From Mongolia to Florida, the Revolutions Have Begun

This protest sounds like it could erupt in any nation on Earth at any moment.

Jacobin: In Mongolia, Protesters With Empty Stomachs Are Denouncing Empty Promises

What originated as an anti-inflation protest also happened to coincide with the Mongolian Economic Forum, which one protester’s sign referred to as “Mongolia’s Disaster Forum.” Together with the prime minister’s empty promises, the economic forum — which showcased the administration’s “New Recovery Policy” to kickstart the economy, in front of representatives from government, foreign embassies, and the private sector — appeared totally disconnected from people’s ordinary lives. Some protesters even held up signs that read “If only I could live like a Parliament member” and “3 million Mongolians [should] eat together,” while others brought and held up everyday items, such as a half loaf of bread, a small piece of meat, a handful of potatoes, and empty plastic bags. The demonstration became a protest against empty stomachs, empty promises, and an empty government palace. While everyone was voicing different aspirations and discontents, there was also a shared feeling of euphoria and solidarity organized around the imperative: we want to live.

...Unlike the empty promises of politicians, the protesters’ slogans had a visceral dimension. There is something haunting about the line “Since I can’t die, I must live” and seeing a teenager holding a poster with the message “I would like to live.” Although the demand “to live” seems like the most basic and self-explanatory of human rights, there is nothing simple about it. It implies the question: to live what kind of life? On one level, the protesters associated this demand with the right to afford the basic necessities of daily life and its reproduction. To be able to afford bread? Of course. But life is about more than biological survival. To be able to live without crushing debt? To be able to trust in the public institutions and infrastructures that organize social life? It is impossible to separate these two. The demand to live, and to live well, is a collective problem experienced as individual privation.

...Mongolians’ anger at the state comes from the overwhelming sense that politicians live in their own bubbles sheltered from the lives of ordinary people. Despite more than three decades of democracy, most Mongolians feel powerless. It was notable that Mongolian youth, who have largely abstained from participating in elections, took to the streets to make their voices heard. A driving factor of the global phenomenon of “democratic disillusionment” is the depoliticization of policy-making, which paradoxically takes place under the mantle of democratic process.

Yellow vests in France, truckers in Canada, January 6 and BLM in the USA...it's a global phenomena. What comes next will be something entirely new though. Jacobin are living in the past:

It does not help matters that the ruling Mongolian People’s Party was carved out of the Mongolian People’s Revolutionary Party, which ruled Mongolia during its seventy-year socialist history. Many people see politicians’ corruption, bureaucratic inflexibility, and hollow phraseology as the long tail of Mongolia’s socialist past, rather than as the creatures of electoral competition and market incentives. For most Mongolians, socialism is a failure of the past, which makes the idea that socialism could be something new, democratic, and capacious unavailable to the political imagination. As a result, political discourse is stuck in the dreary cliché of plucky democratic youth versus communist mummies — obscuring the reality that both the ruling party and the opposition are ruthlessly capitalist.

Socialism fused the state and the corporation. The failure of anti-market socialism became obvious, thus socialism adopted market forces. Where the left fails is where it looks to the past, towards retreads like Bernie Sanders in the USA.

China and the USA look similar because they took similar paths to the current destination, but went in a different order. China went from full communism to adopting market forces within a socialist system. The U.S. went from full capitalism to adopting socialist controls on society, including corporations. The concentration of power, including economic, results in both countries' ruling classes behaving in similar manners. The only main differences being two. The CCP is sovereign. It is clearly in charge. This give it far greater police power for removing enemies, while the Western ruling class must rely on corporations and cancel culture. The Western ruling class pretends as if there is freedom and that private companies are behaving independently when they destroy any competing companies or individuals with different political views. Similarly to how they are now claiming taking an mRNA shot was optional, despite using all manner of coercive policies via government and corporations to pressure people into taking them. 

The other difference is that because it is clearly in power, many CCP policies are aimed at bettering the lives of ordinary Chinese citizens. Whereas in the nominally democratic West, the ruling class pretends it is an aggrieved victim of some nebulous forces such as "system racism" or various "phobias." Its grip on power is also tenuous because the West has an electoral system for peaceful, wholesale revolution. The Western elite are therefore at war with their own citizens, morally justifying their predatory behavior with their victim narratives.

