NATO: R.I.P., b.1949 - d. 2026?

NATO is dead, or in the process of dying. NATO was born when the United States stood alone militarily and economically as the West's  power while Europe was weak. Europe is no longer weak, but it certainly acts that way. If if it had the will, Europe would be capable of defending itself. Hence the founding predicate of NATO no longer holds.

The proximate cause of NATO's demise was President Trump's announcing his willingness to seize Greenland by force from NATO ally Denmark earlier this year, (See:Shulmaven: Donnie Does Davos* and Mayhem in Minneapolis ) his failure to consult on his war plans to attack Iran, and most important the the obstruction of NATO allies Spain, France and Italy to deny their respective airspaces to the U.S. Air Force's efforts to to attack Iran. Indeed they even denied access to the U.S. air bases in those countries. It is one thing for them to be passive, it is far another thing to actually obstruct the U.S. military. 

It is not as if NATO has no skin in the game in the Persian Gulf. Indeed their economies are suffering far more from the rise in the price of oil than the U.S. I don't know what, if anything, President Trump will say tonight on NATO, but the clock is ticking on its demise. Further it will require congressional approval for the United States to withdraw from NATO. Of course, the only winner in this will be Russia's Putin

Shulmaven Anticipates Hal Brands Foreign Affairs Article on Pre-WW II and Today

In an article entitled "The Next Global War: How Today's Regional Conflicts Resemble the Ones that Produced World War II" on January 26th in Foreign Affairs, Hal Brands, the Kissinger Distinguished Professor of Global Affairs at Johns Hopkins School of Advanced International Studies, wrote as follows See:https://www.foreignaffairs.com/united-states/next-global-war) :

"World War II was the aggregation of three regional crises: Japan’s rampage in China and the Asia-Pacific; Italy’s bid for empire in Africa and the Mediterranean; and Germany’s push for hegemony in Europe and beyond. In some ways, these crises were always linked. Each was the work of an autocratic regime with a penchant for coercion and violence. Each involved a lunge for dominance in a globally significant region. Each contributed to what U.S. President Franklin Roosevelt, in 1937, called a spreading “epidemic of world lawlessness.” Even so, this wasn’t an integrated mega-conflict from the outset."

and:

"The parallels between this earlier era and the present are striking. Today, as in the 1930s, the international system is facing three sharp regional challenges. China is rapidly amassing military might as part of its campaign to eject the United States from the western Pacific—and, perhaps, become the world’s preeminent power. Russia’s war in Ukraine is the murderous centerpiece of its long-standing effort to reclaim primacy in eastern Europe and the former Soviet space. In the Middle East, Iran and its coterie of proxies—Hamas, Hezbollah, the Houthis, and many others—are waging a bloody struggle for regional dominance against Israel, the Gulf monarchies, and the United States. Once again, the fundamental commonalities linking the revisionist states are autocratic governance and geopolitical grievance; in this case, a desire to break a U.S.-led order that deprives them of the greatness they desire. Beijing, Moscow, and Tehran are the new “have not” powers, struggling against the “haves”: Washington and its allies.

Two of these challenges have already turned hot. The war in Ukraine is also a vicious proxy contest between Russia and the West; Russian President Vladimir Putin is buckling down for a long, grinding struggle that could last for years. Hamas’s attack on Israel last October—enabled, if perhaps not explicitly blessed, by Tehran—triggered an intense conflict that is creating violent spillover across that vital region. Iran, meanwhile, is creeping toward nuclear weapons, which could turbocharge its regional revisionism by indemnifying its regime against an Israeli or U.S. response. In the western Pacific and mainland Asia, China is still relying mostly on coercion short of war. But as the military balance shifts in sensitive spots such as the Taiwan Strait or the South China Sea, Beijing will have better options—and perhaps a bigger appetite—for aggression."

Shulmaven wrote last November (Shulmaven: Reliving the 1930's - Part 5 ), in far more concise prose, something very similar to Brand's core idea. We are gratified that our thoughts are very similar to that of such a distinguished scholar of global strategy as Professor Brands.  Indeed we recently reviewed his most recent book on strategy. (See: Shulmaven: My Amazon Review of Hal Brands' Ed. "The New Makers of Modern Strategy...." ) Our thoughts of last November are highlighted below and if anything our view has been amplified by last week's U.S. response to a drone at attack on a Jordan base that killed three Americans.

