I have decided to strip out these elements and focus only on indicators that can be objectively measured, i.e. the numbers of killed and imprisoned journalists set against the size of the national journalistic pool. Using figures from the Committee to Protect Journalists, I tally the numbers of journalist murders from the past three years – to reflect the fact that journalist killings can have a chilling effect years into the future – and the numbers of imprisoned journalists imprisoned now multiplied by six, so that their aggregate weighting is twice that of journalist killings. The reason I do that is because truly authoritarian regimes typically have a tight clampdown on monopoly violence, including on the various independent criminal elements (e.g. drug cartels, rogue intelligence officers); as such, direct killings of journalists tends to be rare. On the other hand, due to the threat of imprisonment and other harassment, independent journalism is severely circumscribed if at all existent. But instead of just going with this figure, I further adjust it to the size of the national journalist pool, because – for obvious reasons – a few journalist killings in a country the size of India is tragic, but nonetheless qualitatively different from the same number of killings in a country with a far smaller population like Honduras where there is a far bigger chance those journalists would know each other. The resulting figure is the Journalism Security Index; a narrower (but far more objective) measure than the Press Freedom Index, which – by necessity – relies on fallible expert judgments on unquantifiable measures such as self-censorship and journalistic independence.

Scroll down to the bottom to see the full results of the Journalism Security Index 2012.

Some of the rankings will come as a surprise to many people, so let me address those. First, we see a few countries where press freedoms are certainly heavily circumscribed, such as Saudi Arabia, Cuba, and Vietnam, get perfect scores. This reveals the major weakness of the index – it measures not so much press freedom as journalistic security (hence its name). Second, and tied in with this, it only measures the most severe things that can happen to a journalism, i.e. killing or imprisonment. It has no way of accounting for things such as Hungary’s new media laws, the rumored weekly meetings of Russia’s federal TV channel heads with Kremlin officials, or the 42 journalists and counting arrested at Occupy events in the US. Suffice to say that a score of zero on the JSI most certainly does not mean said country is an oasis of press freedom.

This is also not to mention that the CPJ has a fairly rigorous methodology for listing a journalist as imprisoned – it has to be political. For instance, while Turkey “only” has 7 journalists listed as imprisoned, other estimates put the number at more than 70. However, according to Yavuz Baydar, a similar methodology may give a figure of 17 imprisoned journalists in the UK for their part in the News of the World phone hacking scandal. Obviously, a line has to be drawn somewhere.

Third, there may be surprise that Russia is ranked somewhere in the middle, whereas it is near the bottom on most other indices of press freedom. The explanation is fairly simple. Russia does not currently have any imprisoned journalists by the CPJ’s reckoning, and whereas a total of four journalist deaths are recorded for the years 2009-2011, this is both a significant decrease on earlier years and not a catastrophic situation when set against its 143 million strong population (see Gordon Hahn’s Repression of Journalism in Russia in Comparative Perspective from December 2009) or – to be even fairer – the vast size of its journalistic pool, which at 102,300 newspaper journalists is the largest in the world.

On the converse, countries such as Bahrain, Syria, and Afghanistan do really badly because even a small number of journalist killings and imprisonments translate into very high scores because of the hugely circumscribed size of the journalistic pools in those countries. Some may dispute that Israel’s ranking is absurdly low. If so, please take it up with the CPJ. It lists 7 imprisoned journalists; now of them, 3 are under Hamas arrest, so I subtracted them from the Israeli total and gave them to Palestine. Nonetheless, that still leaves 4 Palestinian journalists that are under Israeli imprisonment, all of them without charge.

(In contrast, the sole Russian journalist listed as imprisoned in recent years was one Boris Stomakhin for “inciting hatred” and “making public calls for extremist activity”, writing things such as, “Let tens of new Chechen snipers take their positions in the mountain ridges and the city ruins and let hundreds, thousands of aggressors fall under righteous bullets! No mercy! Death to the Russian occupiers! … The Chechens have the full moral right to bomb everything they want in Russia.” One may dispute the ethics of imprisoning someone for what is, in the end, still an opinion; but one has to note that prosecutions take place in the UK (Samina Malik) and the US (Jubair Ahmad) for essentially equivalent activities).

Whereas countries like Brazil and Mexico have essentially free media, they are – as are Russia and much of the rest of the former Soviet republics – terrorized by the generally high background violence of their societies. In the former, this issue is particularly problematic, as Brazil has a much lower aggregate press pool than Russia; therefore, its three murders in the past three years exert more of a relative effect than Russia’s four.

Please make sure to note the caveats and methodological clarifications that follow below the following table.

Journalism Security Index 2012

Methodological clarifications: Impr. figures taken from CPJ‘s 2011 Prison Census; Kill. figures taken from CPJ’s numbers of killed journalists from 2009 to 2011; #pop. taken from Wikipedia’s list of official statistics on national populations; #journ. taken from UN data on the numbers of journalists per country.

JSI(p) is the Journalism Security Index calculated only relative to the population; it is more accurate, in narrow terms, than the JSI calculated relative to numbers of journalists (see below why), but suffers from the fact that it underestimates the risks of working in very populous and poor countries where journalists are low as a share of the population and even a few killings can have a chilling effect on their general community.

JSI is the official Journalism Security Index, calculated by (1) tallying the numbers of journalist murders from 2009-2011 and the numbers of imprisoned journalists imprisoned in 2011 multiplied by six so that the aggregate weighting of every imprisoned journalist is twice that of a killed journalist, (2) dividing by the numbers of newspaper journalists in that country, and (3) multiplying that figure by 10,000 to get convenient numbers for the index.

There are two very important caveats to be made about the UN data on journalists. First, it only measures the numbers of newspaper journalists, not the total number of journalists and media workers. As such, it should be viewed as a rough proxy. In some regions, newspapers have a much higher profile relative to TV (e.g. East-Central Europe, Russia, Scandinavia); in others, it is the opposite (e.g. Latin America). Adjusting for this would, for example, narrow the gap between in the JSI between Russia and Brazil. Second, far from all countries have data; many of them are fairly important ones in terms of press freedom issues (e.g. Iran, Israel, Mexico, Bahrain). To fix this, I just extrapolated the per capita figures from other countries with similar literacy and socio-cultural profiles, e.g. I equalized Iran and Mexico with Turkey; Israel and Belarus with Russia; Bahrain with Qatar, and calculated their numbers of journalists by multiplying their population by their estimated journalists per capita figures. Needless to say, this is an extremely inexact method, and may be off by several factors. For that reason, countries with no concrete data from the UN source are marked in italics; note that for them, the JSI may be off by several factors (though most likely not by an order of magnitude).

But at what point can a country be considered to have definitively retreated from liberal democracy? After all, though much of the above are common to authoritarian states, they are sometimes present in liberal democracies too; and besides, the US does have some mitigating features (e.g. strong freedom of speech provisions that are relatively free from PC and libel laws, unlike in the UK and much of Europe).

The argument can be made that the US ceased being a liberal democracy on December 31, 2011 – the day the NDAA 2012 was signed into law by Obama. This legalizes the indefinite detention of US citizens by the military on the mere suspicion that the suspect is “associated with” terrorism or committed “belligerent acts” against the US or its allies. Bearing in mind the incredibly broad and flexible definition of what “terrorism” actually means, this could potentially encompass any number of anti-elite groups: Anonymous, Wikileaks, Occupy Wall Street, the Tea Party, etc.

Even if we are to (very generously) assume that this law will only be conscientiously wielded against genuine terrorists, there is room for doubt that indefinite detention is compatible with liberal democracy. After all, no other countries commonly considered to be liberal democracies – so far as I’m aware – have indefinite detention powers as sweeping as those contained in the NDAA. Even many countries considered to be illiberal democracies (or outright dictatorships), such as Russia, don’t have anything like it. And, of course, this assumption of good intentions is pollyannaish, given that the government has given no cause for trust whatsoever in this matter (what with the FBI setting up terrorist plots, the numerous cases of wrongful detention at Guantanamo, etc).

