The Flies of Summer

"Any faith that China will be standing at the base of the burning building with a fireman’s net is misplaced. "

A portion of the Silk Road passing through Northern Fujian Province, October 2016 image by Albert Bates

  As national Republican political strategist Rick Wilson said on The Last Word, what we witnessed this past Thursday at the clown show in the White House was impulse, not policy. "Whoosh, whoosh, bang, bang, he got to turn the key and watch the pretty rockets go ... this is a guy with the attention span of a gnat on meth."

The cost of the whoosh whoosh bang bang, just in spent ordnance, not delivery, was somewhere north of $80 million. Damage on the ground has been estimated at $700,000. Raytheon, who makes Tomahawks for the Navy, saw its stock value jump $500 million.

The more important meeting took place in Rick Wilson's home state of Florida, where POTUS continued to rack up Secret Service bills (some $30 million so far this year) at his Mar-A-Lago Resort where membership fees — that go to him — went up $100,000 since he took office.

That meeting was between Romulus Augustulus, the final Caesar (if you don't count the Russian Czars), and the future Justinian. The president of a dying empire met with the president of its successor.

The world being handed off was concisely described 200 years ago by Edmund Burke: 

“... [T]he temporary possessors and life-renters in it, unmindful of what they have received from their ancestors, or of what is due to their posterity ...  act as if they were the entire masters; that they ... think it amongst their rights to cut off the entail, or commit waste on the inheritance, by destroying at their pleasure the whole original fabric of their society; hazarding to leave to those who come after them, a ruin instead of an habitation - and teaching these successors as little to respect their contrivances, as they had themselves respected the institutions of their forefathers.

"By this unprincipled facility of changing the state as often, and as much, and in as many ways as there are floating fancies or fashions, the whole chain and continuity of the commonwealth would be broken. No one generation could link with the other. Men would become little better than the flies of summer.”

— Burke, Reflections on the Revolutions of France

In the dying empire, both the left and the right share the same myopia. In the inner chambers of most of the world’s governments economic growth and environmental stewardship are viewed as an adversarial relationship. In fact, that need not be the case. It is not seen that way in Bhutan, Denmark or Iceland.

In the new empire there are no dichotomies; One Belt One Road (OBOR); Two Mountains. As yet, these remain completely obscure concepts in the West.

We described the Two Mountain policy here last fall. Xi Jinping himself described it in his January address to the UN plenary in Geneva:

“Man coexists with nature, which means that any harm to nature will eventually come back to haunt man. We hardly notice natural resources such as air, water, soil and blue sky when we have them. But we won’t be able to survive without them. 

“Industrialization has created material wealth never seen before, but it has also inflicted irreparable damage to the environment. We must not exhaust all the resources passed on to us by previous generations and leave nothing to our children or pursue development in a destructive way.

“Clear waters and green mountains are as good as mountains of gold and silver. We must maintain harmony between man and nature and pursue sustainable development.”

China has staked its future now on preservation of nature. While POTUS erects his 2000-mile long, 100-foot-tall concrete barrier on the Mexican border, Xi is planting the 2800-mile long Three-North Shelterbelt or “Green Great Wall,” to halt and re-vegetate the Gobi Desert.

Erebus Wong, Lau Kin Chi, Sit Tsui and Wen Tiejun, writing for the independent socialist Monthly Review, observe:

The Chinese government has publicly stressed the lessons of the 1930s overcapacity crisis in the West that precipitated the Second World War, and promoted these new initiatives in the name of “peaceful development.” Nevertheless, the turn to OBOR suggests a regional scenario broadly similar to that in Europe between the end of the nineteenth century and the years before the First World War, when strong nations jostled one another for industrial and military dominance.