What Follows

There is no escape via "the left" as it has existed because that left got us here. The leftists of the 1960s became the CEOs and politicians of the 1990s and 2000s. They birthed the next generation that is unleashing totalitarian controls today. The left won, and doesn't recognize its vision for society is flawed, impossible because it is doomed by man's nature. If the left wins, things might improve for a generation because of a new class of rulers will be less predatory, but history tells us predators are attracted to power concentration the way a moth is attracted to a flame. A victory by the left will beget a worse situation down the road.

There 's no escape via "the right" either. It is still captured by platitudes about markets and capitalism, failing to recognize that a corporation can be as effective, even more so, at implementing authoritarian policies. Power in all forms including corporate power is an enemy of the people.

There was a major sign of change this week though. Florida has gone to war with one of its largest companies, Disney: Florida lawmakers have stripped Disney of special tax status. If you're not American or not attuned to politics, this might not seem like a big deal, but this event shatters every assumption about politics going back 50+ years. Disney is exactly the type of company that Florida politicians, especially right-wing politicians, would have been guaranteed to defend the past 50 years. Even two years ago, it would be crazy to think of Florida going after Disney. The right is also talking about abolishing the FBI and CIA, among other government agencies. That Florida went after Disney signals these aren't idle wishes of Internet essayists, but something that could become a serious political agenda faster than most realize.

The policies of the past two years revealed that the ruling class hates the people, that politicians hate their voters and corporations hate their customers. The form of revolution will be different everywhere, but as long as inflation is high, the people will be motivated to action against their rulers. From Mongolia to Florida, the revolutions have begun.

China Slowdown Crushes Mongolia

Dumb government plus commodities boom equals epic bust every single time.

Bloomberg: Mongolia Calls for Economic ‘Crisis’ Plan; Bonds Tumble

“We came into a situation where we may not be able to afford to finance salaries and operational costs of government departments, such as the Mongolian military who protect our borders and national security, the social and health employees who are in charge public health, as well as individuals in culture and sport,’’ Choijilsuren Battogtokh said in a nationally televised address on Tuesday. “We are in a deep state of economic crisis.’’

Mongolia has suffered from falling commodities prices, an economic slowdown in China and waning interest by foreign investors spooked by anti-investment laws and inconsistent policy. Choijilsuren’s comments come six weeks after the Mongolian People’s Party trounced the Democratic Party in June elections, which appears to lay the groundwork for increased austerity measures.

Why Bondholders Are Belittling Mongolia’s Crisis Warning

Consider further the Mongolian central bank’s decision to hike interest rates to 15% from 10.5% to halt the currency’s tailspin last week. The lack of such bold monetary policy initiative is what set bondholders against Turkey’s authorities for years.

Of course, Mongolia isn’t Italy or Turkey. With little over 3 million people and an economy similar in size to Albania or Mozambique, it’s certainly not too big to fail. Fiercely independent in the model of the nation’s founding father Genghis Khan, Mongolians are jealous guards against over-zealous influence from Russia to the north or China to the south. Mongolia can’t presume to rely on the support of the International Monetary Fund or bondholders. And this is why the new government is taking its own medicine before it’s prescribed.

China Ramps Up Military Spending; Move Will Strengthen Anti-China Alliance

In The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I look at the economic angle and Edward Luttwak's book, The Rise of China and the Logic of Strategy. One of his points was that a major military buildup by China is alarming to its neighbors and sending them into the arms of the United States, to the point where they are prodding the U.S. to play a role in the region.

This latest news means there will be no easing of tensions.

China's Xi ramps up military spending in face of worried region

The government said it would increase the defense budget by 12.2 percent this year to 808.23 billion yuan ($131.57 billion), as China seeks to develop more high-tech weapons and to beef up coastal and air defenses.

Will the United States eventually decide that the way to slow Chinese military spending is to slow the Chinese economy? As I mentioned in the prior post, there are growing economic arguments against free trade. Trade deficit nations such as the U.S. also benefit in the short-run from trade restrictions because it means the domestic economy must supply more goods and services. The odds are certainly above zero that a politician will see a way to boost the economy and appeal to nationalism with one policy.