Of course, this is not to say that in a few years the US will come to resemble a tinpot dictatorship. Some historical perspective is necessary. Indefinite detention and imprisonment without trial aren’t unprecedented: See the 1950 McCarran Act, introduced at the height of the red scare, didn’t exactly lead to authoritarianism (though the US at the time was a great deal more illiberal that many care to admit). Furthermore, it’s also important to note that the NDAA legislation merely codifies powers that the executive has both claimed (through the AUMF) and exercised for the past decade, and besides it is only building on past efforts such as the flopped Enemy Belligerent Act of 2010; so one can argue that the change is not so abrupt as to constitute a crossing-the-Rubicon type of event.

Perhaps. Then again, there are caveats to that viewpoint too. The 1950′s-60′s were a period of fast growth and prosperity, so there was no real base for authoritarian regression. The prospects for the next decade don’t look anywhere near as good; in fact, they are downright dismal, and may well see some combination of high inflation and default. And democracy tends to wane in days of depression. Faced with challenges from the far left and the far right, the elites may find it necessary to consolidate a profoundly different social order, a post-constitutional Third Republic of sorts: One that is fiscally and socially conservative, and more authoritarian than the current one. To do this they will need to enlist the support of the billionaires; as far as this is concerned, the Wall Street bailouts, Citizens United and corporate citizenship, SOPA/PIPA, etc. may well be only harbingers of what is yet to come.

But this is all speculation. In the here and now, the fact of the matter is that the US now has national security laws on its books far more draconian than those of any other country considered to be a liberal democracy; indeed, I doubt you would find anything similar even in countries whose democracies are often criticized, such as Russia, Venezuela, or now Hungary. These laws apply to “terrorists”, a grouping every bit as ephemeral and ill-defined as “counter-revolutionaries” under Article 58 of the Stalinist lawcode. I have no choice but to lower the US from a “semi-liberal democracy” to an “illiberal democracy” in this year’s edition of the Karlin Freedom Index.

In previous years, my tradition was to review the previous year before launching into new predictions. I find this boring and will now forego the exercise, though in passing I will note that many of the defining traits in 2010 - the secular rise of China and of “The Rest” more generally; political dysfunction in the US; growing fissures in Europe, in contrast to Eurasian (re)integration; the rising prominence of the Arctic - have remained dominant into this year. The major new development that neither I nor practically anyone else foresaw was the so-called “Arab Spring”, as part of a pattern of increasing political stress in many other states: Occupy Wall Street and its local branches in the West; the Meetings for Fair Elections in Russia; Wukan in China and anti-corruption protests in India. I don’t disagree with TIME’s decision to nominate The Protester as its person of the year. However, as I will argue below, the nature of protest and instability is radically different in all these regions. I will finish up by reviewing the accuracy of my 2011 predictions from last year.

1. There is little doubt that Putin will comfortably win the Presidential elections in the first round. The last December VCIOM poll implies he will get about 60%. So assuming there is no major movement in political tectonics in the last three months – and there’s no evidence for thinking that may be the case, as there are tentative signs that Putin’s popularity has began to recover in the last few weeks from its post-elections nadir. Due to the energized political situation, turnout will probably be higher than than in the 2008 elections – which will benefit Putin because of his greater support among passive voters. I do think efforts will be made to crack down on fraud so as to avoid a PR and legitimacy crisis, so that its extent will fall from perhaps 5%-7% in the 2011 Duma elections to maybe 2%-3% (fraud in places like the ethnic republics are more endemic than in, say, Moscow, and will be difficult to expunge); this will counterbalance the advantage Putin will get from a higher turnout. So that’s my prediction for March: Putin wins in the first round with 60%, followed by perennially second-place Zyuganov at 15%-20%, Zhirinovsky with 10%, and Sergey Mironov, Mikhail Prokhorov and Grigory Yavlinsky with a combined 10% or so. If Prokhorov and Yavlinsky aren’t registered to participate, then Putin’s first round victory will probably be more like 65%.

2. I will also go ahead and say that I do not expect the Meetings For Fair Elections to make headway. Despite the much bigger publicity surrounding the second protest at Prospekt Sakharova, attendance there was only marginally higher than at Bolotnaya (for calculations see here). So the revolutionary momentum was barely maintained in Moscow, but flopped everywhere else in the country – as the Medvedev administration responded with what is, in retrospect, a well balanced set of concessions and subtle ridicule. Navalny, the key person holding together the disparate ideological currents swirling about in these Meetings, is not gaining ground; his potential voters are at most 1% of the Russian electorate. And there is no other person in the “non-systemic opposition” with anywhere near his political appeal. There will be further Meetings, the biggest of which – with perhaps as many as 150,000 people – will be the one immediately after Putin’s first round victory; there will be the usual (implausibly large) claims of 15-20% fraud from the usual suspects in the liberal opposition and Western media. But if the authorities do their homework – i.e. refrain from violence against peaceful protesters, and successfully reduce fraud levels (e.g. with the help of web cameras) – the movement should die away. As I pointed out in my article BRIC’s of Stability, the economic situation in Russia – featuring 4.8% GDP growth in Q3 2011 – is at the moment simply not conductive to an Occupy Wall Street movement, let alone the more violent and desperate revolts wracking parts of the Arab world.

3. Many commentators are beginning to voice the unspeakable: The possible (or inevitable) disintegration of the Eurozone. I disagree. I am almost certain that the Euro will survive as a currency this year and for that matter to 2020 too. But many other things will change. The crisis afflicting Europe is far more cultural-political than it is economic; in aggregate terms, the US, Britain and Japan are ALL fiscally worse off than the Eurozone. The main problem afflicting the latter is that it suffers from a geographic and cultural rift between the North and South that is politically unbridgeable.

The costs of debt service for Greece, Portugal, Italy, and Spain are all quickly becoming unsustainable. They cannot devalue, like they would have done before the Euro; nor is Germany prepared to countenance massive fiscal transfers. The result is the prospect of austerity and recession as far as the eye can see (note that all these countries also have rapidly aging populations that will exert increasing pressure on their finances into the indefinite future). Meanwhile, “core Europe” – above all, Germany – benefits as its superior competitiveness allows it to dominate European markets for manufactured goods and the coffers of its shaky banking system are replenished by Southern payments on their sovereign debt.

The only way to resolve this contradiction is through a full-fledged fiscal union, with big longterm transfers from the North to the South. However, the best the Eurocrats have been able to come up with is a stricter version of Maastricht mandating limited budget deficits and debt reduction that, in practice, translates into unenforceable demands for permanent austerity.  This is not a sustainable arrangement. In Greece, the Far Left is leading the socialists in the run-up to the April elections; should they win, it is hard to see the country continuing on its present course. On the other side of the spectrum, the Fidesz Party under Viktor Orbán in Hungary appears to be mimicking United Russia in building a “managed democracy” that will ensure its dominance for at least the next decade; in the wake of its public divorce with the ECB and the IMF, it is hard to imagine how it will be able to maintain deep integration with Europe for much longer. (In general, I think the events in Hungary are very interesting and probably a harbinger of what is to come in many more European countries in the 2010′s; I am planning to make a post on this soon).

Maybe not in 2012, but in the longer term it is becoming likely that the future Europe will be multi-tier (not multi-speed). The common economic space will probably continue growing, eventually merging with the Eurasian Union now coalescing in the east. However, many countries will drop out of the Eurozone and/or deeper integration for the foreseeable future – the UK is obvious (or at least England, should Scotland separate in the next few years); so too will Italy (again, if it remains united), Greece, the Iberian peninsula, and Hungary. The “core”, that is German industrial muscle married to Benelux and France (with its far healthier demography), may in the long-term start acquiring a truly federal character with a Euro and a single fiscal policy. But specifically for 2012, I expect Greece to drop out of the Eurozone (either voluntarily, or kicked out if it starts printing Euros independently, as the former Soviet republics did with rubles as Moscow’s central control dissipated). The other PIGS may straggle through the year, but they too will follow Greece eventually.

I expect a deep recession at the European level, possibly touching on depression (more than 10% GDP decline) in some countries.

4. How will Russia’s economy fare? A lot will depend on European and global events, but arguably it is better placed than it was in 2008. That said, this time I am far more cautious about my own predictions; back then, I swallowed the rhetoric about it being an “island of stability” and got burned for it (in terms of pride, not money, thankfully). So feel free to adjust this to the downside.

