regions. If the central government doesn’t have the money to distribute to the Oblast, well there’s no terror going on that’s frightening a governor to obey, he’ll go his own way.

In Europe, fragmentation consists of nobody paying attention. In Russia, fragmentation consists of nobody receiving benefits from the central government, and therefore pursuing their own interests in whatever direction it goes.

The China Crisis

In China, what we have seen is a cyclical crisis. You cannot sustain that level of growth permanently. No matter what Goldman Sachs said, it can’t beat the United States. You cannot start where they are, and in a sprint over 40-50 years, surpass a century-deep government. What you do is what Japan did. You reach a point where you cannot sustain it, and you reach a new normal. You’ve had a new normal in Japan. People talk about the lost generation. This was not lost from the Japanese point of view. They maintained full employment. They were feeding their people. There was not unrest. Only American investors felt it was lost. There were no opportunities. The Japanese apologize, but they hadn’t built their economy for Westerners to profit, but they were stable.

China cannot reach a new normal, because in China, by Chinese statistics, six hundred million Chinese, have incomes below $2 dollars a day, household incomes. Four hundred and forty million Chinese, have incomes of $2-$4 a day. China is an extraordinarily poor country, a fact you can miss if you fly into Pudong and have one of those dinners where you mortgage your house, and go to your hotel. If you go to China, rather than this American extension into China, Shanghai, you discover a country of enormous poverty.

This is where Mao Zedong took the long march. The long march when he went to Yanan and raised an army, and came back after two decades and shut down the country to create equality. This is where this holiday, people who have gone to Shanghai, or Guangdong, with dreams, went home, never to come back, let go from their jobs.

The issue here is not what is the Chinese stock market doing. It is an irrelevancy really to the entire thing. It is, what are these people going to do with shattered lives, in a country that has a tradition of Maoism, which is why you see Xi, desperately trying to expropriate that tradition of Maoism. He wants to own it, and then hone it in two ways. First, he is the heir. Second, he will strike at any organization that threatens him.

China has become a dictatorship, because the alternative in China is regional fragmentation. The real issue here is whether China returns to a form of Maoism, or whether it goes back behind Maoism to Regionalism. The Regionalism will be the Chinese communist party fragmenting.

Why? Because if you are in Shanghai, and you are making a great deal of money from your relationship to Apple, you have a greater interest in that relationship, than you have to Beijing’s latest demand for the transfer of money. Or, you’re so afraid of Beijing, that you’ll transfer the money. This is the great, not very sophisticated, but very great question of China.

Will the party committee in the coastal regions be more afraid of the secret police, or less afraid of secret police and more desirous for their relationship with the West? This, by the way, up until 1947, was the nature of China. These are the two Chinas. The China of Mao, and the China of Chiang Kai-shek and Sun Yat-sen. It is not self-evident that it won’t be one of these choices, but it is the least likely that it will return to the way it was for the past generation. There is no path back to that right now.

This is why Xi is conducting intense purges. He has discovered, to his shock, that there is corruption going on in China. That’s not the point. What he is doing is eliminating opponents, fragmenting elites that could rise up against him, and generally creating a sense of insecurity within the Chinese communist party, so that any fragmentation of the party won’t happen.

He is also, of course, playing a game in south China sea. That’s not a trivial game, but it’s not a serious one, however, it is designed to do exactly what the Russians did in Syria. Aside from whatever strategic benefits they had, Putin has 80 percent popularity. That’s no kidding. In the same way that George W. Bush was enormously popular in the first six months after 9/11, nations rally, and the Chinese nation will rally to a confrontation. Not two years’ worth, six months’ worth. What everybody is doing on that continent, that massive two continents, is playing with fire to maintain political stability.

The Middle East Crisis

In the Middle East, you have had the collapse of the states that Europe invented. Syria was an invention, Lebanon was an invention, Jordan was an invention, Israel was an invention, Iraq was an invention. They all had origins of sorts, but many of them—particularly Syria and Iraq—no longer exist. They don’t exist because at a certain point the United States decided it was not going to take responsibility, as the British might have, for the future of the region.

Not necessarily a stupid decision, but one with consequences. The consequence was, that the most natural force in the region, Islam, the most embittered force in the region, Islam, began to form new entities. This will sort itself out, as Lebanon did, because Lebanon is the example.

In 1970s, Lebanon fragmented, the national government collapsed, and Lebanon consisted of various fragments fighting each other. You now have the Lebanese model transferred to Syria and Iraq, and now the Saudis are desperately worried, because they themselves are a faction—the House of Saud—that came to power under British mentorship, if you will.

They look at the price of oil. They look at the stability of the royal family that expects to be paid. Of those not within the tribe, who also expect to be paid. They took to their crisis, and their frightened. Now you have flowing out of that, the Arabian Peninsula, itself on the cusp, to the point where the great triumph of the Saudis was the nationalization of Aramco. The crown prince raises the question; we might sell five percent. This is the equivalent of selling rugs out of your house to pay the rent, and it strikes at the heart of legitimacy of Saudi nationalism such as this.