"We started this series in March 2014 ( Shulmaven: Reliving the 1930s)  with Putin taking Crimea and using his proxies in eastern Ukraine and the last one was in April 2017 with  Trump’s and Obama’s vacillation in Syria in 2013 and 2017. ( Shulmaven: Reliving the 1930s - Part 4) With this blog I go further in that I now believe that we are no longer in the Post-Cold War Era, but rather we are now in what future historians will call a pre-war era.

 

Instead of facing the Berlin-Rome-Tokyo Axis we now face the Russia-China-Iran North Korea Axis We see this new axis playing out in Ukraine, Gaza, and the Taiwan Straits. All the signs were there in the 1930’s with Japan invading Manchuria in 1931 and the heart of China in 1937; Italy invading Abyssinia in 1935, and Germany reoccupying the Rhineland in 1936. However, it was not until 1938 that they were taken seriously."

My Amazon Review of Christopher Clark's "Revolutionary Spring: Europe Aflame......"

 Revolution was in the Air

 

Contrary to the “Communist Manifesto” the specter haunting Europe in 1848 was not communism, but rather nationalism.  In this way too long 891-page book the distinguished historian Cambridge’s Christopher Clark recounts the revolutions that swept through Europe in 1848.  Starting in Palermo in the Kingdom of the Two Sicilies and then spreading to Paris, Germany, Vienna, Romania, Hungary, and Poland. Europe was aflame with liberals and radicals demanding fundamental reforms. The liberal goals were limited to formal constitutions, political rights, and suffrage for the property-owning classes while the radicals were demanding full manhood suffrage and a right to a job. In the end the liberals would win out.

 

Clark starts his history with the 1815 Vienna settlement’s reaction to the French Revolution and then goes on to discuss the growing immiseration of the working class as the industrial revolution moves into high gear. The problems of the working class were defined as “the social question” by many of the intellectuals of the day. Falling real wages and periodic draughts characterized the milieu according to Clark.

 

Here is where I believe, as an amateur, Clark goes astray. It seems to me that Clark ignores Marx’s paean to the bourgeoisie in his manifesto. To quote “…has created massive and colossal productive forces…chemistry, agriculture, steam navigation, electric telegraphs and canals.” Again, in Marx’s words, “all that is solid melts into air.” In my opinion Clark should have spent much more time on the technological disruption that created the material basis for the revolutions. Indeed, the improved technology enabled the news of the Paris revolt to spread quickly throughout Europe.

 

The revolutions failed because of the radical-liberal split, the failure to bring the military on board, and the near complete lack of understanding of rural Europe by the urban intellectuals. Doesn’t that sound familiar? Remember Marx himself called it “the idiocy of rural life.”

 

However, the revolutions were in no way a long-term failure. Post-1850 new constitutions were written, Germany and Italy would be unified within twenty years, Jews were largely emancipated, and there were massive public investment programs in railroads, health, roads, and canals. The economy was about to boom and with it the ideas of social democracy and women’s rights took hold. Moreover, the pattern of radical movements centering around cafes and newspapers was firmly established and that would last up to the late 20^th century.

 

This is a massive book and there is much to be learned, but as I noted in the beginning it is far too long for the educated lay reader.

For the full Amazon URL see: Revolution was in the Air (amazon.com)

 

My Amazon Review of Tara Zahra's "Against the World: Anti-Globalism........."

The Revolt of the Masses

 

University of Chicago history professor Tara Zahra describes a world of growing trade protectionism, rising anti-immigrant sentiments, growing antisemitism, the rise of right-wing populist demagogues, and the fear of a global pandemic. This sounds all to familiar, but she is not discussing the world of today, but rather the inter-war period of 1919-1939. The primary difference is that the wheels have yet to fall off the global economy.

 

In the halcyon era for the global elite before World War I, all was right with the world bringing ever-growing prosperity for those plugged into the global economy. However, just as today many were left behind and there resentments were smoldering beneath the surface and when World War I upset the global apple cart, those resentments exploded which in its extremis brought fascists to power, especially in Germany and Italy. In central Europe, the dependence on imported food brought with it massive starvation as the allied blockade starved out the population. Hence, after the war the goal was to become initially self-sufficient in agricultural commodities and later, as was the case for Germany, to go as far into autarky as possible. Along the way, according to Zahra, democracy fell by the wayside.

 

What Zahra has ignored in this important book is that it was not only the elite who benefited from globalism but is was also the rising middle-class in all of the countries that the global economy touched. And when the global economy started to circle the drain in 1929, it was the middle class that went down with it planting the seeds of the authoritarianism that was to come. She also ignored the role of left-wing populism in reinforcing the power of the right. The fear of Bolshevism pushed many otherwise sensible conservatives into the hands of the far right.