• The major cause of the steep Russian recession of 2008-2009 wasn’t so much the oil price collapse but the sharp withdrawal of cheap Western credit from the Russian market. Russian banks and industrial groups had gotten used to taking out short-term loans to rollover their debts and were paralyzed by their sudden withdrawal. These practices have declined since. Now, short-term debts held by those institutions have halved relative to their peak levels in 2008; and Russia is now a net capital exporter.
• I assume this makes Russia far less dependent on global financial flows. Though some analysts use the loaded term “capital flight” to describe Russia’s capital export, I don’t think it’s fair because the vast bulk of this “flight” actually consists of Russian daughters of Western banking groups recapitalizing their mothers in Western Europe, and Russians banks and industrial groups buying up assets and infrastructure in East-Central Europe.
• The 2008 crisis was a global financial crisis; at least *for now*, it looks like a European sovereign debt crisis (though I don’t deny that it may well translate into a global financial crisis further down the line). There are few safe harbors. Russia may not be one of them but it’s difficult to say what is nowadays. US Treasuries, despite the huge fiscal problems there? Gold?
• Political risks? The Presidential elections are in March, so if a second crisis does come to Russia, it will be too late to really affect the political situation.
• Despite the “imminent” euro-apocalypse, I notice that the oil price has barely budged. This is almost certainly because of severe upwards pressure on the oil price from depletion (i.e. “peak oil”) and long-term commodity investors. I think these factors will prevent oil prices from ever plumbing the depths they briefly reached in early 2009. So despite the increases in social and military spending, I don’t see Russia’s budget going massively into the red.
• What is a problem (as the last crisis showed) is that the collapse in imports following a ruble depreciation can, despite its directly positive effect on GDP, be overwhelmed by knock-on effects on the retail sector. On the other hand, it’s still worth noting that the dollar-ruble ratio is now 32, a far cry from what it reached at the peak of the Russia bubble in 2008 when it was at 23. Will the drop now be anywhere near as steep? Probably not, as there’s less room for it fall.
• A great deal depends on what happens on China. I happen to think that its debt problems are overstated and that it still has the fiscal firepower to power through a second global crisis, which should also help keep Russia and the other commodity BRIC’s like Brazil afloat. But if this impression is wrong, then the consequences will be more serious.

So I think that, despite my bad call last time, Russia’s position really is quite a lot more stable this time round. If the Eurozone starts fraying at the margins and falls into deep recession, as I expect, then Russia will probably go down with them, but this time any collapse is unlikely to be as deep or prolonged as in 2008-2009.

5. Largely unnoticed, as of the beginning of this year, Russia, Belarus, and Kazakhstan became a common economic space with free movement of capital, goods, and labor. Putin has also made Eurasian (re)integration one of the cornerstones of his Presidential campaign. I expect 2012 will be the year in which Ukraine joins the Eurasian common economic space. EU membership is beginning to lose its shine; despite that, Yanukovych was still rebuffed this December on the Association Agreement due to his government’s prosecution of Yulia Tymoshenko. Ukraine can only afford to pay Russia’s steep prices for gas for one year at most without IMF help, and I doubt it will be forthcoming. Russia itself is willing to sit back and play hardball. It is in this atmosphere that Ukraine will hold its parliamentary elections in October. If the Party of Regions does well, by fair means or foul, it is not impossible to imagine a scenario in which accusations of vote rigging and protests force Yanukovych to turn to Eurasia (as did Lukashenko after the 2010 elections).

6. Russia’s demography. I expect births to remain steady or fall slightly (regardless of the secular trend towards an increasing TFR, the aging of the big 1980′s female cohort is finally starting to make itself felt). Deaths will continue to fall quite rapidly, as excise taxes on vodka – the main contributor to Russia’s high mortality rates – are slated to rise sharply after the Presidential elections.

7. Obama will probably lose to the Republican candidate, who will probably be Mitt Romney. (Much as I would prefer Ron Paul over Obama, and Obama over Romney). I have an entire post and real money devoted to this, read here.

The US may well slip back towards recession if Europe tips over in a big way. I stand by my assertion that its fiscal condition is in no way sustainable, but given that the bond vigilantes are preoccupied with Europe it should be able to ride out 2012.

8. There is a 50% (!) chance of a US military confrontation with Iran. If it’s going to be any year, 2012 will be it. And I don’t say this because of the recent headlines about Iranian war games, the downing of the US drone, or the bizarre bomb plot against the Saudi ambassador in the US, but because of structural factors that I have been harping on about for several years (read the “Geopolitical Shocks” section of my Decade Forecast for more details); factors that will make 2012 a “window of opportunity” that will only be fleetingly open.

• Despite the rhetoric, the US does not want to get involved in a showdown with Iran due to the huge disruption to oil shipping routes that will result from even an unsuccessful attempt to block of the Strait of Hormuz. BUT…
• While a nuclear Iran is distasteful to the US, it is still preferable to oil prices spiking up into the high triple digits. But for Israel it is a more existential issue. Netanyahu, in particular, is a hardliner on this issue.
• The US has withdrawn its troops from Iraq. In 2010, there were rumors that the US had made it clear to Israel that if it flew planes over Iraq to bomb Iran they would be fired upon. This threat (if it existed) is no longer actual.
• The US finished the development of a next-generation bunker-busting MOP last year and started taking delivery in November 2011. But the Iranians are simultaneously in a race to harden and deepen their nuclear facilities, but this program will not culminate until next year or so. If there is a time to strike in order to maximize the chances of crippling Iran’s nuclear program, it is now. It is in 2012.
• Additionally, if Europe goes really haywire, oil prices may start dropping as demand is destroyed. In this case, there will be an extra cushion for containing fallout from any Iranian attempt to block off the Strait of Hormuz.
• Critically, the US does not have to want this fight. Israel can easily force its hand by striking first. The US will be forced into following up.

The chances of an Azeri-Armenian war rise to 15% from last year’s 10%. If there is any good time for Azerbaijan to strike, it will be in the chaotic aftermath following a US strike on Iran (though the same constraints will apply as before: Aliyev’s fears of Russian retaliation).

From "The Oil Drum"

9. Though I usually predict oil price trends (with great and sustained accuracy, I might add), I will not bother doing so this year. With the global situation as unstable as it is it would be a fool’s errand. Things to consider: (1) Whither Europe? (demand destruction); (2) What effect on China and the US?; (3) the genesis of sustained oil production decline (oil megaprojects are projected to sharply fall off from this year into the indefinite future); (4) The Iranian wildcard: If played, all bets are off. But I will more or less confidently predict that global oil production in 2012 will be a definite decrease on this year.

If investing, I would go into US Treasuries (short-term) and gold to hedge against the catastrophic developments; yuan exposure (longterm secular rise) and and US CDS (potential for astounding returns once SHTF). Property is looking good in Minsk, Bulgaria, and Murmansk. Any exposure to Arctic shipping or oil & gas is great; as the sea ice melts at truly prodigious rates, the returns will be amazing. I do think the Euro will survive and eventually strengthen as the weaker countries go out, but not to the extent that I would put money on it. Otherwise, I highly agree with Eric Kraus’ investment advice.

10. China will not see a hard landing. It has its debt problems, but its momentum is unparalleled. Economists have predicted about ten of its past zero collapses.

11. Solar irradiation was still near its cyclical minimum this year, but it can only rise in the next few years; together with the ever-increasing CO2 load, it will likely make for a very warm 2012. So, more broken records in 2012. Record low sea ice extent and volume. And perhaps 100 vessels will sail the Northern Sea Route this year.

12. Tunisia is the only country of the “Arab Spring” that I expect to form a more or less moderate and secular government. According to polls, 75% of Egyptians support death for apostasy and adultery; this is not an environment in which Western liberal ideas can realistically flourish. Ergo for Libya. I can’t say I have any clue as to how Syria will turn out. Things seem strange there: Russia and Israel are ostensibly unlikely, but actually logical, allies of Assad, while the US, France, the UK, and the Gulf monarchies are trying their best to topple him. These wars are waged in the shadows.

I've got some ways to go before I reach Navalny's demagogic stature.

