2010: Economic Pandemonium

2010: Economic Pandemonium

The true financial crisis begins when the world realizes that there are couple months food supply missing from 2010. The last two years were a gentle, mild preview of the real thing.

Total Panic

The sudden, shocking discovery that food supplies are running out will produce total panic. The reaction will inventory building — hoarding –at all levels. Major food producing nation will export bans (India has already banned food exports). Producers, Middlemen, And Households will rush the acquire supplies. All this hoarding will wrosen the crisis by throwing supply and demand further out of balance: export bans cut supply available on international market and inventory building increases demand. Food prices will more than double.

Central bank exodus from the dollar

With one out of eight Americans on food stamps, foreign central banks are subsidizing US food consumption by funding the US government with their treasury purchases. Once the food crisis begins next year, they will be faced with the choice:

1) Continue subsidizing US food consumptions as triple digit food inflation ravages their economy and their people starve.
2) Dump their treasury holdings onto the market to rapidly appreciate their currencies, lowering the cost of food imports and preventing widespread domestic starvation.

Not much of choice. China, for example, will drop the dollar peg without a second thought to prevent triple digit food inflation from damaging its economy and causing widespread of social unrest. Chinese exporters will be badly hurt, but that will be a small cost if it can keep food prices down.

In India, the government is ALREADY under pressure to selloff the country’s $270 billion in forex reserves.

Food prices are rising faster than any other commodity and food prices hit the poor the most.

While overall inflation is just 3 per cent, food prices are rising at unforgivable 17.7 per cent. Prices of rice and wheat have gone up in double digits in one year (10 per cent).
…
Perhaps the most surprising is that while food prices are rising, the government seems to be doing nothing, although it is fortunate to have many policy options at hand.

One option is to release food grain stocks [which unfortunately, DON’T EXIST], say analysts. They argue why should wheat and rice prices rise when India has near record stocks of food grains.
…
The second option that the government has to reduce the inflation in potatoes, onions and pulses is to use some of India’s enormous reserves of foreign exchange to import these food items so crucial for the poor.

India today has $270 billion in forex reserves. A small fraction of this could be used to import food and help the poorest.

“But the dollar can’t collapse because there is no alternative to the US dollar for a reserve currency…”

I love the “there is no alternative to the US dollar for a reserve currency” argument. Every time I hear it, I imagine someone standing on the deck of the Titanic on the night of April 14, 1912, and declaring, “This boat can’t possibly sink because there aren’t enough lifeboats!”

The lack of viable alternatives doesn’t mean the dollar can’t sink, it simply means that when it does go down, it will result in a tragedy of epic proportions which will be remembered for centuries to come.

Political Fallout of 2010 Food Panic

While a food crisis was unavoidable to some extent because of the abnormal weather and financial crisis, the total panic which will soon grip world agricultural markets is a creation of the USDA and its fictitious production estimates. If not for the USDA’s interference, food prices would have risen in the first half of 2009 in anticipation of the 2009/10 shortage. The United States Department of Agriculture, has caused incalculable damage to the world economy by encouraging overconsumption of rapidly diminishing food supplies.

Once the 2010 Food Crisis starts, confidence in the US government will be shattered as a result of the USDA’s faulty estimates. The starvation and misery caused by higher food prices will also create a lot of anger…

Insolvent Midwestern banks

With failed crops, farmers across the Midwest are bankrupt, and so are their banks. This is especially important considering that the FDIC is out of money. Every bank failure is now being financed with the immediate sale of treasuries.

Whether the US choose to bail out Midwest banks with billions of emergency aid for bankrupt farmers or finances the FDIC takeover of their banks, the outcome will be the same. The enormous quantity of debt which the US will need to sell to finance emergency aid and resolve bank failures in the Midwest will pressure an already collapsing market for US treasuries.

Panic selling of distressed debt

When the dollar starts rapidly losing value, the flaw in the whole “hold to maturity strategy” will be revealed. Financial institutions around the world will realize that the dollar will lose all value years before their toxic assets ever have the chance to mature. They will then begin dumping trillions of toxic US debt at firesale prices, simply to escape the dollar’s devaluation.

Self-reinforcing Breakdown of derivative markets and US financial system

Short term treasuries function as the collateral backing derivative markets and US financial system. When the dollar and treasuries start falling in value with exit of foreign central banks, investors will lose confidence in that collateral and start withdrawing from derivative markets. This will result in a flood of new treasuries coming onto the market as collateral is liquidated, causing further loss of confidence, and so on.

To image how this damaging dynamic would work, take a look at the Portfolio Allocation of PIMCO Commodity Real Ret Strat C Fund (PCRCX). PCRCX is a commodity fund which uses derivatives to gain its exposure to commodities.
PIMCO Commodity Real Ret Strat C Fund (PCRCX) Portfolio Allocation
Track portfolio allocation change of PIMCO Commodity Real Ret Strat C fund (PCRCX)

Date	Cash	Stock	Bond	Other
06/2009	11.56%	0%	75.75%	12.7%
03/2009	27.7%	0%	62.97%	9.34%
12/2008	34.59%	0%	57.76%	7.64%

Most Recent Top 10 Holdings in PIMCO Commodity Real Ret Strat C Fund (PCRCX)

30-Jun-09
Pimco Cayman Cmdty Fd Ltd Instl	13.41%
US Treasury Note 3%	10.07%
US Treasury Note 2%	10.04%
US Treasury Note 1.875%	9.84%
FNMA	9.70%
US Treasury Note 2.5%	8.68%
US Treasury Note 2.625%	8.29%
US TREASURY NOTE	7.82%
US Treasury Note 2%	6.79%
PIMCO FDS PRIVATE ACCOUNT PORTFOLIO SER	5.63%

It is easy to see why, with the treasury market breaking down, investors will question the wisdom of investing in a fund that has over 76% of its assets in US bonds. Investors will start withdrawing their money from the fund, and PCRCX will have to sell treasuries into a market already filled with only sellers. This “run on the bank” dynamic will gain steam until it leads to the collapse of derivative markets and the US financial system.

The use of a single asset class as collateral for an entire financial system is idiotic. There is no such thing as liquidity of investment for the community as a whole.

Derivative casino will be bankrupt

derivatives are essentially bets (about future value of commodities, currencies, bonds, etc). Like gambling at casinos, to make money in derivative markets requires meeting two conditions:

1) Being on the winning side of the bet.
2) Being able to collect on the bet.

The point here is that it doesn’t matter how many chips are won if the casino goes bankrupt before they can be traded in.