 

The way out of the deglobalization trap, was, according to Zahra, was a form of global Keynesianism, where each country would prop domestic demand, making it easier to accept imports from the outside. Throughout her book, Zahra humanizes what happened with vignettes about leading industrialists and liberal-minded internationalists. In many ways this is a scary book, because it seems that history is rhyming in its own way today.

For the full Amazon URL see: Revolt of the Masses (amazon.com)

My Amazon Review of Richard Overy's "Blood and Ruins: The Last Imperial War, 1931-1945"

 

A Long Slog

 

Reading “Blood and Ruins” is a long slog vaguely reminiscent of the German Army’s long retreat from Stalingrad to Berlin from 1943-1945. Richard Overy, a distinguished British historian, has written an encyclopedic history of World War II which he rightly starts with the Japanese invasion of Manchuria in 1931. However, with the book running 1040 pages in the print version, it is way too long for the average lay reader interested in the history of that time.

 

He makes up excuses for German, Italian and Japanese aggression in arguing that they were frozen out of the international trading system by colonial preferences of the British and the French. Other countries were frozen out, but they did not start aggressive wars. He also argues that the British and French motivations were to preserve their empires. True, but they were also out to save their own necks in Europe.

 

Overy is a distinguished historian, and I am the rankest of amateurs. Nevertheless, I think he wrong on two major points. He characterizes Chamberlain’s appeasement policy as “containment.” Give me a break. If it were a containment policy, it failed disastrously. He refuses to characterize Soviet Russia as an imperial power. That is flat out wrong. Starting with the Ribbentrop-Molotov Pact the goal of the Soviets was to create an empire in Eastern Europe which they succeeded in implementing with the advancing Red Army. He also ignores that the Soviets had designs on the West with the Communist parties it controlled. In many respects the Soviets were as much as an aggressor as Hitler.

 

Where Overy shines is his discussion of the horrors of the Pacific war and life under the Japanese occupation. Having known someone who fought in the Battle of Tarawa as a 17-year-old Marine, Overy brings that battle to life. He is also correct in noting that the war resulted in ending the imperial system that had to give way to new nation states in Africa and Asia.

 

There is much in this book, but as I noted at the outset, it is a slog.

For the full amazon URL see: A Long Slog (amazon.com)

"Interest Rates Move to the Center Stage," UCLA Anderson Forecast, June 2018

Interest Rates Move to the Center Stage

David Shulman

Senior Economist

UCLA Anderson Forecast

June 2018

The era of ultra-low interest rates is behind us. With the yield on the 10-year U.S. Treasury Note surpassing 3% and with the Federal Reserve set to push up the Fed Funds rate above 2%, interest rates are well on their path to normalization. (See Figure 1) To be sure, we are not forecasting yields to reach their pre-crisis levels of 5%+ for both short-term and long-term rates, but a Fed Funds rate north of 3% and a 10-Year Treasury yield north of 4% for late 2019 will seem awfully high compared to the past decade.

Figure 1. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2008Q1 -2020Q4F

Sources: Federal Reserve Board and UCLA Anderson Forecast

The rise in rates is being propelled by high inflation, higher wages, an exploding federal deficit and the quantitative tightening policy adopted by the Federal Reserve.  An added wrinkle is the sale of fixed income securities by corporations utilizing their newly repatriated cash to buy back stock.

The Italian Job

Our interest rate forecast is largely based on domestic considerations. Now, all of a sudden, a political crisis involving the Euro in Italy along with monetary problems in Argentina and Turkey has triggered a flight to quality causing 10-Year treasury yields to plummet 30 basis points from 3.1% to 2.8% over a two week period. The flight to quality can best be seen in the Euro-area bond markets where over a four week period ending May 29, Italian 10-Year yields spiked by 138 basis points from 1.8% to 3.18% while German yields were cut in half dropping from 58 basis points to 26 basis points.  However, markets calmed down the next day. At this point we do not know how this will work out and it will largely be dependent on the Italian electorate’s position on the Euro. If the electorate decides to leave, we will face a currency/solvency crisis in the heart of Europe bringing with it even lower yields. While if the Italians decide to stay, yields will quickly snap back to where they were before. Because we do not view ourselves as experts on Italian politics we will stick to our U.S. interest rate forecast based on domestic considerations. Recall post-Brexit after dropping precipitously in the summer of 2016, markets quickly normalized.