13. As mentioned in the intro, 2011 has been a year of protest. As I argued in BRIC’s of Stability, in countries like China, Russia, or Brazil they will remain relatively small and ineffectual. Despite greater scales and tensions, likewise in Europe (though Greece may be an exception); these are old societies, and besides they are relatively rich. They won’t have street revolutions. I do not think Occupy Wall Street has good prospects in the US. By acting outside the mainstream (as part of a “non-systemic opposition”, to borrow from Russian political parlance) it remains irrelevant – the weed smoking and poor sartorial choices of its members works against its attaining respectability – and municipalities across the US are moving to break up their camps with only a few squeaks of protest. (This despite the arrests of 36 journalists, a number that had it been associated with Russia would have cries of Stalinism splashed across Western op-ed pages). I say this as someone who is broadly sympathetic with OWS aims and has attended associated events in Berkeley.

The nature of protest in the Arab world is fundamentally different, harkening back to earlier and more dramatic times: Bread riots, not hipsters with iPhones; against cynical and corrupt dictators, not cynical and corrupt pseudo-democrats; featuring fundamental debates about reconciling democracy, liberalism and religion, as opposed to weird slogans like “Occupy first. Demands come later.” Meh.

14. The world will, of course, end on December 21, 2012.

What about the 2011 Predictions?

1) My economic predictions were basically correct: “Today I’d repeat this, but add that the risks have heightened… The obvious loci of the next big crisis are the so-called “PIGS” (Portugal, Italy, Greece, Spain), and Ireland, Belgium and Hungary.”

2) Neither the Iranian war (chance: 40%) or an Azeri-Armenian war (chance: 10%) took place. If they don’t happen in 2012, their chances of happening will begin to rapidly decline.

3) Luzhkov still hasn’t been been hit with corruption charges, but merely called forth as a witness. Wrong.

Prediction of 3.5%-5.5% growth for Russia was exactly correct (estimates now converging to 4.0%-4.5%).

With headlines this December cropping up such as “End is nigh for Russia’s ‘reset’ with US“, my old intuition that US – Russia imperial rivalry couldn’t be set aside with a mere red plastic button may have been prescient: “In foreign policy, expect relations with the US to deteriorate.”

4) Pretty much correct about the US and the UK, though I didn’t predict anything drastic or unconventional for them.

5) “Oil prices should stay at around $80-120 in 2010 and production will remain roughly stable as increased demand (from China mostly) collides with geological depletion.” Totally correct, as usual.

6) China will grow about 9.4% this year, well in line with: “China will continue growing at 8-10% per year. Their housing bubble is a non-issue; with 50% of their population still rural, it isn’t even a proper bubble, since eventually all those new, deserted apartment blocs will be occupied anyway.”

7) 2011 was the warmest La Nina year on record, so in a sense thermometers did break records this year.

“Speaking of the Arctic, as its longterm ice volume continues to plummet and sea ice extent retreats, we can expect more circumpolar shipping. I wouldn’t be surprised to see up to 10 non-stop voyages along the Northern Sea Route from Europe to China, following just one by MV Nordic Barents in 2010.” If anything, I low-balled it. 34 ships made the passage this year! Sea ice cover was the second lowest on record, and sea ice volume was the lowest. So in the broad sense, absolutely correct.

“Likewise, expect the Arctic to become a major locus of investment.” This year, plans were announced to double the capacity of the Port of Murmansk by 2015.

Wrong on the Wikileaks prediction. The insurance file was released by The Guardian’s carelessness (whose journalists, David Leigh and Luke Harding, then proceeded to mendaciously lie about it), not by Assange. And the extradition proceedings are taking far longer than expected, though my suspicions that his case is politically motivated is reinforced by US prosecutors’ apparent pressure on Bradley Manning to implicate Assange in the theft of the State Department cables.

9) On Peter’s enthusiastic reminder, I did get my Russia Presidential predictions for 2012 wrong. Or 75% wrong, to be precise, and 20% right (those were the odds that I gave for Putin’s return back in May). I did however cover it separately on a different post, here. That said, I do not think the logic I used was fundamentally flawed; many other Kremlinologists ended up in the same boat (and most didn’t hedge like I did).

I’m glad you do, because this is basically the saga of Kommersant Vlast’s publication of its investigation on falsifications in the Russian legislative elections. It has not been removed from the Internet, to the contrary you can still read it on their site and comment on it. It is an extensive work, titled “United Stuffers” (a play on United Russia) featuring a collection of twelve articles. The only part of it that was subject to “censorship” – and the reason given by its tycoon owner Alisher Usmanov for the dismissal of the editor who approved it – is the photograph below:

“PUTIN, GO FUCK YOURSELF.”

The literal translation is different, it sounds something along the lines of “Putin go to the cock” but the meaning is as above. Okay, you might think this is edgy, controversial stuff; perhaps grounds for a warning, but probably not a firing. But then consider the caption: “Correctly filled out ballot, ruled spoiled.” If you think this is anything but a double entendre used by an editor to spell out his feelings for Putin, I have a bridge to sell you to Russky Island. Needless to say, whatever your personal feelings about swearwords, there is no doubt that this would be completely unacceptable in a major newspapers in reference to any Western political leader. This is the Russian version of the NYT we’re talking about, not The eXile.

What this would have looked like in the US… How long would the editor who approved the photo to the right keep his job? Hmm… a few minutes?

It is telling that even in the comments to the article (which was left unchanged apart from the removal of the offending photo) most readers – and Kommersant’s readers tend to be relatively liberal – agree that it was unacceptable.

And now you can’t find Putin’s cock on Kommersant! (Yes, the file was literally called that)

Incidentally, this particular article itself was about the voting in London. It was pretty interesting. Our good man Andrei Sidelnikov, the Strategy-31 Abroad organizer whom I’ve written about here, makes an appearance. There were clear violations of the electoral law (e.g. anti-United Russia political campaign materials close to the polling station). The ballot with big orange letters “addressed personally to the Prime Minister” (as the writer calls the ballot that is the subject of this post) was marked spoiled, which apparently is “in contradiction of the law” because, despite its defacement, there was nonetheless a clear cross next to Yabloko. Nonetheless, that one “stolen” vote didn’t stop Yabloko from voting 43% of the vote in that station, followed by 21% for the Communists, 16% for Fair Russia, and 10% for United Russia. Pretty much what one can expect of Londongrad.

Courtesy of our Strategy-31 Abroad friends and great champions of free elections like Berezovsky.

In reality, this entire ridiculous episode was made out to be like Putin’s oligarch henchmen clamping down on Russian criticism of the elections (which in reality has been widespread and with no serious consequences for the journalists involved to date).

Possibly the most dishonest reporting of this came via The Telegraph (Russian media tycoon Alisher Usmanov fires two after reporting election fraud), which implies that journalists were fired for fulfilling their journalistic duties whereas the actual facts of the matter is that it was a senior editor and business manager getting the boot for things like breaking Kommersant’s own code of conduct. The other photo that The Telegraph alleges the Kremlin / Usmanov took a dislike to – “another photograph from London of a spray-painted image of Putin with the slogan in English “Public Enemy No. 1″” – was unaffected and remains online.

A recent analogue in Western coverage of the Russian media’s “persecution” is the case of the translator who left Inosmi because – according to him – they forbade him from translating “harsh stories” about Putin and United Russia (or to least not feature those stories on the front page). His case was likewise championed in the Western media as evidence of the endless and permanent disintegration of media freedoms in Russia. My guess is that he thought his job sucked and decided to go out with a bang. Whatever the case, a single visit to Inosmi and use of Google Translate will reveal thus story for the absurdity it is; Inosmi not only posts regularly anti-UR and anti-Putin material but positively delights in doing so as it provokes the most voluminous and salacious responses from its varied audience.

Now that’s a wise and tasteful vote.

There are two further points I want to make.

First, Kommersant is privately owned, and theoretically Usmanov can hire and fire pretty much as he pleases. Though parts of his career are shady to say the least, his claims that he does not interfere in Kommersant’s editorial policy are valid, as evidenced by the fact that they had some of the best and most critical coverage of the elections and falsifications. But weren’t the Western commentariat claiming that all Russian media is Kremlin-controlled anyway? Ah, but Usmanov is an oligarch who serves the Kremlin, so there’s no difference. Not unlike our free and independent watchdog press. (To appreciate the scorn in that last reference just read any Glenn Greenwald article on the Western media).

