Intertwined Markets and the Armageddon to Come

Adam Tooze: Crashed. How a Decade of Financial Crises Changed the World. ISBN 978-1-846-14036-5 ⭐️⭐️⭐️⭐️⭐️ This book is a challenge and it is a challenge worthwhile to be taken up. A basic understanding of how bond markets work and how the yield of bonds is tied to the evolution of interest rates is helpful. An interest in economy and politics is indispensable.

Tooze retraces the three highly dramatic episodes of the financial Armageddon of 2008/2009: It starts with the crisis of the US mortgage system, becoming victim of deregulization and banks accumulating debts. Tooze walks us through the failing of American and European banks to provide sufficient liquidity to alleviate that first crisis leading to a European follow-up crisis. The final episode is the rescue attempts of the US Federal Reserve Bank and the European Union, the first being forceful and crowned with at least some success, the latter being timid, incremental and prone to create new problems without solving the old ones. The author shows the different crisis response mechanisms on both sides of the Atlantic and how intimately the two financial markets are linked. If one fails, it draws down the other. Forget all those dreams about national independence. People like Donald Trump, Michael Gove or Nigel Farage are either incompetent or liars. Or both.

Tooze points out fundamental problems of the financial markets and especially the institutional weakness of the European Union when it comes to crisis response. The system of checks and balances between the Commission, the European Central Bank and the Council may give the EU a democratic veneer, but it ties crisis management to the political doctrines of the bigger member states: Germany and France. Greece become an unvoluntary guinea pig and its economy suffered to such a point that is no longer clear what was worse: the disease or the cure. The newly created European Stability Mechanism may able to absorb future shocks, bu for how long? And having a fire-brigade ready never prevented a fire from breaking out. The inherent logics of the financial markets present a risk of their own and the question is whether we have enough safety rules and firewalls to either prevent or contain in a very early stage a would-be inferno.

I learned a great deal from the book. I had to look up a few things I had not learned at school. I still don’t feel comfortable with the concept of bond yields. But once I had worked my way through the first 150 somewhat technical pages I began to dive into a fascinating and scaring politico-economical thriller – John Le Carré for economists! And since the errors of the past tend to be the precursors of the errors in the future, I strongly recommend the book to anyone interested in current affairs. With Trump playing with fire and China holding large reserves of foreign assets – US bonds – we are heading for an uncertain future. If we can’t prevent the next crash, we may at least find some comfort in understanding it!

The potential risk of destabilisation and violent revolt after a collapse of financial markets is comparable to the French Revolution in 1789 and or the Russian Revolution of 1905. Dmitry Shostakovich has captured this spirit in his Symphony No. 11 in G Minor:

Managing Change – A Matter of Life and Death

Who Will Rule the Busiest Sea Lane of the World?

Robert S. Kaplan: Asia’s Cauldron. The South China Sea and the End of a Stable Pacific. ⭐️⭐️ ISBN 978-0-8129-9906-8 China is creating facts in the South China Sea by building airstrips on disputed islands like the Spratley’s, adding aerial defence systems and dredging natural harbours to make them accessible for larger warships. At the same time China’s navy is expanding and modernizing: submarines, cruise-missiles, unmanned aerial vehicles, stealth fighters and space-based command and control assets make China a formidable foe that not even the US aircraft carrier groups in the Pacific wish to confront. Beijing asserts what it calls a historical right to dominate the South China Sea and builds up the military power to defend it.

Robert Kaplan has visited the region and interviewed many officials in the countries having a stake in the question of who should rule the South China Sea: The United States Navy as the guardian of free sea lines of communication in the busiest shipping area of the world? Or China in its effort to exploit a situation where the military and diplomatic influence of the US has passed its climax, in its endeavour to replace an international system dominated by the US by a multi-polar system with Beijing as a major player? The fact that huge deposits of oil and natural gas may lie hidden below the sea floor doesn’t make the answer any easier.