The Logic of Strategy: Yuan Devaluation and the Road to Trade War

There's an excellent post for anyone interested in China: Review of “The Rise of China vs. The Logic of Strategy” by Edward Luttwak. I just finished the book and I don't think I can add much to that complete and thorough review. Read through it to get an idea of the arguments put forth in Luttwak's book, plus a summary of all the players.

If you're lazy, the quick and dirty summary can best be given by a comparison with Germany and England prior to WWI, with China as Germany and the USA as England. Germany was the up and coming power and had surpassed England economically, culturally and academically. What got Britain very nervous was Germany's decision to build a large navy. England responded with a new ship, the dreadnought, and with a diplomatic flurry to move enemies into the neutral or friendly category. The result is well-known: although eclipsed in many areas, British superiority in diplomacy and war defeated Germany twice.

China's rise was similarly peaceful, but China's aggressive military buildup and claims to South China Sea territory have all of the surrounding nations on alert. Due to the advent of nuclear weapons, logic dictates that total war will be avoided in Asia. However, the U.S. and a group of allies could effectively deter Chinese aggression in the Pacific, and even though the U.S. has not sought out a coalition, Chinese aggression has pushed Southeast Asian nations (and even Mongolia) into the arms of the U.S. Finally, due to its size and the desire to avoid an outright conflict, the United States has a very powerful weapon if it can overcome the free trade ideology: economic policies designed to slow China's economic growth. Using economic policy, the U.S. could deliver an effective blow to Chinese growth that will keep its military from exceeding U.S. capabilities without requiring a massive buildup in military spending, a policy which would further slow GDP growth in China. If the U.S. and regional economies prefer U.S. influence in the region to that of Chinese influence (and putting aside all ideology, the distant hegemon remains more attractive than the near), they can choose a path of slower economic growth designed to keep China from becoming the dominant power.

The reason for this policy is not a U.S. desire to keep China from rising. Instead, it is China's increasingly aggressive policies in the region that make neighbors nervous. China makes claims to territory based on very loose evidence, such as a map from hundreds of years ago. Using the same logic, Italy could claim all the land formerly held by the Roman Empire or Sri Lanka can claim India (one example given by Luttwak). No one would fear a claim by Italy or Sri Lanka, but imagine Italy was among the fastest growing economies in the world, rapidly building up its military capabilities and it was openly making bold claims to territory. Everyone in Europe, North Africa and the Middle East would be nervous.

There's a talk by Luttwak on the topic of his book:



The "logic of strategy" coincides with social mood and current events. Protectionism is on the rise due to economic factors tied to declining social mood, but Luttwak's book adds a geostrategic grounding for protectionism as part of an economic cold war in the Pacific designed to restrain China's ambitions. Luttwak doesn't delve into economics in his book, but it is very easy for me to imagine the path to protectionism.

There are three U.S. China policies according to Luttwak. The first is the Pro-China Treasury Department. This wing also represents the capture of American government by Wall Street and the financial industry: Treasury doesn't care about manufacturing and pursues a China policy solely almost aimed at profits for Wall Street. The Treasury also represents the idea of free-trade as ideology. Manufacturers have almost no voice in American policy these days.

Next is the State Department, which confronts China in Asia. The State Department is mainly concerned with the "Asia Pivot." It was not U.S. policy to encircle China by forging closer alliances with Southeast Asian nations, rather China's own aggressive posturing pushed these nations into proactive efforts to attract the United States. There are areas where the U.S. was proactive though, such as working to strengthen ties with India.

Finally, there is the national defense establishment. They view China as potentially the main enemy of the future, though this is as of yet undecided. China is a cyber threat and potential military threat. The Defense Department is involved with strengthening regional military ties, such as the naval visits to Vietnam.

Prediction

The protectionists are ever so slowly gaining the upper hand thanks in part to negative social mood. 2008-2009 will probably mark the peak moment for Wall Street and the Treasury Department, even though there is as yet no sign of it in Washington. Changes can be seen in the form of issues such as immigration, which has turned the grassroots of the conservative movement against the Chamber of Commerce and large corporations (due to an attack initiated by the latter against the former). This has pushed the Overton window of acceptable debate among conservatives who can now take shots at big business. There is also the growing libertarian faction pulled together by Ron Paul that supports his son, Rand Paul, that consistently attacks the Federal Reserve and Wall Street. Put it together and it is not hard to envision an anti-Wall Street, pro-manufacturing political consensus emerging. This will cut across party lines, with manufacturing unions pulling in Democratic support if there are specific bills to vote on.