We also see these crises merging. The European, Middle Eastern crisis on multiple levels, immigrants, terrorism, French/British fighters deploying to the region, nothing intense yet, but merging. The Russian-European relationship is merging, not just over the question of Ukraine, but certainly over the question of Ukraine, because that’s vital. The Russian-Middle East relationship is merging with the Russians intervening.

In the middle of this, note, one nation that intersects everything—intersects the European crisis, intersects the Russian crisis, intersects the Middle Eastern crisis—Turkey. Desperately trying not to get in, having no way to stay out. You will watch Turkey. One of the things I predicted in that book I had mentioned, was the rise of Turkey, not because there is a vast conspiracy, but because everything is going to fall apart around it.

The Europeans are now going to the Turks trying to make a deal on refugees. The Russians are shooting at them, and visa versa. The Americans are demanding that the Turks do something about Syria. Turkey.

But that is not the most important thing. The most important fact of the world is the United States exports 13 of its GDP, and effectively really about seven percent of its GDP outside. That makes the United States, who has always been criticized as being non-competitive, in an enormously comfortable position. It is also the United States that is withdrawing from this region, is not involved in Europe, is not involved in the Middle East the way it’s supposed to be, is playing Kabuki game with the Chinese. The Russians are a more interesting question of how we will play them. The United States now has the option of elective affinities.

It does not have to marry. It does not have to engage. It may withhold. This is not, incidentally, isolationism. It’s called prudence. This changes the American position in the world dramatically.

We all believe, because we’re Americans, that times have never been as terrible as this. This is a religious faith. There’s problems. But the relative position of the United States, compared to all other great powers, is incomparable. What has happened since 2008 was, that a stupid American idea, subprime loans, was bought by even stupider people in Europe. I always say that the guy who bought it is dumber than the guy who sold it. And that has pyramided. But if it wasn’t that, it would be some other thing. The entire eastern hemisphere, each of these countries was standing on a volcano. Whatever was going to set off the volcano, they were all going to fry.

The last time I saw a pattern like this was World War II. It was the last time that all of Eurasia was somehow involved in a destabilization. It is very difficult to imagine this turning into a war. For one thing, none of these countries have the energy for a war. By energy, I mean the sheer moral power to do it. You cannot ignore the fact that whatever subjectively I might think, the pattern is enormously ominous.

The most ominous part of this, and I’ll stop there, is this fact. I think the Russians are going to be very aggressive. I think the Russian Federation will go the way of the Soviet Union, for the same reasons: high defense costs, low energy prices. That took down the Soviet Union. That will, I think, take down Russia. When the Soviet Union collapsed, all nuclear weapons under American tutelage was transferred to the Soviet Union, so the Kazakhstan wouldn’t have a nuclear capability, which we all think is a good idea.

If the Russian Federation collapses, what happens to those nuclear weapons? The frightening thing about Russia is that it is a nuclear power, and if it fragments, something has to be done about it. There really isn’t anything that can be done. What do you do? That’s one fear.

The other thing to look at is the entire center. I haven’t talked about central Asia, but give me that. The center of the Eurasian land mass is being hollowed out. We see one country already emerging—Turkey. The real power, that has always been the dominant power in east Asia, Japan, is now beginning to sense itself. Poland, in most dealing with the Russians, or anyone else, is far more influential than Germany, who is paralyzed by fear of what happens to exports.

So, we are in a position where the world is rotating. The world always rotates. Everybody thinks that it will go back to the way it was; it never does. Those who understand that will fret more than others.

We are now at a turning point. Where the last time I came here and spoke to you about the inherent weakness of Europe, I now have to go to a broader picture: a fundamental destabilization of the hemisphere, while the other hemisphere—ours—remains oddly, but explicably immune. This becomes the real issue.

We are now the imperial power, if you will, in the sense of being the most stable, powerful country in the world. How do we handle this? What is there to be done? The answer is, I don’t know, but I will ask.

[Question and answer period follows.]

About Geopolitical Futures

Geopolitical Futures is a publication dedicated to predicting the future course of the international system. In doing so, Geopolitical Futures challenges two assumptions. First, that political leaders decide what they will do and individual actions can’t be predicted. Second, that there is no methodology for predicting non-quantitative events.

The fact is that political leaders’ decisions are not individual decisions made independent of external factors or domestic circumstances. Leaders come to conclusions based on the various pressures that are placed on them by the international system, as well as by internal political considerations. Having been shaped by their struggle to attain power, they follow a rational course of action when in power and, therefore, their decisions are predictable.

The second assumption, that non-quantitative forecasting is impossible, is untrue. Human beings make successful decisions daily based on non-quantitative models. The models are informal. Geopolitical Futures uses a formal methodology known as “Geopolitics,” along with other methods, to model how the international system is working and will evolve over time.



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