The Domestic Backdrop for Higher U.S. Interest Rates

With year-over-year inflation as measured by the consumer price index already exceeding 2% and likely to be in the 2.5%-3% range over the forecast period, real bond yields, instead of being negative, will run in the 1%-2% range. (See Figure 2) Further, with the economy operating at full employment, wage increases will break out of the 2.5% recent growth rate to approach 4%. (See Figure 3)

Figure 2. Consumer Price index vs. Core CPI, 2008Q1 -2020Q4F

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 3. Employee Compensation, 2008Q1 – 2020Q4F

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Further upward pressure on interest rates will come from the Fed’s policy of quantitative tightening as it continues its course to reduce its balance sheet from approximately $4.4 trillion to about $2.8 trillion over the next few years. Thus, instead of buying bonds as it did during 2008 – 2015, the Fed has become a net seller. (See Figure 4) Adding to the supply is the Trump Administration’s all-out fiscal policy of spending hikes and tax cuts layered on a fully employed economy. As a consequence, the federal deficit is forecast to increase from $666 billion in 2017 to $1.06 trillion in 2020. (See Figure 5)

Figure 4. Federal Reserve Assets, 2006 – 23May2018, In $Billions

Source: Federal Reserve Board

Figure 5. Federal Deficit, FY 2008 – FY 2020F

Sources: Office of Management and Budget and UCLA Anderson Forecast

The 3-2-1 Economy

Although we expect real GDP growth to pick up to 3%+ for the balance of the year, up from the first quarter’s 2.3% pace, we expect growth to fade in 2019 and 2020 as higher interest rates take their toll. In round numbers on a fourth quarter-to-fourth quarter basis, think of the economy growing at 3% in 2018, 2% in 2019 and 1% in 2020. (See Figure 6) Another way of looking at it is that a fully employed economy has difficulty growing without substantial increases in productivity.

Figure 6. Real GDP Growth, 2008Q1 -2020Q4F

Sources: Department of Commerce and UCLA Anderson Forecast

As the economy bumps against its full employment ceiling, job growth will noticeably decelerate over the forecast horizon. For example, employment growth averaged 200,000 jobs/month in 2017; it will average 133,000/month for the remainder of this year and then decline to 85,000/month and 60,000/month in 2019 and 2020, respectively. (See Figure 7) Concomitantly, the unemployment rate will decline from its current 3.9% to 3.4% in mid-2019 and then gradually return to 3.9% by the end of 2020. (See Figure 8)

Figure 7. Payroll Employment, 2008Q1 – 20120Q4, In Millions, SA

Figure 8. Unemployment Rate, 2008Q -2020Q4F, SAAR

Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Business Investment Drives the Bus

Spurred by a major reduction in corporate tax rates, 100% expensing for equipment purchases and deregulatory policies coming out of Washington, D.C., we forecast business investment to continue to be the driving force in the economy. For both 2018 and 2019, we forecast real investment in both business equipment and structures to increase at an approximate 7% clip. (See Figures 9 and 10) However, growth will slow in 2020 as the effects of 100% expensing wane.

Figure 9. Real Equipment Spending, 2008Q1 – 2020Q4F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 10. Real Investment in Business Structures, 2008Q1 -2020Q4

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Housing Activity Growing, but Less than Robust

Housing activity has been the great disappointment of the economic recovery and expansion that began in 2009. To be sure, housing starts have more than doubled off their moribund lows of 2009-2011, but still remain well below their long-term average and a far cry from the earlier boom periods.[1]  Specifically, we are forecasting housing starts to increase from 1.21 million units in 2017 to 1.34 million units and 1.40 million units in 2018 and 2019, respectively. (See Figure 11) However, we see housing starts declining in 2020 to 1.36 million units as the lagged effects of higher interest rates and a slowing economy inhibit new construction.

Figure 11. Housing Starts, 2008Q1 -2020Q4F

Sources: Bureau of the Census and UCLA Anderson Forecast

Trade Remains the Biggest Downside Risk

Despite all of the bluster, some of which is legitimate, coming out of the Trump Administration decrying the U.S. trade deficit, the trade deficit, in terms of real net exports, is forecast to increase from $622 billion in 2017 to $814 billion in 2020. (See Figure 12) Why? The trade deficit is the result of the U.S. consuming more than it produces which is the result of a very low national savings rate. Thus, in order to reduce the deficit, the U.S. has to save more and/or produce more domestically. Over the near-term it is hard to produce more, but the high deficit fiscal policy of the Trump Administration reduces national savings requiring us to import more. All the Trump Administration can do is move around the trade deficit among our import partners.