There are also the academic attacks on free trade. Australian economist Steve Keen discusses the work of Dani Rodrick in 1,000,000 economists can be wrong: the free trade fallacies - See more at: http://www.debtdeflation.com/blogs/2011/09/30/1000000-economists-can-be-wrong-the-free-trade-fallacies/.

But there is an obvious fallacy to this neat and plausible argument: To effect specialisation, England has to shift labour and capital from wine to cloth (and Portugal has to do the opposite). Arguably labour can be retrained—a vigneron can become a machinist—but how do you convert wine press into a spinning jenny?

The obvious answer is that you don't. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo's model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the "new" model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo's argument would be considered, but it has never been seriously addressed.

Ricardo also assumed that British businessmen wouldn't uproot their life and open a factory in Portugal. As the real life modern example of free trade has shown, thanks in part to modern travel and telecommunications, that is exactly what happens. Not only does the factory close in America, but the capital follows it to China. Instead of building a new industry in the United States, the entire manufacturing sector is hollowed out. There are small diverse benefits to lower consumer goods prices, but the vast bulk of the gains go to two groups: workers in the destination country such as China, and to the holders of capital, which are mainly the nation's wealthiest citizens. The nation's capital base is sold off or relocated, with the profits going to the top. The median male income is flat since the 1970s in the U.S., with trade playing a huge role (along with the increase in labor supply from immigration and feminism, both of which also benefit the wealthiest Americans who own most of the capital).

With a growing economic case against free trade, a shift in social mood making anti-free trade opinion more popular, plus the loss of political support for the financial sector, free trade will become a centerpiece issue in American politics. The trigger will be one of two factors. One is economic. China's credit bubble isn't going to slowly ride off into the sunset. There will be pain, it is only a matter of where it lands. The path of least resistance is devaluation of the yuan, something I have been looking for here for several years now due to the growth in credit. A target of ￥8 to $1 is a reasonable ballpark figure, with ￥10 to 1 not unbelievable given the rise of the shadow banking sector. The actual number isn't as important as the size of the devaluation: it will likely be large and set off the anti-China arguments that have been growing in the United States. The left and right have their beef with China's economic policies and the right has provided the main rhetorical cover for business. When that goes, there will be a bipartisan push for policies that counteract China's "predatory" currency policies. A Chinese devaluation could be the trigger.

The second factor is geopolitical. Do take the time to read the lengthy review linked above, and/or watch the video. Luttwak's main point is that China cannot simultaneously build up its economy and influence at the same time it builds up its military, and not run into resistance from surrounding states. He cites the Chinese policy on the island disputes as the case in point: instead of increasing China's power in the region, it has pushed Vietnam, the Philippines, Japan and Indonesia into the arms of the United States. An anti-China coalition is building up due to each nation following the logic of China's inevitable rise in power along with the perception of an increasingly aggressive China. China has "tipped its hand" so to speak and these nations are moving preemptively. Due to the nuclear arsenal of the United States and China (to say nothing of Russia's interest in the region), there isn't going to be a major war for survival. This reduces the options for confrontation, with one of the most powerful being economic. If there is a minor military confrontation that is too large to be ignored, the most politically acceptable response will be economic.

Either the economic or the geopolitical event can happen first then, but in time, the two will be seen as inseparable. Once events move in this direction, the logic to continue down the path is compelling.

Anyone can run GDP numbers for the U.S. and China. One simple calculator is here: Catching the eagle. The default is 7.1% GDP growth, 4% inflation and 2.9% yuan appreciation for China. For the U.S., 2.4% GDP growth and 1.4% inflation. With these numbers, China's economy overtakes the U.S. in 2019. If growth is more like the 4% that Marc Faber believes (and the debt growth/gdp growth ratio suggests is correct), China overtakes the U.S. in 2022. Lowering that GDP growth to the 3% low end forecast of Michael Pettis adds one year, to 2023. However, take down the inflation number (due to credit deflation) or factor in a devaluation of the yuan, and China quickly falls behind the U.S. and can "never" catch up. See: China may not overtake America this century after all.