Second, it is especially ironic to see these criticisms coming from American media, where many journalists have been dismissed for far more circumspect criticism of Israel (i.e. not using schoolyard insults) or trying to consider Arab or Islamist viewpoints (not endorse them; just consider them on their own merits). As a general rule the mass media is subservient to the taboos established by power in all societies, but I would venture to say that in 2011 the Russian media, especially print media, has proven to be a much better watchdog of freedoms – as evidenced by the generally excellent coverage of the elections and protests – than has been the case in the US (and much of the West) for years. Which reminds me. Shouldn’t outlets like the WSJ or NYT be covering shit like this as opposed to Russian editors losing their jobs for acting like teenagers?

I guess not. A Russian editors’ obsession with Putin’s cock is far more important.

The European debt crisis dominates headlines, with the Anglo-Saxon media crowing about the lazy, shiftless Meds (as opposed to the diligent and careful Germans) and blaming socialism for their problems. This of course has a number of flaws within it. Greeks work the most hours in the EU – 2000 per year, relative to 1300 in Germany. And the only major EU nations without huge debt and fiscal problems are the Scandinavians, who are about as “socialist” as one gets nowadays.

But this is all sidestepping the fact that debt and fiscal crisis afflict the entire Western world, and it is just that – due to the special political weaknesses of the Eurozone – have manifested first and foremost in Greece, Italy, and Spain. However, a look at the actual statistics reveals that even the “serious” countries are in a great deal of trouble. For instance, in 2010 both the US and Britain had bigger primary deficits (cyclically adjusted) than “basketcase” Greece, whereas Italy’s was actually positive! The Meds’ total net government debt is larger, but on the other hand, if even France is beginning to experience perturbations – a country whose fiscal balances are better in every way than Britain’s or America’s – then it surely cannot be long before the crows come home to roost in the Anglo-Saxon world.

The fiscal crisis

Below are two tables that would be very informative for discussions about the crisis, as they overturn many of the lazy myths and tropes populating the discourse.

Though the US position looks salvageable because of the positive GDP growth less cost of finance indicator (suggesting that its ability to pay back its debts are growing faster than the debts themselves), I am not convinced of the reliability of that indicator. First, it assumes fast growth – growth that has yet to materialize despite massive fiscal and monetary stimulus since 2008. Second, it assumes that interest rates on Treasuries will remain low – but that assumes a US that is becoming rapidly indebted and making signals it is going to inflate it away remains an investor safe heaven. It shows zero ability to make a credible commitment to eliminating the budget deficit, which is only going to be compounded as the baby boomers start retiring.

This chart from Michael Pollaro shows that in some respects the US position is actually worse than those of the PIGS in aggregate. For every $60 it received in revenue, it spends $100, and it would take almost 6 years for the US to repay its debt if the entire budget was devoted to it. In contrast, the average PIGS figure is $78 in revenue for every $100 in spending, and it would take them only 2 years of their combined budgets to repay their debts.

The position of Britain is very weak. It’s economy, and especially its budget, is highly reliant on the City of London. The tanking of the financial system has resulted in zero growth (GDP is still about 5% below peak 2007 levels) and chronically high budget deficits at around 10% of GDP, and the prospect of a second recession with pull the figures even further into the red. Nor has a weaker pound stimulated an export based recovery. Britain’s big trump card is that its bonds have very high average numbers of years to maturity, so refinancing will be easier even if its rates were to suddenly lurch upwards. Now its still over-extended and will probably go bankrupt within this decade, but probably later than the Meds or even the US.

Germany has a strong position, with only a modest budget deficit and reasonable levels of debt. Overall, it is net global creditor, with a net international investment position of 37% of GDP. But this presents another problem. Quite a lot of that is in the forms of loans to and assets held by its banks in the stricken Med region. A meltdown there would send the value of these assets plummeting, necessitating massive bailouts that could in turn threaten even Germany’s solvency. Hence, a possible reason for the recent poor sales of German government bonds.

Despite chronic budget deficits and an astronomic public debt of 220% of GDP, I actually think that Japan may be the country in the least danger in the medium-term future. 95% of its government debt is domestic, largely to Japanese corporations, which lend to the government for social spending in exchange for the understanding that tax rates will be held low. But those same banks and corporations are flush with cash: Japan’s net international investment position is an impressive 56% of GDP. In a way, it’s just a different method of financing a welfare state. It’s still probably unsustainable – domestic investors too may dry up, especially as the Japanese population continues to age and begins to spend rather than save - but I’d wager less so than the US or most of Europe.

Fiscally secure nations include China, Latin America, Scandinavia, and Russia. China has problems with various non-performing loans and municipal over-indebtedness, granted, but these weaknesses are largely mitigated by its phenomenal growth rate and a net international investment position of 36% of GDP. Latin America and Scandinavia tend to have responsible fiscal management and adequate growth rates.

Russia has globally low levels of government debt, its citizens likewise have low debt levels (a feature more of its underdeveloped credit system, granted), and an international net investment position of 17% of GDP. Though the budget deficit is currently balanced thanks to high oil prices, a significant drop can take them into the red very quickly and deeply; however, this is NOT a problem because it is a near certainty that on average oil prices in the next decade will remain high and rise further. What IS a problem is that Russia is a “high-beta” economy, highly affected by developments elsewhere – in 2008, its recession was deeper than in any major Western economy (though compared to them it also had the strongest recovery). The primary reason was the sharp cut-off in Western credit to Russian banks and corporations, resulting in multiple refinancing crises. Today, this problem is less acute, with the Russian banks and corporations having learnt that such dependence may be a problem – nonetheless, a huge sovereign debt crisis in the West can still give Russia a very sharp knock in the short-term.

The exergy crisis

This brings us to another side of the issue: peak oil. Oil reserves are depleting, and global production – after being on a plateau from 2005 to today – will probably begin to consistently fall from 2012 as oil megaprojects sharply fall off. Furthermore, a war with Iran, and its possible capability to blockade the Strait of Hormuz for some time, may cause an extremely disruptive spike in world oil prices, as 25% of world oil supplies transit through the Persian Gulf. On the other hand, China is right now entering the mass automobile age, with the numbers of cars sold per year overtaking the US in 2010. So we will see a rise in demand from China and other emerging markets.

But this is not all. As discussed on other posts in the blog, e.g. here, here, economic growth in general is crucially dependent on net energy availability and the efficiency with which it is converted into useful work. Both indicators have slowed to a crawl, and quite soon the former may well go into reverse. Furthermore, the reality of open global markets with limited global energy supplies means that countries will be more and more competitively bidding for the high-EROEI energy sources that remain (primarily, oil). The US in particular is highly dependent on oil to power its service-based economy, but it simply cannot afford oil to the same degree as can China (see this excellent Oil Drum post A Brief Economic Explanation of Peak Oil for an explanation). This means that the economic pie is now limited, and growth in one place (above all, China) is now to the detriment of growth in other already high-income places (the US, and the less efficient parts of Europe). For a limited time, this issue can be bypassed by the accumulation of debt in the high-income countries – much of which, it should be noted, is loaned out from China and the oil exporters. But poor countries lending to maintain rich country living standards is bizarre at face value, and it is unsustainable in the long-run.

How to survive the coming storm?

From the investment perspective: Keep assets in US dollars, but only those that can be sold off at relatively short notice.

Though dangerous in the short-term, China, Russia, and some countries in Eastern Europe are very good long-term plays. In particular, buying in at the depths of crisis can pay huge dividends in the future. A good bet right now: property in Bulgaria and Minsk.

Natural resources are another excellent long-term play (including gold – a good bet in a time of instability). However, it is probably not a good time to buy in right now, as there is the risk of a sharp (but short) fall once the economic deterioration gathers critical pace.

If you have the means to be an independent financial speculator, try out US CDS. The US will probably never formally default – controlling its own currency, at the most, it will do so via inflation – however, the perceived risk of default WILL be reflected in those instruments. Don’t bet the farm on it, as they’re high risk, but do consider setting aside 10% of your investment poll into this or similar instruments, as the returns have the potential to be mindbogglingly high.

The other two BRIC’s, India and Brazil, I am not so certain of because their low human capital precludes very fast growth.

In terms of specific sectors in the long-term, probably the best bets are IT and medicine because the entire world is aging, and when people are unemployed, they will spend their time on Facebook and playing video games.

Perhaps I’ll have another post on the other aspects of how to keep afloat in the coming era of turbulence. Keep an eye out for it.