There is about $14 Trillion collateral behind listed/OTC derivative markets, and this collateral is invested in short term dollar-denominated debt. As the dollar and credit markets collapse, this collateral will lose all value (the equivalent of a casino going bankrupt). Investors trying to collect on profitable bets (ie: call options on gold) will find their derivative contracts backed by insolvent counterparties and worthless debt.

Warped perception of risk

Right now, the entire commodity derivative market is built on the idea of no default risk. This is to say, investor are now taking default risks very seriously in the credit markets (after experiencing horrible loses due to financial crisis), but these concerns over counterparty solvency are completely absent in commodity derivatives. When the the dollar, treasuries and derative markets start collapsing, concerned investors will start wondering who is on the other side of their commodity investments, and they will be horrified at what they find out.

Deflationary panic in commodity markets

The biggest sellers of commodity IOUs are insolvent institutions desperate for funding. They are taking advantage of the warped perception of risk to raise capital cheaply. For example, investors in commodity derivatives will be thrilled to learn that completely-insolvent, taxpayer-bailed-out AIG Financial Product is a key player in commodity derivatives.

AIG Financial Products and it subsidiary Banque AIG have been key players in the development of commodities as an asset class and has been active in this space since 1991. AIG Financial Products provides clients with a full suite of commodity offerings, including OTC derivatives on both individual commodities and commodity indices, structured products, and bespoke commodity investment solutions. As the creator of a leading benchmark for commodities investing, the Dow Jones – AIG Commodity IndexSM, AIG Financial Products helped spearhead the rapid growth of commodity-based investment in recent years and as of the end of the third quarter of 2006, there was an estimated $30 billion tracking the DJ-AIGCI.

Insolvent institutions like AIGFP have been very active and creative in selling all kinds of commodity investments to anyone foolish enough to buy them. Take for examplecommodity linked structured notes being sold to retail investors, banks, and commodity funds.

Retail and institutional investors alike are piling into commodity-linked structured notes according to the firm MTN-I, even as overall sales of structured notes declined.

Sales of commodity-linked notes rose to $15.8 billion over the first half of 2008, up from $7.8 billion over the same period a year ago, according to MTN-I…
…
About 77% of all commodity-linked structured notes sold so far this year were issued by investment banks. MTN-I’s research showed Deutsche Bank leading sales in the first half of 2008, with 59% of all sales. Barclays was second with 13% and Credit Suisse third with 5%. Merrill Lynch, across various entities, represented a little over 5% of sales.
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Typically structured notes are unsecured, which puts buyers at risk if issuers go into bankruptcy. That wasn’t a concern of most institutional investors until the events of this fall. The bankruptcy of Lehman Brothers, however, quickly left buyers on the hook and possibly unable to recoup their capital.

Other troubled financial institutions that have issued commodity structured notes include insurance giant American International Group (AIG), UBS AG (UBS), Morgan Stanley (MS) and French bank Dexia (HIB4.BE).

AIG Financial Products Corp is also actively involved in commodity ETFs. From the prospectus of DJ-AIGCI:

(Who in their right mind would buy an AIG-backed commodity ETF?)

ETFS Agriculture DJ-AIGCI

Investment objective

ETFS Agriculture DJ-AIGCISM (AIGA) is designed to track the DJ-AIG Agriculture Sub-IndexSM and pays a capitalised interest return which cumulates daily. The Sub-Index is an “excess return” index and the interest component combines to give a total return investment.
…
AIGA is backed by matching Commodity Contracts purchased from AIG Financial Products Corp. (AIG-FP) whose payment obligations are guaranteed by American International Group, Inc (AIG) and backed 100% by collateral held by the collateral manager BNY Mellon in a separate account and adjusted daily.

As investors realize who is on the other side of their investments, it will lead to a deflationary panic in commodity markets, with all but the most trusted commodity investments being abandoned. Insolvent institutions like AIG will lose a critical source of funding and, more importantly, investment demand, instead of being absorbed by the IOUs of insolvent institutions, will flow directly into physical commodities, driving up prices.

The Federal Reserve will print trillions

If the treasury market collapses, the government will lose the ability to sell debt to fund itself, which isn’t an option. To preventing such a collapse, the Federal Reserve will have to make purchases in the trillions despite already having run out of room on its balance sheet, which means it will have to print money. A massive expansion of the Fed’s balance sheet at a time of when inflation is spiraling out of control will destroy all confidence in the dollar, worsening the currency crisis.

What life looks like during hyperinflation

Below is an extract from Paper Money by “Adam Smith,” covering Germany’s hyperinflation in 1923, which offers a good account of what life looks like during hyperinflation.

The German Hyperinflation, 1923

Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.

“My father was a lawyer,” says Walter Levy, an internationally known German-born oil consultant in New York, “and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.”

…
More than inflation, the Germans feared unemployment. In 1919 Communists had tried to take over, and severe unemployment might give the Communists another chance. The great German industrial combines — Krupp, Thyssen, Farben, Stinnes — condoned the inflation and survived it well. A cheaper Mark, they reasoned, would make German goods cheap and easy to export, and they needed the export earnings to buy raw materials abroad. Inflation kept everyone working.

So the printing presses ran, and once they began to run, they were hard to stop. The price increases began to be dizzying. Menus in cafes could not be revised quickly enough. A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. “If you want to save money,” he was told, “and you want two cups of coffee, you should order them both at the same time.”

The presses of the Reichsbank could not keep up though they ran through the night. Individual cities and states began to issue their own money. …

The flight from currency that had begun with the buying of diamonds, gold, country houses, and antiques now extended to minor and almost useless items — bric-a-brac, soap, hairpins. The law-abiding country crumbled into petty thievery. Copper pipes and brass armatures weren’t safe. Gasoline was siphoned from cars. People bought things they didn’t need and used them to barter — a pair of shoes for a shirt, some crockery for coffee. Berlin had a “witches’ Sabbath” atmosphere. Prostitutes of both sexes roamed the streets. Cocaine was the fashionable drug. In the cabarets the newly rich and their foreign friends could dance and spend money. Other reports noted that not all the young people had a bad time. Their parents had taught them to work and save, and that was clearly wrong, so they could spend money, enjoy themselves, and flout the old.

The publisher Leopold Ullstein wrote: “People just didn’t understand what was happening. All the economic theory they had been taught didn’t provide for the phenomenon. There was a feeling of utter dependence on anonymous powers — almost as a primitive people believed in magic — that somebody must be in the know, and that this small group of ‘somebodies’ must be a conspiracy.”

When the 1,000-billion Mark note came out, few bothered to collect the change when they spent it. By November 1923, with one dollar equal to one trillion Marks, the breakdown was complete. The currency had lost meaning.

…
But although the country functioned again, the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: “The market woman who without batting an eyelash demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her.”