The sustained economic growth has given China the possibility to catch up in terms of military modernization: less numerous but smarter armed forces. This in turn has fueled a spectacular arms race in the region. Singapore eyes the prohibitively expensive US made Joint Strike Fighter as its next generation war plane. Kaplan and the officials he talked to in Vietnam, Malaysia, Singapore, the Philippines and Taiwan portray China as a growing threat that has to be kept in check. Even Vietnam, once an enemy of the United States, feels more at ease with the status quo – the American hegemony – than with a future dictated by China and makes the case for a long term US naval presence in the South China Sea.

While Kaplan’s book has its merits in explaining the different countries’ twisted relationship with China – he is looking back several hundred years in some cases – and their immediate geostrategic priorities, it fails to explain in more detail the Chinese point of view. We learn little about China’s objectives and its long term vision for the region. The possibility that China’s neighbours might succumb to “Finlandization” – submission through Chinese economic pressure – is mentioned, but Kaplan does not elaborate on it. China’s use of soft power to seduce other countries goes unnoticed. The author also fails to explore in an unbiased way the possibility of China exerting a benign regional hegemony similar to the European Union’s regional dominance over the Mediterranean Sea. China is hostile, full stop – that’s the credo.

Kaplan belongs to the Realist School of political science, established by Hans J. Morgenthau in the 1950s, seeing international relations primary as a struggle for supremacy and analyzing shifts in power balances in terms of strategic interests and the military, political and economic means to reach these goals. This school of thought has however severe limits when it has to explain a globalized world with multiple interdependencies, and Kaplan’s book was already at its publication in 2014 partly out of date in its insistence on conventional military power and its understanding of modern military strategy.

The author advances the argument of “the stopping power of water” to explain why invading a disputed territory is far easier than occupying it, especially when the territory is inhabited by a hostile population. This weakens his own case meant to illustrate China’s dangerous designs. At the same time he fails to see that China has developed, just like Russia, concepts for hybrid warfare: fostering low-intensity internal conflicts by exploiting economic, ethnic or cultural fault lines, disinformation and propaganda spread over social networks, clandestine sabotage acts, subversion of enemy forces and civil servants. This type of warfare is far more subtle and dangerous as it targets the social cohesion of the opponent’s civil society. Its study requires a much more encompassing view of international relations than the Realist School ever has developped.

In 2014 the Ukraine crisis was in full swing, it was and still is a blue-print for the partial success of Russia hybrid warfare, creating “frozen conflicts” that bind the enemy’s political and military resources, situations where the opponent cannot capitulate for political reasons on the one hand and on the other hand is not powerful enough to triumph over his aggressor. A low-intensity war of attrition, waged in the diplomatic and political arena, coupled with an occasional military show of force and the exploitation of ethnical tensions in countries like Malaysia or the Philippines are much more likely to be part of China’s foreign policy than brazen military interventions. The recent dispute over airline codes refering to “Taipei, Taiwan” instead of “Taipei, China” illustrate such an approach. The occupation of this or that reef, the blockade of an Asian competitor or the conquest of Taiwan may simply not be necessary for China to assert its dominance.

Kaplan’s mantra-like emphasis on China’s expanding navy as a proof of its aggressive goals is besides the point, and ironically the author delivers himself the key by quoting the Chinese strategic thinker Sun Tsu: The supreme art of war is to subdue the enemy without fighting. China can wait until the dominance of the South China Sea falls into its lap like a ripe fruit as the role of the US in world affairs is declining. Its modernized navy will not allow China to establish dominance, but to preserve it. Time is on China’s side and it has a notion of time different from ours. It is thinking in decades and centuries, not in legislative periods. Sun Tsu would be pleased to see that his teachings are still a guideline for Chinese policy makers.

Now this book is hard-nosed political science, no-nonsense stuff, a troubling look into the crystal ball. To this I would like to oppose the delightful and delicate music of a Japanese composer, Toru Takemitsu:

Floating like dust – the sound of transcendence