Reread S/O posts about the return of geopolitics to Europe and my decade forecast and piece on future superpowers, and continue reading this blog as it is ahead of so many issues well before they started becoming conventional wisdom.

I was contacted by RT after they noticed my post on why OWS isn’t happening in China and Russia. As befits a program aimed at an American audience, however, the conversation revolved around the prospects for OWS solely in the US. In particular, as winter approaches and media attention wanes, will the Occupy movement be able to remain relevant to its 99% constituency?

Unfortunately, as it was my first time on live TV, I did not manage to make the best impression – as the interview went on, I could not prevent stammers and pauses from beginning to infest my conversation. So apologies for that.

As repeatedly noted by Mark Adomanis, the Russian liberals and the Western media have predicted about 10 of the last zero Russian revolutions. Likewise, the “Jasmine Revolution” in China that was the subject of so much talk about a year ago has fizzled out like a wet firework. Meanwhile, the Arab world remains in the midst of convulsions, and political instability is spreading into the West – most visibly in Greece and the Med, but also in the guise of Occupy Wall Street and associated movements in the US.

This is no doubt disturbing and aggravating to Western supremacists (it is telling that that the media organization providing the most detailed coverage of OWS, RT, is both non-Western and the object of venomous bile from the American exceptionalism culture warriors). Doesn’t the West (and the US in particular) have democracy, freedom of assembly, freedom of speech, free media, economic opportunities, equality under the law, etc. – things that are all starkly and completely absent in countries of the Other, e.g. Russia and China? What the hell are the hippies and liberals protesting? Are they doped up unemployed losers, useful idiots of Leninist agents of influence, or both?

I think the answer is far simpler than it seems. In Russia, younger people tend to be both higher earning (their skills are better fitted to a capitalist economy) and more economically optimistic than their parents, not to mention their grandparents. They are also far more pro-capitalist, and substantially more supportive of Putin and Co. than the older generations (who have not done as well under capitalism, and who have fonder memories of communism). In fact, in the minds of Russian youth – and in stark contrast to the picture drawn by uninformed commentators – capitalism, prosperity, and the Putin era are closely linked. Hence, no real Russian equivalent of OWS (at least for now).

While I’m far from as well informed on China, it basically seems to have the same dynamics. Young people there are now far more educated than the middle-aged, let alone the immiserated elderly, and – many of them single children and enjoying far higher incomes than those of their less well-educated parents – are now coming to enjoy many of the creature comforts of rich country lifestyles, such as Internet access, cars, foreign travel. The young are the most active protest group, and keeping them satiated is most important for avoiding revolution. A similar dynamic also appears to be at work in India and Brazil. Hence, no “Spring” or OWS-equivalent in those countries either.

The situation in the Arab world and the West appears to be the precise opposite. Some of the commentary on the “Arab Spring” has emphasized the generational fault-lines that riven Arab societies, the main burden being the hordes of young unemployed Arab men (and unemployable, because of low skills). When food prices approached a critical level in 2011, social pressures reached a tipping point, and revolutions of varying types and success levels followed in Egypt, Tunisia, Libya, Syria, and Bahrain.

The US makes for an interesting comparison to both the Arab world and the BRIC’s. Despite the fact that its young people still (for the most part) have a much higher material standard of living than the Chinese or Russians, its inter-generational wealth distribution appears to be more similar to that of the Arab world: its youth are much poorer, and suffer much more from unemployment. This is reflected in political ideologies – whereas the baby boomers remain stalwart supporters of capitalism, the people in their 20′s are actually split 50/50 between supporting capitalism and socialism (hence, the appearance of OWS, as I predicted).

Even internationally, the US is much less certain of the benefits of the “free market system” than was the case in prior years. More Chinese (77%), Brazilians (67%), and Germans (68%) now think that free markets are the way to go than Americans (59%). Even the Russians (52%) aren’t that far behind, and if we consider only the youngest generation, amazingly enough, more Russians would now be pro-capitalist than Americans. But as is so often the case, ideology is merely superstructure, dependent on the economic base for its own makeup; when polls indicate that as of 2010 ordinary Chinese find it easier than Americans to afford food, no wonder that faith in free markets soars in one country and tumbles in another. Ergo for Russia.

It is time to set aside the ideologized rhetoric that underpins much of today’s commentary on the purported instability of states based on their perceived “authoritarianism” or “corruption” (especially as measured by the ridiculous CPI). Despite being closer to the trough of the J-curve, and not matching up to the standards of democracy and decency that the West dictates as universal (while frequently failing to adhere to those same standards itself), the fact is that, objectively speaking, both China and Russia have been a lot more stable than the West – and with more favorable inter-generational wealth distributions and far better prospects for growth (due to their combination of First World human capital with merely medium-income economies), they have the objective conditions to remain politically stable for the foreseeable future.

Meanwhile, as iniquities grow and the over-educated young generations of the West are frustrated in their economic ambitions, having their social benefits cut while the establishment concentrates on currying favor with elderly voting majorities and bailing out their sponsors in the financial industry (at least until the whole carapace comes hurtling down due to over-indebtedness), political instability in the West is set to remain and metastasize until the barbarians at the gates can no longer be airily dismissed as weed-smoking socialist loser types “without an agenda” by the MSM and the powers that be.

Anyhow, back to Obama’s impending loss. To be fair, the title is a bit of a misnomer. I’d actually put his odds at 35% (Republicans – 65%). There really isn’t much to explain, is there? The economy sucks and is almost guaranteed to get better than worse. Output remains below peak 2007 levels. The deficit remains stubbornly high and the budget crisis will rear its head again in January 2012. Lord knows what it will become if there is another recession on the scale of the last one. Unemployment remains stuck at over 9%. Obama’s net approval rating is -12%. By the metrics I used to predict McCain’s defeat in 2008, Obama looks like he’s in deep trouble.

For what it’s worth, the InTrade prediction market is coming to the same conclusion. The latest figures created by gamblers who put their money where their mouths are give Obama a 48% chance, but as you can see since the market became high-volume in around April this year he has been trending down. (PS. Note the spike in early May, that was the Osama bin Laden assassination).

Incidentally, it was right around this time that I gambled $10 at Bodog on an Obama loss, immediately after the OBL assassination to take advantage of the cacophony of voices proclaiming Obama’s victory was now sealed. Yes, it would have played a huge rule had it happened a few days before the elections. But in May 2011? A year is an eternity in politics. New issues will cover over any lingering legacy of the OBL assassination. And that is why, with the bookies offering very favorable odds of 17/10 – and at the time, assessing Obama’s chances at only 45% – I made the bet below on Bodog.

In retrospect, with Obama’s re-election metrics continuing to decline, this was a very good bet if I say so myself. If things pan out, I will almost make back the $20 I lost betting on Medvedev as Russia’s next President.

Now a few words on the consequences (and refraining from bringing my own ideologies into this). Obama is not going to solve America’s economic problems. Nor is a Republican President. In any possible political configuration arising post-elections, raising taxes is nigh impossible – and that is the only way to alleviate the budget deficit which has been running at banana republic levels of 10% of GDP since 2009. Not cutting spending will lead to default, either outright or as is more likely by inflation (cue Argentina 2002). Both will be deleterious. Cutting spending at a time when the private sector is too over-leveraged to take up the slack will knock the legs out from the economy and likely result in a big collapse in output (cue Latvia 2008).

The fundamental problem is high oil prices, and the fact that any marginal increases in supply of this commodity that underpins all modern economies is being bid away by emerging markets that can make more productive use of them - primarily, China, with its factories and surfeit of cheap, relatively high-skilled labor (what’s the better return for a barrel of oil – the gas tank of an American SUV, or a Guangzhou factory making useful widgets?) - or the oil exporters themselves. To make the best of the current situation, the US needs long-term investments in raising its human capital (which, elite universities aside, is fairly low by developed country standards, as measured by international standardized tests) and raising energy efficiency. But these are only good in the long-term, and even here special interests are doing their best to prevent anything from being accomplished.

That is why the entire debate in the US over austerity vs. stimulus (both are suicide), or “American exceptionalism”, or the Presidential elections (given Obama’s stance on the War on Terror, Wikileaks, interventions, poker, weed, etc., to what extent to they really matter?), are all so tiring and mundane. In the face of uncompromising fiscal and energetic realities, which the US can mitigate to a degree but chooses not to, they are nothing but meaningless distractions.