With the currency went many of the lifetime plans of average citizens. It was the custom for the bride to bring some money to a marriage; many marriages were called off. Widows dependent on insurance found themselves destitute. People who had worked a lifetime found that their pensions would not buy one cup of coffee.

Pearl Buck, the American writer who became famous for her novels of China, was in Germany in 1923. She wrote later: “The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the masters of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency.”

The death of the “US consumer”

The famous “US consumer” has been the driving force of the global economy for decades. This ends in 2010, as the dollar’s collapse will wipe out America’s purchasing power.

US Economic Disintegration

70% of the US economy is consumer spending, with at least 20% of it directly tied to commercial retail real estate. Less than 10% of our economy is related to the production of basic goods and services. This style of economy cannot handle a pull back in consumer spending.

America is facing a terrifying future. As the dollar loses most of its value, America’s savings will be wiped out. The US service economy will disintegrate as consumer spending in real terms (ie: gold or other stable currencies) drops like a rock, bringing unemployment to levels exceeding the great depression. Public health services/programs will be cut back, as individuals will have no savings/credit/income to pay for medical care.

What has already happened in the last year offers a good preview of what to expect in the next:

‘tent cities’ are growing all around the country
California is experiencing a meltdown
Police cars are being repossessed due to falling tax revenues
Major retailers, hotel chains, and theme parks are going bankrupt
Loan quality at American banks is the worst in at least a quarter century and is deteriorating at the fastest pace ever
The victims of this financial disaster don’t have the money to bury their loved ones.
US states have started printing their own currencies
Recession has put a major strain on social security trust fund
US Contract law torn apart

Given the food shortage in 2010, there is also the potential for famine in the US

The US will not fall alone

With the free falling dollar spreading doubt about all paper currencies, and countries with weak financial health will join the US in hyperinflation. Two countries which will follow the US into economic oblivion are Britain and Japan

Britain is probably the only country worse off than the US, and they know it. Privately,something close to desperation is starting to develop inside government, with cabinet ministers being quoted as saying things such as. “The banks are f***ed, we’re f***ed, the country’s f***ed.” The last time Britain built up this much debt was when it was fighting half of Europe.

Japan meanwhile is facing a demographic collapse and its debt to GDP is approaching 200%. The dollar’s collapse is going to wipe out the value of Japan’s foreign reserves and destroy the country’s largest export market (the US), heavily damaging the economy. The yen, like the pound and dollar, will not survive.

Financially Surviving 2010

Here is some investment advice for surviving the 2010 Food Crisis.

Avoid all commodity futures!

DO NOT BUY agricultural futures! While it might be tempting to buy futures contract for soybeans and other agricultural commodities, this is a mistake. Look at the backwardation which happened at the end of August this year: shortage sent cash price of soybeans over $13 while futures contracts hovered around $11. Futures contracts missed out on most of the price spike by nearly 25%.

The 2010 Food Crisis will send futures into permanent backwardation. In other words, shortages will send cash prices into steep backwardation, and then, when the dollar and treasuries collapse, defaults fears will cause that backwardation to grow. Fears that CME might collapse could easily lead futures to trade at a fraction of the commodities they track.

Avoid all other derivatives

It is impossible to hedge against the dollar’s fall with derivatives! Since global derivatives markets operate on the assumption of the continued stable value of the dollar and short term US debt, Using derivatives to bet against the dollar is NOT a good idea. The panic in 2010 will see the majority of derivatives end up worthless.

Avoid all US debt

The biggest buyers of US debt, foreign central banks, are about to become the biggest sellers. Get out while you still can!

Avoid all investments dependent on US consumer

The dollar’s collapse will rob US consumers of all purchasing power, and any investment depend on US consumption will lose most of its value.

Avoid investments in oil (at least for the next year)

While I am bullish on oil for the long term, there are several reasons to be underweight oil in the near term:

1) There is a supply glut (volumes of oil products stored at sea have risen to more than 90 million barrels.)
2) The dollar’s collapse wipe out a huge amount of demand for oil. While demand from emerging economies like India and China will replace this lost demand, it will take in one to two years.
3) Higher food prices will hurt demand for everything else, including oil.
4) There is a very high the entire Strategic Petroleum Reserve will hit the market next year after the treasury market collapses and the US government is desperate for cash.

Investments in oil won’t be complete disaster as the dollar’s collapse will generate a lot of demand for “real” assets, but I expect oil to be the worst performing commodity in 2010.

Avoid Margin Accounts

If your broker fails, you are virtually guaranteed to be left with nothing.

Invest in Physical gold

With the Gold Market already Reaching The Breaking Point, the 2010 Food Crisis is guaranteed to trigger a gold banking crisis. Those who own physical gold (and not some paper derivative) will do well.

Invest in agriculture sector

Anything (non-derivative) related to agriculture is going to have a good year. The stocks of fertilizer and seed producers should do well for example.

The best investment in agriculture is to buy farmland in countries which don’t subsidies their agricultural sector (subsidies for their booming agriculture sector is the first thing cash-strapped governments will cut).

Invest In commodity producers

Commodities will have a great year next year as the dollar collapse. Agricultural commodities will be the best performing and oil will be the worst. Everything else should fall somewhere in between. Commodities not consumed in the US but heavily consumed in China, like coal, will do best.

Invest in service sector of emerging economies

America’s lost purchasing power will be transfer to nations exporting nations with large foreign reserves. Investments in the service sector of places like Russia, China, Brazil, India, etc should do well.

Invest in the debt of stable currencies

For the short term, I would stick with short term debt (in stable currencies) or, better yet, gold. However, after the 2010 Food Crisis begins, interests rates around the world will jump significantly in response to spiking food prices, and this will probably be a good opportunity to acquire long term bonds at attractive rates (in stable currencies like the yuan, ruble, etc).

Conclusion

There is no precedence for the panic and chaos that will occur next year. The global food supply/demand picture has NEVER been so out of balance. The 2010 food crisis will rearrange economic, financial, and political order of the world, and those who aren’t prepared will suffer terrible losses…

Credit: MarketSkeptics

US car market implodes

US car market implodes

USA Today reports that car dealers fighting to keep buyers of dying brands.

Car dealers want to keep buyers of dying brands
Updated 12/28/2009
The closed Saturn of Colma sales lot sits empty on Sept. 30, in Colma, Calif. General Motors is closing its Saturn brand after negotiations with Penske Automotive to take over the brand fell apart.
By Sharon Silke Carty, USA TODAY

DETROIT — This Christmas and New Year, the auto industry is worried about the orphans.