The ultimate containment strategy for the U.S. and regional partners (who all have access to U.S. markets) then, is an economic strategy. Yes, these nations will suffer slower growth, but they will retain their sovereignty. For East Asian nations, a distant hegemon is better than the near one with an appetite for your territory.

Whichever path is chosen, the economic and geostrategic paths will line up. An economic crisis in China will add the economic component to the emerging geostrategic China policy. A geostrategic decision to confront China economically would set in motion an economic crisis that would propel the strategy forward since China would respond in kind. The decision to halt rare earth exports to Japan and the widespread anti-Japanese riots of recent years already show how China will respond. A major confrontation from the U.S. would require an even larger policy response. Luttwak lays out some possible policy choices, starting with small ones such as banning technology transfers in a limited area such a military or telecom. I fully expect that were a Chinese crisis and devaluation to accompany another recession in the United States, the push for tariffs would find a bipartisan majority in the House and Senate.

Yuan devaluation is inevitable as soon as China enters a serious financial crisis. If the government refused to devalue, the nation would go through a 1930s style deflationary Great Depression. China is unlikely to allow the market to take the yuan lower in a panic collapse like a replay of 1997. At some point, it would announce a large devaluation designed to end the selling and the crisis. This will be called a political act in the United States (those who understand the economics will nonetheless spot the political opportunity) and the political push for protectionist policies will be too attractive to be ignored. The United States will retaliate with sanctions and the world will follow. This will put even more pressure on the Chinese economy and lead to a massive rise in nationalist sentiment (either that or anti-CCP sentiment, so expect the CCP to redirect it into nationalism). A chill wind will blow across the Pacific that will last a generation or more.

Bad debts in Mongolia

The country is moving forward, but there are pitfalls.

Mongolia's building boom brought to halt by debt pile

Now, Mongolia's banks are choking on bad debts with the official figure for sour loans put at 7 per cent of the banks' combined asset base. This is down from a peak of 17 per cent in late 2009, but the International Monetary Fund, among others, has criticised Mongolia's central bank for under counting.

Whatever the true bad-debt picture, it is easy to see that Mongolian banks are foreclosing on unfinished construction projects. Figures for November 2010 from the Bank of Mongolia, the central bank, show that as of October 31 the nation's banks owned 23.6 billion tugrik (HK$146.49 million) worth of real estate, or triple the amount they held a year earlier.

There is a "complete lack of money in Mongolia," says Jargalsaikhan D, chief executive of Xas Leasing, an arm of Mongolia's Xas bank, and author of a popular Mongolian-language blog on the sorry state of his country's real estate business. "And to put it very simply, it is hard to build tower blocks without money."

The play of the decade

Assuming that the next decade does not see the end of U.S. political, financial and/or military hegemony, plunging the world into a chaotic transition period, with or without economy destroying hyperinflation—that is to say, assuming the global economy grows with mildly positive inflation and rising resource prices—then this is the play of the decade. Or put it this way, if you are banking on some type of collapse, this is a good hedge because your investment in this country will probably grow at least 10 times over in the next decade.

If successful, this country will eventually become a buzzword as it transitions towards becoming the next Kuwait. Buying into the stock market is difficult, it only has a market cap of about $1 billion. Good news for small investors though—if you're willing to accept wide bid/ask spreads, it is relatively easy to invest in this market because capital is freely exchangeable. Whereas large investors have trouble in such a small market, a small investor could take a decent position. My sell signal for later in the decade is a country ETF, since the market capitalization and media coverage will have exploded by then.

If you don't search for news on this country, then you'll only bump into a story every few months, such as the following
The Biggest Tests for Mongolia Lie Ahead

Mongolia's enormous Oyu Tolgoi copper and gold complex is expected to start production in late 2012. As a result, the IMF forecasts 2013 gross-domestic-product growth of 28%, the fastest in the world, up from forecast increases of 7%-8% in 2011 and 2012. Foreign direct investment both in the mining industry and in infrastructure is expected to be many multiples of GDP of just $5 billion.