Figure 12. Real Net Exports, 2008Q1 -2020Q4F

Source: U.S. Department of Commerce and UCLA Anderson Forecast

The risk to the forecast is that with all of the talk about a trade war with China and repealing NAFTA, we can sleepwalk into a serious economic accident. For example, in 2017 the U.S. imported a total of over $1.3 trillion dollars of goods from China, Mexico, Canada, Japan and Germany. (See Figure 13) A trade war implies higher tariffs and non-tariff barriers that work as a tax on the American people that would raise prices and restrict output. That is hardly the recipe for economic growth. And because it is hard for import using industries to shift sources in the short-run, there exists the threat of very real economic dislocations. Put bluntly, the administration is playing with fire and the recent nervousness in the stock market is beginning to reflect the risks associated with a trade war.

Figure 13.

Source: Barrons

Conclusion

The U.S. economy is leaving behind a very long period of ultra-low interest rates. Interest rates are in the process of normalizing with 10-year U.S Treasury yields reaching 4% and the Fed Funds rate surpassing 3% as economic growth accelerates and inflation exceeds the Fed’s magic 2% level. High fiscal deficits and the Fed’s quantitative tightening policy will put upward pressure on interest rates. Meantime, the economy, spurred by strong business investment, should grow 3% this year. However, growth will slow as the economy bumps against its full employment ceiling and high interest rates work to slow housing in late 2019 and 2020. Our simplified view is that we are in a 3-2-1 economy with growth on a fourth quarter-to-fourth quarter basis will be roughly 3% in 2018, 2% in 2019 and 1% in 2020.  The two major downside risks to the forecast is the potential for a trade war to break out with one or more of our major trading partners and for the uncertainty around Italian politics to broaden into a full-blown Euro-area crisis.

---

[1] See Shulman, David, “The Best of Times and the Worst of Times for Housing,” UCLA Anderson Forecast, June 2018

My Amazon Review of Henry Hemming's "Agent M: The Lives and Spies of MI5's Maxwell Knight"

Inside MI5

Henry Hemming introduces us to Maxwell Knight a jazz playing naturalist with his own private menagerie who turns out to be a great talent spotter and spy runner for MI5. He is the model for Ian Fleming’s “M.” He marries three times, but none of them were consummated. In other words he was quite the quirky guy.

Hemming’s biography largely focuses on the 1920’s and 1930’s where Knight is recruited into a private spying operation that infiltrates the British fascisti. Knight is well suited for this because he largely sympathetic to their goals and was a firm anti-communist. There he meets William Joyce who would go on to become the pro-Nazi broadcaster Lord Haw-Haw in the 1940's.

When Knight formally joins MI5 his main focus is on Soviet espionage and its handmaiden the British Communist Party. There he pioneers the use of female agents and with the great work of Olga Gray he breaks a major Soviet spy ring that infiltrated the naval armaments industry. He stays focused on the Soviets until Italy invaded Ethiopia and then, and only then, does he wake up to the threat of fascism.

Hemming focuses on Knight’s successes, but Knight, despite suspecting Anthony Blunt, he completely misses the notorious Cambridge Five spy ring. He comes close to detecting the Soviet infiltration of the British nuclear program, but objectively he fails.

Hemming offers us great insight into the operations of MI5 and the life of one of its best agents. For those interested in this topic, though a bit long, his book is well worth the read. 

The full Amazon URL is: https://www.amazon.com/review/ROOQ6F7EYOAB6/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Reliving the 1930s - Part 4

Yet again it looks like we are reliving the 1930s as we watch the U.N. sit idly by as the Assad government in Syria continues to make war on its own people with poison gas. The Obama red line of 2013 has come and gone and now President Trump stated yesterday that Assad went well beyond it. We'll see what Trump's apparent reversal of U.S. policy actually means. Hopefully the leadership of U.N. ambassador Niki Haley will prod him in the right direction.

But what is happening is Syria has an eerie parallel from the 1930s. In 1935 Italy invaded Abyssinia (now Ethiopia) and the League of Nations instituted sanctions. However in 1936 the British and French in the Hoare-Laval Pact chose to appease Italy and lifted sanctions. Meantime with the war on the ground not going well for the Italians, Italy resorted to the use of banned poison gas on the hapless Ethiopians. The war soon ended, but not before Ethiopian Emperor Haile Selassie made a dramatic plea before the League of Nations in Geneva. The delegates sat in silence because they knew that collective security and the League were dead. 

It looks like the U.N. is going down the same path unless America acts alone as we did with respect to the slaughter in Kosovo twenty years ago.