1. On August 2nd, give or take a few days, the US Treasury will run out of money. Some commitments will have to be broken. As this article explains, first in line will be Treasury bond holders; frankly, the US sovereign reputation is so valuable that it will not want to risk it at almost any cost. Nor does either party want to see SS recipients, veterans, and soldiers not getting their salary. Once these are accounted for, little else will remain (the US borrows $1.40 for every dollar it now spends). If a deal isn’t reached, there will be massive furloughs and a shutdown of most non-”essential” government functions.

2. Though the current deficit of 10%+ of GDP is patently unsustainable, the immediate drop in spending the failure to raise the debt limit will represent will instantly plunge the US into deep recession (if not depression, if sustained; i.e. a cumulative GDP drop of more than 10%). The economy is very weak, with recent revisions showing the post-2007 drop in output to have been deeper than thought, and the subsequent recovery much weaker. With consumer spending hurt by deleveraging and high commodity prices; it is only being propped up by government stimulus.

3. The political ramifications. This is a risky bet on the Republicans’ part; whereas the Obama administration would have otherwise got the blame for a sluggish recovery, their perceived role in triggering a deep recession will erase that (nor can we take for granted that Republicans are able to logically perceive this; their Tea Party wing in particular has heavy ideological blinkers). In any case, it was the Republicans who got the blame for the previous government shutdown in 1995.

I went counter-consensus in the immediate aftermath of the Osama bin Laden killing by betting on a Republican win in 2012. This was on favorable odds, with all the commentators crowing that Obama has a victory locked up. Now I’m not sure this was such a good move. As of now, this is ALSO increasingly counter-consensus; in the last few days, many people have began to say Obama’s chances of winning are slipping. I disagree. The Republicans are volunteering themselves as free targets for the blame games that make up Presidential campaigns. If they go through and shut down government, then Obama will seize the opportunity to blame them.

4. So, in the end, what will happen? I think there is a high chance that the US will not go into formal default (that is practically impossible, for now) and that there will be a compromise, if not by August 2nd then within two or three weeks. But if the Republicans remain obstinate, then its back to deep recession.

5. The WSJ on what Russia thinks: Oil-Rich Russia Calm Ahead of U.S. Debt Deadline. I basically agree with it.

6. As in 2008, China will remain largely unaffected – even if the US slips into a deep recession. As I argued in my post on Top 10 Sinophobe Myths, the idea that China depends in any real way on manufacturing exports doesn’t hold water.

7. The PMI indicators show that large parts of Europe are slipping into zero growth or outright recession. But Germany remains solid, and Russia seems to be picking up its pace.

As soon as the US debt limit crisis is papered over, the focus will shift back to Europe. Italy’s budget deficit is small (relatively, anyway), but its debt to GDP ratio is huge and the average maturity of its bonds is only about five years. And needless to say, Italy is no Greece. That said, Europe’s overall fiscal position is better than that of the US, Japan, Britain (which is, despite a 13% of GDP budget deficit, becoming a mini safe haven) so the recent moves towards a German-controlled “eurobond” has diminished the risks of contagion.

STRATFOR provides food for thought with Germany’s Choice: Part 2.

8. Where can investors go? In the past few days, we’ve had the bizarre sight of investors, frightened by the rising turbulence and concerns about low growth, scurrying into the “safe haven” of US Treasuries; issued by the same institution that will not have money to pay the bills in a few days! Well, what can I say… Investors aren’t rational creatures. And it does illustrate the massive reputational advantage still held by the US… a reputational advantage that brings it massive benefits (very low interest rates, most of the international trade in commodities being denominated in its currency, etc) that its more rational politicians will be very unwilling to squander.

Nonetheless, this doesn’t change the fact that no matter how this debt limit issue is going to be resolved in the coming days and weeks, in the longer term US hegemony is unsustainable. That is because its fiscal position is unsustainable, and it is unsustainable because its political system is fundamentally dysfunctional. The Republicans want cuts in spending, but not enough to wipe out the deficit (since some influential lobbies like the MIC, Big Oil, agriculture, etc. are to be protected); the Democrats want to keep entitlements spending and military spending largely as is but increase revenues, but the Republicans are unwilling to raise taxes an iota, not even on natural resource companies and high income earners. It is an idiot’s limbo whose only foreseeable resolution is through a debt trap / default or massive inflation.

The only thing the current antics are doing is, by giving cause to doubt the creditworthiness of the US (previously unthinkable), the politicians are merely bringing forward the day of reckoning.

9. Whither commodities? It will basically be a race between these two forces:

• Recession – and hence falling demand – in the fiscally bankrupt Western nations.
• Stagnant oil supplies (or the onset on rapid decline); rising demand from China to fill any gap left by falling consumption in the West; and investors fleeing from stock-markets and indebted government-issued papers for commodities, where the long-term trend is now certainly for prices to go up.

Which one will win out in the next few months? I don’t have a fucking clue. If I did, I’d be out there gambling on the commodity markets.

One thing I would (still) recommend doing is investing in US credit default swaps; even if the debt limit crisis is amicably resolved, it is still a great long-term play.

10. One final article: Emerging markets could be the new safe haven for investors.

It is bizarre that Russia, a country with almost zero debt and a tiny budget deficit, or China, or dozens of other fiscally sustainable countries are rated much worse (and have higher CDS spreads on their bonds) than a country like the US or the UK. Arguably even Argentina is a less risky investment at this point.

Just as with Russia, the Western media (beholden as it is to its power elite sponsors and anti-Rest ideology) peddles many tropes about China that cloud real understanding of this fascinating civilization-state. In the spirit of Sino Triumphalism, this is my attempt to set the record straight and overturn the lazy arguments used to dismiss, Brezhnev-like, China’s imminent rise to superpowerdom. My message to those Sinophobes: talk cooks no rice. For more on this topic see 1, 2, 3, 4, 5, 6.

十

MYTH: The lack of IP rights curbs innovation, so the Chinese economy will remain based on producing cheap knock-offs of superior Western goods.

REALITY: China now focuses on copying products because its technologically lagging, and as such it is much easier and cost effective to reproduce already existing products than to come up with your own. Much the same can (and was!) said of Japan in the 1960′s, or Germany in the 1880′s – but look at them now!

The lack of IP rights makes this assimilation far easier – why waste money paying rent to foreign software companies when you can use their products for free so easily? You’d have to be their stooge to do this! Throughout history, many successful developers, such as Germany and Britain, flouted IP rights and funded industrial espionage to modernize their economies. They only started praising the virtues of IP rights when they got rich to protect their own new interests.

With China already taking the leading positions in sectors such as High Speed Rail and supercomputers, the time when it joins the developed world in “kicking away the ladder” can’t be far off.

九

MYTH: Corruption and inequality is growing rapidly, which will lead to rising social tensions, economic stagnation, revolts, and collapse. 

REALITY: Corruption is largely irrelevant to economic growth, unless it is cripplingly high (which it definitely isn’t in China). For instance, only 9% of Chinese reported paying a bribe in 2010, which is actually the same as Japan.

True, inequality has risen sharply, with the Gini index reaching 47. This figure is similar to the US and lower than most Latin American countries, albeit far higher than in Europe. However, a peak in inequality is typical of countries in the middle of their industrial development, and is expected to fall in the coming years. Indeed, this seems to be already happening, with the poorer inland provinces beginning to grow faster than the wealthier coastal regions in recent years.

八

MYTH: The brouhaha over China today ignores its bad loans and real estate bubble, which will explode and sink its economy any day now. 

REALITY: Pundits have been ranting about China’s bad loans problem for a decade, but in reality the issue is less acute now than it was then. In the meantime it is the Western financial that collapsed (and had to be bailed out at huge taxpayer expense). Chinese leaders noticed this problem early and nipped it in the bud with a series of restructurings in the 2000′s.

The real estate bubble isn’t really a bubble because, no matter how many empty apartments there are, half of China’s population is still in the countryside and will continue moving into the cities for decades to come.

七

MYTH: Back in the 1980′s, there was the same hysteria about Japan becoming No. 1, and look what happened to them! This Sino triumphalism is nothing but a passing fad.