China is aware that it is the most likely candidate for leading world power to succeed the United States, whose role as the world’s leading empire began with the Spanish American War, peaked in the global economic boom following the Second World War and is now in steep decline. Wong et al write:

China is arguably only the third country in history, after Britain and the United States, with the capacity to shape and lead a global system of finance and trade. Of course, in the foreseeable future, China will not replace the U.S. dollar system; it could at most stand on equal footing. After the United States overtook the United Kingdom to lead the world in industrial production capacity in the late nineteenth century, it took another fifty years and two world wars before it could dominate global finance. China recognizes this reality, and has consistently promoted the AIIB [Asian Infrastructure Investment Bank] and other organizations as complements, not competitors, of the World Bank and Asian Development Bank (ADB).

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Awkwardly for the United States—which launched the TPP with the original intent of blocking China—the AIIB marks the first time since before Bretton Woods that the United States has been excluded from an important international financial structure. When trusted European allies like the United Kingdom, Germany, France, Italy, Switzerland, and others announced their participation, Obama called an emergency national security meeting. The reason is clear: the AIIB challenges, albeit still within an institutional framework, the U.S. financial hegemony that has prevailed since the Second World War.

Of course, these allies are not jumping ship from the U.S. dollar-dominated system just yet, but only hedging their bets, as that hegemony has shown clear signs of exhaustion. In setting up the AIIB, China has stressed shared interests and cooperation among member nations, the better to attract interested allies.

What the US and its allies see in China is a possible way to climb off the ledge they have found themselves on after the liquidity crisis of 2008 was resolved by issuing massive new debt and resuming the exponential derivatives trade. This time they have no margin left, so perhaps China will be there with a net to catch them, they hope. Switzerland, Luxemburg and Britain — strongholds of financial capital that have previously declined to join most international organizations — became the first to join AIIB.

The liquidity swap alliance formed in October 2013 among six central banks—the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the U.S. Federal Reserve, and the Swiss National Bank—is designed to prevent another large-scale liquidity crisis in Europe and North America like the one that precipitated the financial crisis of 2008–09. Yet it is only preventive. The new global paradigm now needs new institutions and proactive propositions. The IMF and the World Bank (and its subsidiary, the ADB), constrained by U.S. interests, are not up to the task. Can China take this opportunity to oversee the development of a new global financial alliance? For a large industrial country just entering the phase of financial capitalism, increasingly roiled by domestic disturbances, the challenge is unprecedented and enormous.

Any faith that China would survive the coming financial crash and be standing at the base of the burning building with a fireman’s net is misplaced. Rob Mielcarski observes:

The Chinese are repeating all of our mistakes, but on a larger scale. It makes no difference how leaders are educated, they will eventually succumb to the inherited behaviors common to all humans.

The main difference between us and them now is that they are “borrowing to employ” and we are “borrowing to consume”.

Tim Morgan adds:

The picture that emerges is quite extraordinary. Over the ten years between 2005 and 2015, GDP grew at rates of between 9% and 14% annually, not even stumbling materially during the 2009 global downturn. But debt has grown by between 17% and 35% of GDP each year, with the exception of 2009, when debt increased by 47% of GDP.

Tianjin (Ghost City) built to employ underemployed construction workers

What this means is that, over a period in which reported GDP increased by RMB 40tn, debt expanded by RMB 129tn. This is a borrowing-to-growth ratio of 3.2:1, still reasonably modest by Western standards, but a far cry from past Chinese practice – back in 2005, the trailing ten-year (T10Y) ratio was only 1.67:1.

Unlike the Western economies, whose vice-of-choice is to use debt to fund consumption and inflate property markets, the Chinese bias is towards using debt for investment in capacity. In theory, capacity investment should be “self-liquidating”, because capacity increases should increase income, and thus fund the paying off of the initial debt. (This is contradistinction to consumer borrowing, which is “non-self-liquidating”).

But the self-liquidating characteristic of business investment depends on capacity expanding without depressing margins, something which happens when expansion creates major capacity surpluses. It is abundantly clear that Chinese PNFC borrowing has followed the course of excess, depressing returns in the process.

As a result, much of the Chinese business sector earns returns which appear to be well below the cost of debt capital. In this situation, an obvious remedy is to convert debt into equity. This, however, seems to have been tried, and failed, because it showed clear tendencies to crash the equity market.

