Issues of the Day

     7 July 2014

Periwinkle,

     I recently read where Berlin has barred Verizon as a mobile carrier option for their community due to spying concerns. There was something in addition today regarding someone’s meddling in Germany with an investigation’s materials or evidence. I see as well where the French are proposing to seek alternatives to the US greenback for their medium of choice given the US penalty imposed on one of their banks. Mr. Putin called the penalty, What was it? Oh, I believe it was “blackmail.” President Putin appears to not wish to lose his country’s Mistral-class ship purchases. Are naval ships not somewhat obsolete today? I think there was something recently in the news-o-sphere about Sarkozy having gotten himself into a pickle as well. Did you note the recent 30 year S400b energy transaction between Putin and Chinese President Xi Jinping? Amazing what a few sanctions from the West can achieve. May as well have the cards on the table. I believe the Russian leaders have been looking for such a deal for quite a while. At some point, Russia will probably move their economy out of the commodity dog house where they have been principally located with the other extraction states, largely in Africa and South America. lt’s been of interest to note, knowing the Russian propensity towards the sciences and math (they do after all launch our satellites), that the country has not been more successful moving its economy towards manufacturing and services. Perhaps this can be attributed to its inability to move away from corruption and a continued largely unfree economy. Chancellor Merkel and PM Cameron have both successfully completed commercial campaigns during their excursions to China. lt’s hard to turn down the potential to develop commercial relations with a continually emerging state with a billion people (customers). Perhaps, Periwinkle, this should be the role of executive leadership, cultivating commercial relations rather than hindering them? Recall Mr. Washington’s Farewell Address? Does this not still today have relevance? Of course it does.
     So, what’s the concern? Historians have written of the role large firms have played in developing economies and militaries of unfriendly and authoritarian regimes through the passing along of their knowledge in the manufacturing process and the sale of their wares. Technology and knowhow as well. This then is the question. Is this error being committed again? Is the pursuit of commercial endeavors with the Chinese aiding in the further development of an unfriendly political state? What are the objectives of the Chinese communist leadership? Gorbachev’s Perestroika resulted in a restructuring of the Soviet economy and the dismissal of some of those in leadership positions. Glastnost appears to be more associated with political openness and attempts to lessen political corruption. It has been a while since I’ve harkened back to this period during the ’80s, but it may be relevant to what is unfolding today in China. The Chinese leadership studies Soviet history with a keen eye as well, hoping not to disintegrate. Post Chairman Mao’s death in 1976, Deng’s economic reforms were gradually allowed to take effect through the Four Modernizations, first expounded by Enali. Deng was a survivor, twice having been purged under Mao himself! Deng implemented a “socialist market economy.” The first Third Plenary Session in 1978 under Deng implemented the Four Modernizations, reforming the economy, agriculture, science and the military. The fact is, given the growth of the Chinese economy, these reforms had teeth and some were able to foresee what has thus far unfolded. The Communist Party Central Committee under the leadership of Party Chairman and President Xi Jinping has recently put forth additional reforms during its recent third plenum. These involve matters pertaining to reforming interest rate policy, governance of the yuan, banking reforms, reform of state controlled firms, much needed hokou (migration) reforms, de-collectivization of rural land (a source of social unrest), new issuance of municipal bonds at the local level aiding over indebted and non-transparent local balance sheets, much needed pollution reforms, and finally reforming the one child policy (recognizing the future demographic time bomb). One may note that reforming a nation of a billion citizens might be likened to turning a large ship in a narrow strait, Periwinkle. Slow as to not cause social unrest. However, one may also note other than recent purging of corrupt leaders, including some of those in the military, there is no mention of reform of the political system or the Communist Party itself.
     Therefore, what are the aspirations of those in authority, President Xi and Prime Minister (Premier of the State Council) Li Keqiang? I reckon this is the question of the day. It may be that there is a further tightening of political control while the economy further liberalizes. How long, however, can such a scenario realistically play out? Are Western firms aiding an authoritarian regime? This is the conundrum. The Chinese are keen to recall the past and certainly have not forgotten their neighbor’s actions during World War II. However, in the age of deterrence (which though not in the limelight, still looms largely in the backdrop of the geopolitical stage) are the Chinese so naive as to significantly disrupt global tranquility? I see the Hong Kong citizenry is ill pleased at the moment as Hong Kong residents have had a long taste of democracy and what an open political system truly means. Beijing will most likely continue to bring the island under its tighter control. This event may foreshadow the larger mainland’s future as the country’s people experience economic prosperity they will most likely demand more political freedoms as well, eventually leading to the party’s authoritarian control cracking. Granted, the average Chinese resident has no tradition of democracy to draw upon. Concepts of the group, unlike the individual in the West, loom large as well. The question is how much longer a political “opening” takes to occur and what President Xi does prior to its having transpired? The global economy is fragile enough without having to expense another unnecessary conflict.
     On a lighter note, the fishing has been pretty productive lately. We’ve taken in a few days on the local lakes over the holiday. I was hoping to float a few streams, but this has yet to unfold. I’ve decided canoes are for rivers, not lakes.
     Regards,

     Tetraneuris

PS. Regarding the recapturing of funds from the financial institutions that most likely would have folded during the not too distant debacle, it seems to be the case that once healthy the entities are able to absorb immense penalties. This is regulatory overreach. Perhaps during future economic declines mismanaged firms can simply disappear like they used to without bringing forth astronomical unemployment and human suffering. Markets in the future need to be able to clear. Banking should be small, simple and local.

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