REALITY: China’s population is TEN TIMES bigger than Japan’s. Realistically, Japan could have never become the world’s biggest economy because doing so would have required its GDP per capita to rise to double that of the US. In stark contrast, China’s GDP per capita needs only be a QUARTER that of America for it to become the world’s largest economy. Some economists think that’s already happened (see below).

六

MYTH: The Communist Party suppresses all freedom of thought, which will inevitable lead to stagnation, regional rifts, and pro-freedom uprisings.

REALITY: First, the idea that the CCP truly suppresses free thought nowadays is a bit quaint. There are plenty of think-tanks – more than in the US – that are discussing exciting new concepts such as deliberative democracy, Comprehensive National Power, and new ways of measuring economic growth.

Second, the leadership is forward-thinking and responsive. To illustrate this, in a recent speech Hu Jintao called for a “circular economy” and “sustainable development.” (Can you imagine Obama voicing similar sentiments? The Republicans would devour him alive.) This is backed by concrete policy measures. For instance, in response to its reliance on coal China invested in renewable energy manufacturing capacity and now produces half the world’s wind turbines and solar panels.

Third, not only does democracy or the lack of it have no discernible effect on the speed of development – in fact, China itself is a refutation of that theory – but its not even that oppressive compared to countries commonly called “democratic.” So it jailed Liu Xiaobo for 11 years (who claims China would be better off under colonialism). But in the meantime, the Marxist activist Binayak Sen got life imprisonment in India, and the US is waging a campaign to shut down Wikileaks and imprison Julian Assange. No talk of a Nobel Peace Prize for those two.

Fourth, it is extremely arrogant to claim that China will necessarily want to follow in the footsteps of the West. It may well take its own sovereign road to democracy, such as a democratization of the current NEPist model. Even if it does democratize aka Taiwan, then why should it collapse? Its factories and people will remain in place; so will economic growth, albeit with a blip or two during the transition. And according to our “democratists” wouldn’t such a development make China stronger anyway?

As for George Friedman’s forecasts that a widening gulf between the coast and inland regions will cause the coastal elites to identify with foreign interests such as Japan and the US and break the power of the government… well, this is the same guy who goes on about The Coming War with Japan. No more comment required.

五

MYTH: Outside showpieces like Shanghai and a few other coastal cities the entire country struggles on in Third World poverty, illiteracy and immiseration.

REALITY: This is belied by fairly basic statistics. A country with 67% cell phone penetration, 36% Internet penetration, and more cars sold per year than in the US as of 2009 cannot be “Third World” be definition. Nor does a literacy rate of 97% or an infant mortality rate of 16/1000 jive with this description.

As of 2010, the IMF gives China a real GDP per capita of $7,500 (which is lower-middle income by international standards). However, in reality this is probably an underestimate. For instance, Thailand with a GDP per capita of $9,000 had manufacturing wages of $250 per month in 2009, as opposed to China’s $400 per month. Its consumption stats also indicate a higher living standard (which is all the more impressive given its high savings rate). In any case, China is a decidedly middle-income country.

四

MYTH: The People’s Liberation Army is full of rusty Soviet-era hardware and derelict warships that will be obliterated in a conflict with the US.

REALITY: Now resting on a solid economic foundation, the Chinese military is being rapidly modernized. In recent years it has unveiled its own drones, a fifth-generation fighter prototype, and a “carrier-killing” ballistic missile. It accounts for a third of global shipbuilding capacity, enabling a rapid naval buildup (even as US capabilities degrade due to fiscal problems and cost overruns). A recent RAND study indicates that China is already be able to establish air superiority over Taiwan in the event of a hot war over the straits.

As Paul Kennedy noted in The Rise And Fall Of The Great Powers (of which Chinese strategists are big fans), military power follows naturally in the wake of economic power. The Chinese economy will eventually be so much larger than everyone else’s in the Pacific basin that its neighbors will have no option but to acquiesce to its hegemony, even if it doesn’t win them over by its rapidly growing soft power.

The only military sphere in which China lags the US (and Russia) is in the size and sophistication of its strategic nuclear forces. But even there it may be stronger than it appears. It was recently revealed that it has built 5000km of tunnels in the hills of Hebei province. For all we know hundreds of ICBM’s could be hidden away there.

三

MYTH: The Chinese economy is dependent on exports for its economic growth, meaning that even if the US collapses it will bring the Chicoms down with it.

REALITY: This is a complete myth. Whereas gross exports are at 40% of GDP, what matters are NET EXPORTS – which are at just 7% of GDP. (In fact this past quarter it even reported a trade deficit). Or if we look at it regionally, those Chinese regions which export a lot are all located on the southern and south-eastern coasts, and account for less than 25% of the population; the rest of the country is far more autarkic.

Now true, a collapse in export demand will lead to a temporary rise in unemployment in those export-dependent regions. But the Chinese can do without the “heroic” American consumer. They’ll just consume more of their own production (as it increasingly the case anyway).

二

MYTH: China will grow old before it grows rich.

REALITY: No, it won’t. According to UN projections, its share of the population aged 15-65 will have dropped from 72.4% now to 68.9% by 2030 (by which time it will be a developed country by its current trajectory). For comparison, Japan’s working age population today is just 64.0% – that’s less than China two decades later!

Furthermore, there are still massive productivity gains to be collected from urbanizing another 20%-30% of the population. As peasants continue moving into the cities, the urban workforce which is the source of most added value production will continue growing well past the time China the total labor force begins shrinking. The decline in the numbers of children will enable each one to get a better education.

一

MYTH: Even if it grows at 10% a year, it will take China’s $5.9 trillion GDP decades to catch up to America’s $14.7 trillion GDP growing at 3% a year. That will come no sooner than 2025. And that’s assuming that Chinese GDP figures are accurate (they’re not, of course, given the Communist penchant for lying).

REALITY: This is a very common argument, even in respected venues, but one that shows fundamental economic illiteracy. The $5.9 trillion GDP is China’s NOMINAL GDP, which reflects a very weak yuan. If the yuan were to appreciate against the dollar, growth in nominal GDP will be much faster than real growth – and in fact IT IS, growing at nearly 25% for the past five years.

Its REAL GDP, which accounts for differences in international prices, is far bigger at $10.1 trillion and not far from America’s $14.7 trillion. But even this may be an underestimate. Back in 2008, the IMF and World Bank both reduced their estimates of China’s real GDP by around 40%; these revisions are considered questionable. Using those old figures, China would already be at America’s size. This is supported by comparisons of Chinese consumption (e.g. Internet access; manufacturing wages; etc) to other middle-income countries, which in my approximations give it a real GDP per capita of perhaps $12,000 and implying a total real GDP of $15-16 trillion.

The case for Chinese manipulation of statistics is unproven. One of the primary arguments here used to be that economic growth didn’t track electricity consumption. But that’s not too convincing in light of China overtaking the US in electricity consumption in 2011.

China’s economic growth has tracked South Korea’s very closely but with a 20 year lag (or 15 years using the old, bigger GDP estimates). Its real GDP per capita in 2000 was equivalent to Korea’s in 1980; as of 2010, it was equivalent to Korea’s in 1990. (The story for nominal GDP growth is remarkably similar: China’s number for 2010 is equivalent to Korea’s in 1988). Now if China continues following Korea’s historical per capita trajectory, it should have a real GDP of $22-$30 trillion by 2020 and $40-$55 trillion by 2030 (former figure based off current GDP estimates; latter off the bigger estimates). This means the US should be overtaken by 2020 at the latest and left in the dust soon after. Assuming a steady rate of convergence to international prices, China’s nominal GDP too should become the world’s biggest by the 2020′s.

The groundwork is secure. Human capital is the foremost determinant of economic growth rates, and China’s today is far higher than South Korea’s two decades ago (recent international standardized tests show that performance even in China’s poorest provinces is close to the OECD average, while Shanghai won global gold prize).

Now consider that China’s foremost obstacle to global superpowerdom is highly unlikely to grow quickly, is overburdened by fiscal deficits, and may yet default on its obligations – and that by then, China’s currency will likely be free floating. In that case, the yuan will be the most likely contender for the title of world’s reserve currency. Upon assuming it, its nominal GDP – and weight in the global economy – will become every bit as dominant as its real economy of steel mills and factories.