There are about 3 million of them: Customers who either lost their dealer because of closings in 2009 or whose current car brand is going out of business. And it’s pitting carmakers and car dealers against one another as they fight for who’ll win that business.

Urban Science, a consultant firm in Detroit, says 1,467 dealers closed in 2009. The bulk were General Motors or Chrysler dealerships. They were forced out of business when the carmakers filed for bankruptcy and could close weak dealers.

Auto sales are expected to rise slightly in 2010, up to around 11 million, compared with fewer than 10 million sold in 2009. But dealers are still expected to close at a faster rate than usual, because GM isn’t done closing outlets.

GM is killing the Pontiac, Saab and Saturn brands. Its Hummer brand will likely be sold to a Chinese company. That leaves Pontiac, Saab and Saturn customers needing a new place to service their cars.

If GM can’t hang on to these customers, it risks losing sales to other brands.

“GM desperately needs those sales and that market share,” says Michelle Krebs, senior analyst and editor at consumer website Edmunds.com’s AutoObserver publication.
…

Chinese car market explodes

Msnbc reports that China’s rural markets have big appetite for cars.

China’s rural markets have big appetite for cars
Dealers run out of inventory; spike is major reason country is No. 1 market
The Associated Press
updated 12:20 p.m. ET Dec. 27, 2009

CHENGDU, China - Minivan salesman Zhu Yi has a problem that most auto dealers elsewhere would happily swap for their own — he doesn’t have enough vehicles to satisfy customer demand.

“Sales are exploding,” says Zhu, a 32-year-old manager at a General Motors Co. joint venture dealership in Chengdu, pointing to charts on his laptop that vividly plot the steep incline.

Car buyers in Chengdu, a grimy city in southwestern China’s Sichuan province best known for its giant pandas and spicy food, face waits of up to several weeks for some popular models, he says.

“We simply don’t have the cars people want. Sales could be climbing even faster.”

As growing numbers of Chinese shop for their first vehicles, or trade up for newer models, sales in China’s immense hinterland are booming,encouraged by tax cuts, government subsidies and growing consumer spending power.

In regions striving to catch up with relatively well-off coastal cities, families and small businesses are gladly swapping scooters and bicycles for the comfort and convenience of the automobile.

The supercharged growth has propelled China ahead of the United States as the world’s biggest auto market and provided a lifeline for automakers like General Motors and Toyota Motor Corp. as sales crashed around the globe.

The government’s role in spurring the market has been crucial but China’s still low level of car ownership points to the potential for decades of strong growth even as some analysts warn the future holds tougher competition and dwindling profits.

To counter a slowdown late last year as the global financial crisis unfolded, the government halved taxes on purchases of small autos and is spending 5 billion yuan (about $730 million) on subsidies for purchases of light trucks and minivans in the countryside, where most of China’s 1.3 billion people live.

Earlier this month, the purchase tax was raised to 7.5 percent, though subsidies also increased.

Happy with the results from this year’s rescue package for the industry, Beijing is leery of risking a relapse, analysts say.

“The message sent by the government is that they will not let the auto industry weaken, especially not in 2010,” said Jia Xinguang, chief analyst at China National Automotive Industry Consulting & Developing Corp., an investment management company.

Enticed by the potentially huge market, automakers have poured billions of dollars into ventures here in the past two decades. Total sales this year forecast to shoot past 13 million units, up a third from last year’s 9.8 million.

Meanwhile, sales in the U.S. have faltered, with January-October vehicle sales totaling 8.6 million, compared with Autodata CorpChina’s figure for 10.9 million in China during the same period.

The revival in sales has been opportune for GM as it struggles to restructure following a spell in bankruptcy court. Including minivans and other passenger cars, SAIC-GM-Wuling, GM’s minivehicle venture in China, led nationwide sales in November, with 83,753 units sold.

Car sales in the main cities like Beijing and Shanghai are robust, but the zippiest growth has been in so-called second, third and fourth-tier cities. Chengdu, a city of 11 million, now ranks in the top four auto markets, with sales jumping almost 60 percent over a year earlier in September, to 22,585 units.

The major city nearest the epicenter of a catastrophic May 2008 earthquake that left almost 90,000 people killed or missing, Chengdu did not suffer extensive damage, but it is now booming as money floods in to finance rebuilding in the quake zone.

Along the main roads ringing the city and to the airport stand cluster after cluster of newly built auto dealerships — luxury brands like Jaguar, Porsche and Rolls Royce as well as more affordable foreign and domestic brands.

Zhu’s dealership, which sells mainly SAIC-GM-Wuling compact minivans,has seen sales more than double to 37,000 units so far this year, he says.

The vans, which seat seven and go for 30,000 yuan-50,000 yuan ($4,400-$7,300), are the country’s biggest selling model, favored mainly by small, private businessmen like Wu Weizhong, a glove seller who was peering under the driver’s seat, where the vehicle’s engine is located.

“That’s the heart of the vehicle, the most important part!” Wu said before jumping inside to try out the seat and steering.

Chengdu’s dusty, smog-choked roads are jammed with a smorgasbord of brand names — big Toyota and Lexus SUVs, sleek Mercedes Benz, Buick sedans and smaller, compact Suzukis and Peugeots. Along with the foreign brands are plenty of Changans, Cherys and BYDs — fast-growing domestic automakers that are grabbing market share by catering to customers seeking affordable, fuel efficient cars.

The proliferation in choice has made buyers more discerning.

“Before, it was a seller’s market, and people would just buy whatever was available, but now they have all sorts of requirements,” says veteran saleswoman Chen Lin, who moved to BYD, a battery maker that branched into automaking this decade, looking for new opportunities.

BYD’s F3 compact is currently the country’s best-selling sedan, and nine out of 10 of Chen’s customers are first-time car buyers, though growing numbers of visitors to her brightly-lit dealership on the outskirts of town are looking to trade up to the automaker’s F6 midsize sedan, she says.

“People in Sichuan are very practical. They are focused on value for money, not prestige. So our cars seem to suit the local market,” Chen said.
…

… with car ownership at only 40 per 1,000 people, and even less in the countryside — a tenth that of the U.S. — dealers like Zhu and Chen have few qualms about the industry’s future.

“Customers are buying because, quite simply, they need a car, their incomes are rising, and they now have the kind of purchasing power they need to buy them,” Zhu says.

Conclusion: America outsourced its prosperity over the last three decades. Chinese quality of life is rapidly adjusting upwards to reflect their new prosperity (transferred so generously from the US), while America collapses into a third world nation. As the 2010 Food Crisisunfolds next year, the entire US will see the same economic disintegration already being experienced in places like Detroit and Las Vegas.