The final sting in the tail of this analysis is that, if underlying GDP is a lot lower when stripped of the borrowing effect, debt ratios are correspondingly higher. On the SEEDS basis of computation, aggregate debt already stands at 385% of GDP (rather than the reported 246%), and is growing a lot more quickly than publicly available numbers indicate, adding around 43% of GDP (rather than 20%) annually.

The void that China attempts to fill with OBOR and AIIB is deeper than merely technical insolvency. Since at least the Second World War, the United States based its economic empire on its military power. The only reason that the dollar has not already been replaced by the Yuan as the standard international currency is that the former is backed by overwhelming force. The US spends more on its military than the next 10 countries combined and the current administration is willing to beggar its domestic programs to double down.

That cloak is showing tears in its fabric, however. “Bringing democracy to the Middle East” has been revealed for what it really is — chaos and mayhem; internecine regional conflicts; and death and displacement on a massive, economic-community-destroying scale.

China plans to replace military bluster with “peaceful development” — to sponsor infrastructure investments, promote cooperation and minimize conflict. It will find that difficult.

For instance, how can the AIIB avoid the damage done by the World Bank and others to the environment and indigenous livelihoods? How can China promote infrastructure investments that drive local development through diversity and sustainability, and not simply serve its own need for export outlets? The challenge, in other words, is to ensure that the AIIB and Silk Road Fund do not simply become East Asian counterparts of the IMF and World Bank.

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It should be clear that this discursive power will depend on deeds as much as words. If China continues to absorb excess capacity through rapid urbanization without regard for rural culture or ecological sustainability, and if the government fails to address the severe social contradictions caused by rising wealth inequality, labor disputes, environmental deterioration, and official corruption, then the slogans of “infrastructure-based developmentalism” will have little persuasive power overseas.

Jack Goldsmith, writing for Lawfare, sums up our predicament:

Two months into the Trump administration, we are witnessing the beginnings of the greatest presidential onslaught on international law and international institutions in American history. 

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An in-your-face attitude toward international law and institutions will invite blowback — from international and domestic actors — not unlike what Trump has been experiencing in response to his controversial attacks on domestic courts and the press. There is a quiet way to pull back from international law and institutions, and a loud way. The loud way has heightened symbolic impact, and for that reason invites heightened resistance and retaliation.

This is what we are witnessing. We are over the peak on the Limits to Growth and into the slide. There is a jockeying for position for the quickly vanishing scraps on the false premise that there is still some way to regain the peak we only just experienced.  The prosperous way down is to downsize population, expectations, and mechanistic productivity.

None of that is yet being done and so a hard reckoning is inevitable. Whether that hard reckoning comes to blows remains to be seen, but our side is not taking its gloves off. It likes to poke sticks at hornets' nests.

It is doing that now, with Tomahawks hurled at Russian MIGs.

Burke also said in his Reflections:

“Nothing turns out to be so oppressive and unjust as a feeble government.”

Village Tofumaker, October 2016 by Albert Bates

Perhaps Xi Jinping's best contribution is one that is most overlooked. As part of his Two Mountains policy Xi is sponsoring creation of 100 ecovillages in 5 years. The key to social adoption of climate ecoforestry is ecovillage. The social glue of ecovillage depends upon cognitive semantics training and permaculture. The economic engine will be, in most cases, small (village-scale, even in urban contexts) microenterprises, particularly the Cool Lab, which we described in last week's post.

Key to the kind of capital formation that is needed, and redirection from the kinds of capital that are not, is the training of trainers, particularly in Cool Schools, and the development of even better varieties of social benefit (B-type) enterprises to share profits in order to spread wealth more evenly and achieve the more difficult measures required to stabilize climate and return us to the Holocene in which we all have a safer space to argue.





This post is part of an ongoing series we're calling The Power Zone Manifesto. We post to The Great Change on Sunday mornings and 24 to 48 hours earlier for the benefit of donors to our Patreon page. Albert Bates offers ecovillage apprenticeships, including Cool Lab trainings, this year at The Farm in Tennessee April through July.