As we write this article, the prospect of going over America’s fiscal cliff is real and high. Over this weekend, Democrats and Republicans in the US Senate will try to come up with a compromise that will let the world breathe easier for the next month or two. This compromise might be both trivial and fake. But it could serve like Europe’s financial shenanigans in kicking the can down the road.
Treasury Secretary Geithner has announced that the Debt Ceiling will be reached on December 31. This means the Congress will have to act in the next two-three months to raise the current Debt Ceiling or risk a default of Treasury Debt. The Republicans have already stated that they will need $1 of spending cuts for each $1 increase in the Debt ceiling.
This is not just a disagreement but a civil war over the future of American Society. Unlike 2010, this past election has provided tail wind to the Europeanistas who prefer increased government spending on the middle class while increasing taxes on the more wealthy. Arrayed against them are core Americans who want to cut government spending and restrict the growth of entitlement programs.
America has always been paranoid about losing its preeminence. But such paranoia has enabled America to address potential problems well before they become unmanageable. That is what today’s civil war is all about. Today, America can easily cover its interest payments on its debt. But that may not be true 5-10 years down the road. That also means it is much easier to fix America’s long term debt problems today than wait until they get out of control.
The reality is
that America has remained successful and predominant precisely because
American society has always addressed its problems before they become
big. Does American society still have this strength? If it does, America will enjoy a period of financial supremacy for the next decade or more. If it does not, it will slowly resemble Europe.
The less said about this miserable continent the better. It is pathetic that the richest economy in the world, the richest 550 million people in the world find themselves in the mess they are in. This is a true civil war just like the last two military civil wars of the 20th century – a conflict between the North & the South – between societies that produce and societies that consume with monies borrowed from the producer societies. It seems that Europe will suffer a slow deflation just like Japan did for the past 20 years.
Now this is a civil war in the classical sense. On a macro level, you see a region-wide conflict between resurgent Sunnis & Shias, supported & perhaps encouraged by relatively Gulf Sunni regimes and Iran. Syria is the obvious battleground but Iraq could be next. Iraq itself could find itself in a civil war between core Iraq and its Kurdistani provinces, a war over rights to Oil reserves. If all this were not enough, you have the prospect of a region wide intra-Sunni conflict between the more extreme Salafists and the more institutional Muslim Brotherhood. No one has any solutions or answers. But as long as oil continues to flow, the misery will be restricted to the region.
China & Japan
China seems to have become a beacon of stability under the leadership of President Xi Jinping. He seems smart, tactically sound and adept at communicating his message softly. The real question is whether he can persuade the PLA to take a softer tone with China’s neighbors. The more serious question is whether the new Chinese leadership can address China’s seemingly insoluble economic problems.
In contrast, the new Prime Minister Shinzo Abe has aggressive plans to raise Japan’s foot print and image in Asia. His currency policy represents a secular change in Japanese policy. Mr. Abe is also determined to establish closer business and military ties with Australia and India before he tries to improve relations with China. Frankly, a stronger, more outgoing Japan may be exactly the medicine needed to persuade China into a softer stance.
The “shining” India image has been replaced by the “stark” reality that India is a pathetically ill-governed, debt-ridden, dirt poor country in which half the people do not even have access to a toilet. It has a political system that is as “colonial” as any in the past 1,000 years – a system that exists solely to enrich the Political Caste, the new colonialists. And these new colonialists are literally looting the Indian Treasury as no Mughal ever did.
The visible story of India is the current civil war between two “colonial” forces – the British-apeing Indians fighting with the Mughal-TurkoAfghan- apeing Indians. You see states in North India fighting the increasing influence of English and the states in South India fighting the increasing influence of Hindi. But underneath it all, is the micro story of core Indians increasing their wealth, getting more confident and beginning to exercise their power.
In other words, the macro story of India could be visibly pathetic for the next couple of years but the micro story could be very bullish.
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