Credit: MarketSkeptics.com

Checkmate – Strategy of a Revolution feat. by Susanne Brandstätter

“Tyranny to Freedom: Diary of a Former Stalinist”, by Ludwik Kowalski

The author of this autobiography is one of many deceived communists who abandoned their former ideology. Born in 1931 in Poland, Ludwik Kowalski lived in the Soviet Union up to age 15. His undergraduate and graduate education was completed in Poland and France. After returning to Poland in 1963 with a French Ph.D. in Nuclear Physics, he was invited to a scientific conference in the US, and became a research associate at Columbia University. His teaching career began in 1969, at Montclair State University, in New Jersey. After retiring in 2004, he wrote “Hell on Earth: Brutality and Violence Under The Stalinist Regime,” a short and easy-to-read book for those Americans who know very little about Soviet history.

Kowalski’s autobiography is based on his diaries, starting in 1946; it is a fascinating story of one man’s struggle to clarify his political identity. But this is not all; some readers might be interested in other aspects of his story, such as scientific work, affairs of the heart, religious belief, etc. After re-reading his voluminous diaries (written in Polish), Kowalski realized that they contained enough substance to be of interest to others. Seeking editorial help, the author asked his wife “Are you going to be embarrassed to read descriptions of episodes from my sexual life?” The answer was “we are senior citizens now.”

“Tyranny to Freedom: Diary of a Former Stalinist” can now be purchased online at:

http://www.wastelandbooksonline.com/shop/index (click “details”)

or at:

http://www.amazon.com .

It can also be ordered from a bookstore (The ISBN number is 978-1-60047-390-6).

To see the cover of the book go to:

http://pages.csam.montclair.edu/~kowalski/mybook.html

Royalties will be donated to a Montclair State University scholarship fund.

Comments and reviews will be highly appreciated. Contact the author by e-mail:

kowalskiL@mail.montclair.edu

Share the above information with others who might be interested (for example, by forwarding this message to a friend). A self-published author needs help to make the book known to potential readers. What can be done to accomplish this? Suggestions will be appreciated. Thank you in advance.

Nicolai Kondratjew, 5th wave 1966/67-2006/07 (III)

Cycles of History, Boom and Bust
by J. R. Nyquist

Many things are cyclical. That is to say, they occur again and again like clockwork, on the striking of an hour or the passage of a certain day. Winter recurs annually. The menstrual cycle corresponds to the phases of the moon. The life cycle of every living creature involves birth, growth, maturity, old age and death. On average, dogs live so many years and human beings live so many more. The cyclical course of nature itself is inescapable. Our clocks are based on the continuous motion of the earth as it rotates. Our calendars and seasons are based on the path of the earth around the sun. No wonder, then, it has been the tendency of political philosophy to describe politics and economics as cyclical, according to given seasons. The ancients saw a cycle of political revolutions emerging from the simple forms of the state. The moderns see a certain correspondence between the rise and fall of Rome and the rise and fall of America or “the West.” There is, as we all know, something called the “business cycle.”

It has been claimed that history itself is cyclical. The German writer Oswald Spengler claimed that each civilization passes through definite stages. Such theories are not viewed today as scientific. Social phenomena are considered too complex for such analogies to be useful. But as there are small cycles, there must be larger cycles. How could there not be? Brilliant men and scholars have believed in regular economic “supercycles.” Joseph Schumpeter suggested the correctness of Kondratiev wave phenomenon (or “grand supercycles”) in which a disastrous economic downturn would follow every 50 to 60 years.

As noted above, such theories are not “scientific,” but rely on the fact that all phenomena appear to follow a cyclical pattern – whether regular or irregular.

Not adhering to the Kondratieff pattern, the United States did not suffer a second Great Depression in the 1980s. But still, there were those who believed the 1990s would see an economic downturn according to the Elliott Wave Principle. It was Robert Prechter, Jr. who believed in a wave pattern similar to that described by Nikolai Kondratiev. Curious as it may seem, Prechter was not an economist but a psychologist. He has repeatedly stated that mass psychology is the key to economics.

While the Elliott Wave Principle is far from scientific, and anyone adhering to Prechter’s market predictions would have had a 15-year annualized return of negative 25.4 percent (according to the Hulbert Financial Digest), Prechter’s dark predictions of impending economic catastrophe possesses metaphorical elegance. As gold approaches $900 an ounce and oil approaches $100 a barrel, we are reminded that grand economic supercycles are very possible indeed.

In 1995 Prechter predicted the coming of a debt-credit contraction. On page 278 of his book, At the Crest of the Tidal Wave, he wrote: “If there is one fundamental event that will result from a major bear market in social mood, it is the collapse in the bloated debt structure, a devastating event that not one citizen in ten thousand knows is coming. All this debt will have to be liquidated, and the process is unlikely to be serene.”

According to Prechter, the bursting of the credit bubble and the liquidation of debt would lead directly to deflation. “In the deflation of the 1930s,” noted Prechter, “stocks, real estate and commodities fell 90% in value, and questionable bonds fell 20% to 50%. Many stocks went to zero, and the companies were never heard from again.” The motor for the downward “spiral” of the economy, says Prechter, will be psychological. It will involve a shift from mass optimism to mass pessimism. “Booms last longer,” wrote Prechter, “because optimism is fed by slowly rising emotions involving hope and greed,which, because they are tempered by caution, can reach maximum intensity only over a long period….” Economic busts, however, can be sudden and fast-paced because “pessimism is fed by fast-flaming emotions such as fear and anger, which can be realized in a flash of destructive action.”

According to Prechter, the final bust experienced by modern capitalism will the greatest of all. Prechter quotes the late A. Hamilton Bolton, who wrote: “In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by deflation of excess credit. This was the factor in common.” This observation puts things into perspective, as the United States has witnessed the greatest credit inflation in history and must now experience a corresponding credit deflation. As Prechter noted, “Major deflations are … extremely destructive, and the next one should be no exception. That we are in the midst (and apparently near the end) of the greatest debt buildup in world history suggests that the resulting deflation and depression will be correspondingly severe.” According to Prechter, it will be the greatest depression in over two centuries.

Even if Elliott Wave Theory is mistaken and unscientific, the cycle of boom and bust is real enough. It is not pessimistic to say that the United States will eventually experience another Great Depression. It is realistic to make such a statement. But are we currently approaching the decisive psychological turning-point between optimism and pessimism? If it doesn’t come at the end of 2007 it will come, nonetheless, in 2008 or 2009. The world economy cannot expand indefinitely. There will be another Great Depression. And this revelation has military-political significance for Americans. It has national-survival significance.

When the economic situation changes, when peak oil has its say, when the Middle East crisis cannot be solved, when American politics reduces to a sharp ideological division, when the real estate bubble continues to burst, what will happen? What will the Russians and Chinese do? For thousands of years the world was about war and dominance, the power of oligarchies and the exploitation of peasants. Does anyone believe that the world cannot revert back? Does anyone think that the fall of modern capitalism will result in any other outcome?

Well, of course, we are yet surrounded by militant optimists who insist that realism is pessimism. All the same, life and history follow certain cycles. This much is undeniable.

Moldovan Priest Attacks Menorah, Erects Cross

(IsraelNN.com) An Orthodox Christian priest and his followers attacked a public Chanukah menorah in Moldova’s capital city on Monday, replacing it with a cross.

Anatoliy Chirbik led a group of about 100 singing supporters through a demonstration at Stefan the Great Square in Kishinev, during which they used hammers and iron bars to dismantle the five foot tall menorah, hastily erecting a huge cross in its place.

We are an Orthodox country,” Chirbik told the assembly. ”Stephan the Great defended our country from all kinds of Zjids [deragotory term for Jews], and now they come and put their menorah here. This is anarchy.”

Local Jewish leader Alexandr Bilinkis called on the Orthodox Church to denounce the priest’s actions. The Moldovan government condemned the vandalism, saying the menorah was subsequently found, reinstalled, and is back in place under police protection.

In 1900, Jews made up approximately half of the population of Kishinev.  Blood libels were raised as the Jewish population swelled, leading to two major pogroms in 1903 and 1905, causing an exodus of thousands of Jews.

Moldovian Jewry hit another peak immediately prior to World War II. During the war, 53,000 of Kishinev’s 65,000 Jews were murdered by the Nazis.  Jewish life was then severely curtailed under the Soviet Union. Twenty years ago, there were 66,000 Jews in Moldova, but now there are approximately 12,000, with many Jews having emigrated to Israel.

ROMANIA: A DISPUTED ELECTION AND DECEMBER UNREST

ROMANIA: A DISPUTED ELECTION AND DECEMBER UNREST

Summary
Official results for the Dec. 6 election show incumbent Romanian President Traian
Basescu defeating opposition leader Mircea Geoana in the country’s run-off election, with Geoana alleging voter fraud. Though political turmoil is nothing new for Romania, the sharp economic downturn makes domestic unrest an increased possibility.

Analysis

Incumbent Romanian President Traian Basescu won the runoff election for the
presidency, defeating Social Democratic Party (PSD) challenger and former Foreign Minister Mircea Geoana 50.3 percent to 49.7 percent, according to the results released Dec. 7 by Romania’s central election office. Geoana claimed victory Dec. 6 after exit polls showed him narrowly beating Basescu, and Geoana has refused to accept the official results, alleging voter fraud.

Uncertainty over the election could lead to potential unrest in Romania, particularly as the country grapples with the effects of a sharp economic downturn and the politically contentious anniversary marking the fall of communist rule.

Power in Bucharest is shared by the president and prime minister. However, Romania’s government collapsed Oct. 1 after nine PSD ministers resigned from the Cabinet, leaving Prime Minister Emil Boc and his Democratic Liberal Party (PDL) without enough support in the parliament to govern. Many saw this as a pre-election maneuver by Geoana to put Basescu — who is formally independent but supported by the PDL –into a difficult spot.

The upcoming crisis over the presidential elections will undoubtedly delay the
appointment of the new government and prime minister. Prior to the presidential
election, there was a consensus in the parliament among the opposition parties that the mayor of Sibiu, Klaus Johannis, should become prime minister. Johannis is seen as an independent because he is unaffiliated with any large party, being the leader of a very small party, the Democratic Forum of Germans in Romania. But with Basescu claiming victory, it is unlikely that the opposition parties will be able to convince him to accept their candidate as the prime minister.

The delay in forming a government comes at a bad time for Romania. Political
uncertainty surrounding the government has led to the blocking of the 20 billion
euro standby loan from the International Monetary Fund. The economy, which grew at 6.2 percent in 2008 — the fastest gross domestic product (GDP) growth in all of the European Union — is forecast to decline by 8.5 percent in 2009.

Furthermore, the European Union has already threatened to block EU funds to Romania for past corruption, and hints of a fraudulent election could lead to a renewed call for such action in Brussels.

Aside from the economic problems, there is considerable social angst in Romania.
Prior to the runoff election, a number of supposedly spontaneous protests erupted on Dec. 1 in Timisoara. While the protests were apparently “anti-communist,”
demonstrators were seen ripping up Geoana posters. Geoana’s supporters have claimed that the protests were orchestrated by Basescu’s camp to connect Geoana and his center-left PSD with communist rule in Romania.

Increased unrest is highly possible. The recession, coupled with a high degree of
economic uncertainty, is likely to provide motivation for many to take to the
streets. Furthermore, events marking the 20th anniversary of the Romanian
anti-communist revolution will begin on Dec. 16 and will offer an opportunity for
anti-Basescu parties to coalesce, echoing the way that the 50th anniversary of the
1956 Hungarian uprising against Soviet occupation spurred anti-government rioting in Budapest in October 2006.

This will be a welcome sight in Moscow, as Basescu is considered as a serious thorn in Russia’s side. His support for an anti-communist revolution in neighboring

Moldova and staunch support of the United States have made him the Kremlin’s main enemy in the Balkans. Basescu will undoubtedly use this fact to present himself as the only legitimate political heir of the anti-communist struggle in Romania. The conflict between Basescu and Geoana, grafted onto the coming anniversary of the anti-communist uprising, could provide for a very combustible December in Romania.

Sursa: Stratfor

Support the Liberal Party’s 150th anniversary plaque appeal

On 6 June 1859, at Willis’s Rooms in King Street, St James, London, three groups of MPs – Radicals, Whigs and Peelites – met to formalise their parliamentary coalition to oust the Conservative government of Lord Derby and bring in a new administration under Lord Palmerston. Thus was born the first Liberal government, and the meeting in Willis’s Rooms marks the foundation of the Liberal Party.

To mark this 150th anniversary of the formation of the Liberal Party, and to commemorate the Willis’ Rooms meeting permanently, the Liberal Democrat History Group is arranging to erect a Westminster Council ‘heritage plaque’ on the current-day site, Almack House in King Street.

The cost will be approximately £1,000, so the Group is launching an appeal to meet the cost of th project. It has the backing of party leader Nick Clegg, who says: ‘The founding of the Liberal Party in 1859 was a landmark event in British political history, and I give my whole-hearted support to the campaign to put up a plaque at Almack House on the 150th anniversary of such a momentous occasion.

www.liberalhistory.org.uk

Liberal International Leader begins Central American Tour in Nicaragua

ly a week after assuming the presidency of Liberal International, Hans van Baalen MEP is leading a high level delegation to several Central American states. Other members of the delegation include Juli Minoves, Deputy President, Josep Soler, Bureau Member and Emil Kirjas, Secretary General.

The first stop of the tour is Nicaragua, a state where democracy is under threat by the unconstitutional and totalitarian attitudes of Sandinista leader Daniel Ortega.

Van Baalen urged all Nicaraguan liberals to unite, not to work with Daniel Ortega and to put forward one candidate for the 2011 Presidential elections. Liberal International will support the liberal leader who is chosen as the Presidential candidate through a free and fair process.

‘Liberals have to defend the Nicaraguan Constitution which Ortega violates. Liberal International will return on the invitation of all the liberal leaders present today, in order to advise and assist them in realising further cooperation and unity’, said President Van Baalen.

Mr. Van Baalen met with the liberal leaders of Nicaragua at the InterContinental hotel in Managua. The meeting was arranged though the invitation of Eduardo Montealegre, and participants included: Indalecio Rodríguez, President of Partido Liberal Independiente; Alejandro Mejía, President of Alianza Liberal Nicaraüense and Arnoldo Alemán, former President of the Republic from Partido Liberal Constitucionalista. Liberal International was also represented by Bureau Member Josep Soler and Secretary General Emil Kirjas. The Friedrich Naumann Foundation for Liberty was represented by Ulrich Wacker, Regional Director for Latin America and Christian Lüth, Director for Central America.

Liberal International

Twenty Years After the Fall

By George Friedman

We are now at the 20th anniversary of the fall of the Berlin Wall and the beginning of the collapse of the Soviet empire in Eastern Europe. We are also nearing the 18th anniversary of the fall of the Soviet Union itself. This is more than simply a moment for reflection — it is a moment to consider the current state of the region and of Russia versus that whose passing we are now commemorating. To do that, we must re-examine why the Soviet empire collapsed, and the current status of the same forces that caused that collapse.

Russia’s Two-Part Foundation

The Russian empire — both the Czarist and Communist versions — was a vast, multinational entity. At its greatest extent, it stretched into the heart of Central Europe; at other times, it was smaller. But it was always an empire whose constituent parts were diverse, hostile to each other and restless. Two things tied the empire together.

One was economic backwardness. Economic backwardness gave the constituent parts a single common characteristic and interest. None of them could effectively compete with the more dynamic economies of Western Europe and the rest of the world, but each could find a niche within the empire. Economic interests thus bound each part to the rest: They needed a wall to protect themselves from Western interests, and an arena in which their own economic interests, however stunted, could be protected. The empire provided that space and that opportunity.

The second thing tying the empire together was the power of the security apparatus. Where economic interest was insufficient to hold the constituent parts together, the apparatus held the structure together. In a vast empire with poor transportation and communication, the security apparatus — from Czarist times to the Soviet period — was the single unifying institution. It unified in the sense that it could compel what economic interest couldn’t motivate. The most sophisticated part of the Russian state was the security services. They were provided with the resources they needed to control the empire, report status to the center and impose the center’s decisions through terror, or more frequently, through the mere knowledge that terror would be the consequence of disobedience.

It was therefore no surprise that it was the security apparatus of the Soviet Union — the KGB under Yuri Andropov — which first recognized in the early 1980s that the Soviet Union’s economy not only was slipping further and further behind the West, but that its internal cohesion was threatened because the economy was performing so poorly that the minimal needs of the constituent parts were no longer being fulfilled.

In Andropov’s mind, the imposition of even greater terror, like Josef Stalin had applied, would not solve the underlying problem. Thus, the two elements holding the Soviet Union together were no longer working. The self-enclosed economy was failing and the security apparatus could not hold the system together.

It is vital to remember that in Russia, domestic economic health and national power do not go hand in hand. Russia historically has had a dysfunctional economy. By contrast, its military power has always been disproportionately strong. During World War II, the Soviets crushed the Wehrmacht in spite of their extraordinary economic weakness. Later, during the Cold War, they challenged and sometimes even beat the United States despite an incomparably weaker economy. The Russian security apparatus made this possible. Russia could devote far more of its economy to military power than other countries could because Moscow could control its population successfully. It could impose far greater austerities than other countries could. Therefore, Russia was a major power in spite of its economic weakness. And this gave it room to maneuver in an unexpected way.

Andropov’s Gamble

Andropov proposed a strategy he knew was risky, but which he saw as unavoidable. One element involved a dramatic restructuring of the Soviet economy and society to enhance efficiency. The second involved increased openness, not just domestically to facilitate innovation, but also in foreign affairs. Enclosure was no longer working: The Soviet Union needed foreign capital and investment to make restructuring work.

Andropov knew that the West, and particularly the United States, would not provide help so long as the Soviet Union threatened its geopolitical interests even if doing so would be economically profitable. For this opening to the West to work, the Soviet Union needed to reduce Cold War tensions dramatically. In effect, the Soviets needed to trade geopolitical interests to secure their economic interests. Since securing economic interests was essential for Communist Party survival, Andropov was proposing to follow the lead of Vladimir Lenin, another leader who sacrificed space for time. In the Brest-Litovsk Treaty that ended Russian participation in World War I, Lenin had conceded vast amounts of territory to Germany to buy time for the regime to consolidate itself. Andropov was suggesting the same thing.

It is essential to understand that Andropov was a Party man and a Chekist — a Communist and KGBer — through and through. He was not proposing the dismantling of the Party; rather, he sought to preserve the Party by executing a strategic retreat on the geopolitical front while the Soviet Union regained its economic balance. Undoubtedly he understood the risk that restructuring and openness would create enormous pressures at a time of economic hardship, possibly causing regime collapse under the strain. Andropov clearly thought the risk was worth running.

After Leonid Brezhnev died, Andropov took his place. He became ill almost immediately and died. He was replaced by Konstantin Chernenko, who died within a year. Then came Mikhail Gorbachev — the true heir to Andropov’s thinking — who implemented Andropov’s two principles. He pursued openness, or glasnost. He also pursued restructuring, or perestroika. He traded geopolitical interests, hard-won by the Red Army, for economic benefits. Contrary to his reputation in the West, Gorbachev was no liberal. He actually sought to preserve the Communist Party, and was prepared to restructure and open the system to do so.

As the security apparatus loosened its grip to facilitate openness and restructuring, the empire’s underlying tensions quickly went on display. When unrest in East Germany threatened to undermine Soviet control, Gorbachev had to make a strategic decision. If he used military force to suppress the uprising, probably restructuring and certainly openness would be dead, and the crisis Andropov foresaw would be upon him. Following Lenin’s principle, Gorbachev decided to trade space for time, and he accepted retreat from East Germany to maintain and strengthen his economic relations with the West.

After Gorbachev made that decision, the rest followed. If Germany were not to be defended, what would be defended? Applying his strategy rigorously, Gorbachev allowed the unwinding of the Eastern European empire without intervention. The decision he had made about Germany amounted to relinquishing most of Moscow’s World War II gains. But if regime survival required it, the price had to be paid.

The Crisis

The crisis came very simply. The degree of restructuring required to prevent the Soviet Union’s constituent republics from having an overarching interest in economic relations with the West rather than with Russia was enormous. There was no way to achieve it quickly. Given that the Soviet Union now had an official policy of ending its self-imposed enclosure, the apparent advantages to the constituent parts of protecting their economies from Western competition declined — and with them, the rationale for the Soviet Union. The security apparatus, the KGB, had been the engine driving glasnost and perestroika from the beginning; the advocates of the plan were not going to shift into reverse and suppress glasnost. But glasnost overwhelmed the system. The Soviet Union, unable to buy the time it needed to protect the Party, imploded. It broke apart into its constituent republics, and even parts of the Russian Federation seemed likely to break away.

What followed was liberalization only in the eyes of Westerners. It is easy to confuse liberalism with collapse, since both provide openness. But the former Soviet Union (FSU) wasn’t liberalizing, it was collapsing in every sense. What remained administratively was the KGB, now without a mission. The KGB was the most sophisticated part of the Soviet apparatus, and its members were the best and brightest. As privatization went into action, absent clear rules or principles, KGB members had the knowledge and sophistication to take advantage of it. As individuals and in factions, they built structures and relationships to take advantage of privatization, forming the factions that dominated the FSU throughout the 1990s until today. It is not reasonable to refer to organized crime in Russia, because Russia was lawless. In fact, the law enforcement apparatus was at the forefront of exploiting the chaos. Organized crime, business and the KGB became interconnected, and frequently identical.

The 1990s were a catastrophic period for most Russians. The economy collapsed. Property was appropriated in a systematic looting of all of the former Russian republics, with Western interests also rushing in to do quick deals on tremendously favorable terms. The new economic interests crossed the new national borders. (It is important to bear in mind that the boundaries that had separated Soviet republics were very real.) The financial cartels, named for the oligarchs who putatively controlled them (control was much more complex; many oligarchs were front men for more powerful and discreet figures), spread beyond the borders of the countries in which they originated, although the Russian cartels spread the most effectively.

Had the West — more specifically the United States — wanted to finish Russia off, this was the time. Russia had no effective government, poverty was extraordinary, the army was broken and the KGB was in a civil war over property. Very little pressure could well have finished off the Russian Federation.

The Bush and Clinton administrations made a strategic decision to treat Russia as the successor regime of the FSU, however, and refused to destabilize it further. Washington played an aggressive role in expanding NATO, but it did not try to break up the Russian Federation for several reasons. First, it feared nuclear weapons would fall into the hands of dangerous factions. Second, it did not imagine that Russia could ever be a viable country again. And third, it believed that if Russia did become viable, it would be a liberal democracy. (The idea that liberal democracies never threaten other liberal democracies was implanted in American minds.) What later became known as a neoconservative doctrine actually lay at the heart of the Clinton administration’s thinking.

Russia Regroups — and Faces the Same Crisis

Russia’s heart was the security apparatus. Whether holding it together or tearing it apart, the KGB — renamed the FSB after the Soviet collapse — remained the single viable part of the Russian state. It was therefore logical that when it became essential to end the chaos, the FSB would be the one to end it. Vladimir Putin, whom the KGB trained during Andropov’s tenure and who participated in the privatization frenzy in St. Petersburg, emerged as the force to recentralize Russia. The FSB realized that the Russian Federation itself faced collapse, and that excessive power had fallen out of its hands as FSB operatives had fought one another during the period of privatization.

Putin sought to restore the center in two ways. First, he worked to restore the central apparatus of the state. Second, he worked to strip power from oligarchs unaligned with the apparatus. It was a slow process, requiring infinite care so that the FSB not start tearing itself apart again, but Putin is a patient and careful man.

Putin realized that Andropov’s gamble had failed catastrophically. He also knew that the process could not simply be reversed; there was no going back to the Soviet Union. At the same time, it was possible to go back to the basic principles of the Soviet Union. First, there could be a union of the region, bound together by both economic weakness and the advantage of natural resource collaboration. Second, there was the reality of a transnational intelligence apparatus that could both stabilize the region and create the infrastructure for military power. And third, there was the reversal of the policy of trading geopolitical interests for financial benefits from the West. Putin’s view — and the average Russian’s view — was that the financial benefits of the West were more harmful than beneficial.

By 2008, when Russia defeated America’s ally, Georgia, in a war, the process of reassertion was well under way. Then, the financial crisis struck along with fluctuations in energy prices. The disparity between Russia’s politico-military aspirations, its military capability and its economic structure re-emerged. The Russians once again faced their classic situation: If they abandoned geopolitical interests, they would be physically at risk. But if they pursued their geopolitical interests, they would need a military force capable of assuming the task. Expanding the military would make the public unhappy as it would see resources diverted from public consumption to military production, and this could only be managed by increasing the power of the state and the security apparatus to manage the unhappiness. But this still left the risk of a massive divergence between military and economic power that could not be bridged by repression. This risk re-created the situation that emerged in the 1970s, had to be dealt with in the 1980s and turned into chaos in the 1990s.

The current decisions the Russians face can only be understood in the context of events that transpired 20 years ago. The same issues are being played out, and the generation that now governs Russia was forged in that crucible. The Russian leadership is trying to balance the possible outcomes to find a solution. They cannot trade national security for promised economic benefits that may not materialize or may not be usable. And they cannot simply use the security apparatus to manage increased military spending — there are limits to that.

As a generation ago, Russia is caught between the things that it must do to survive in the short run and the things it cannot do if they are to survive in the long run. There is no permanent solution for Russia, and that is what makes it such an unpredictable player in the international system. The closest Russia has come to a stable solution to its strategic problem was under Ivan the Terrible and Stalin, and even those could not hold for more than a generation.

The West must understand that Russia is never at peace with itself internally, and is therefore constantly shifting its external relationships in an endless, spasmodic cycle. Things go along for awhile, and then suddenly change. We saw a massive change 20 years ago, but the forces that generated that change had built up quietly in the generation before. The generation since has been trying to pull the pieces back together. But in Russia, every solution is merely the preface to the next problem — something built into the Russian reality.

Published in Stratfor.com