The world map of Sinodependency

I found this revealing map in the Economist a while back. It shows the extent of China’s global trade, and gives some sense of the importance of China to the major economies of the world. It is, after all, the largest export market for countries as far apart as Brazil, South Africa, India, Japan and Australia. China’s global influence (like America and Britain before it) lies on the back of these trading ships. The map also shows how much China accounts for each of these countries’ GDP. These small numbers suggest that China’s influence may not be as big as we think.

Time to buy guns and gold?

In general, I hate to be alarmist. But recent events tell me that we are reaching a psychological turning point in the world. Weak economic data out of the U.S., combined with continuing worries in the Eurozone continue to spook the markets. More than just the numbers, the inability of the political establishment (in either the U.S. or Europe) to deal with the economic crises is spooking the market even more. In fact, it is this lack of faith in government that caused S&P to downgrade the U.S.

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While the world’s finances go into free fall, the political situation is fast deteriorating as well. Violence of the worst kind continues to plague Libya and Syria. Continued attacks in Iraq, Pakistan and now Israel also punctuate the morning news. But more telling than these is the less destructive but equally worrying violence in London. There is no doubt in my mind that what happened in the British capital was criminality. But these things do not come out of nowhere. They are a result of the alienation and sense of hopelessness of a new generation that is about to enter the work world. I suspect that this alienation is widespread across Europe. There is a possibility (though not yet a probability) that this unrest will spread to the United States. Over the longer term, even when economic growth returns, if the benefits only accrue to a few, and a majority is left flipping burgers, the scene is still set for a social explosion.

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For all the market and social reasons I outline above, I believe some of the brightest long term spots in the world economy may now be guns (ie the security industry) and gold. Gold is an easy proposition. The U.S. currency is most likely going to be debased, whichever way you look at it, and the Euro is not giving much room for comfort. Continued malaise in Japan and the lack of convertibility of the Renminbi suggests there are few other places to hide. Investors will look to gold as a safe haven (even though they will continue to look to the U.S. dollar for some time given the lack of alternatives). A more difficult proposition is guns. After all, cutting the deficit is going to hit the defense industry more than any other. However, this is a short term view. History has shown that it is at times of economic stress that you see domestic unrest and heightened geopolitical tensions. Well, the unrest is already here. As for geopolitical tension, Asia is entering into an arms race, that is spreading from China to Japan to Australia and India. It is only a matter of time till the U.S. doubles down in the region too. Over the medium term, after the current cuts, it is entirely possible that the defense sectors in the U.S. and globally are reenergized.

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So what does this market meltdown and social unrest tell me? It may be time, at least psychologically speaking, to be thinking guns and gold.

Kagan: Preemptive Superpower Suicide

I am attaching a link to a short clip of an interview with Robert Kagan of FPI. In it he discusses how we can turn the financial crisis into preemptive superpower suicide if we rush to raid the Pentagon coffers. We will address the economy – gutting defense is something that we dont have to do. In fact, it is in cutting the military that we will see our real global decline – when we no longer play the security guarantee role that the world expects of us. To Kagan, this is not something that is forced upon us, but something that we are talking ourselves into. That we are committing preemptive suicide for fear of dying.

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Its only a minute and half long. Worth watching

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http://tinyurl.com/3qhg62n

The bigger the defense cuts, the more urgent the need for a new security strategy

It is clear that the Pentagon will see some serious cuts as the country tries to deal with its fiscal situation. To an extent, this is as it should be – with wars winding down and the chances of us engaging in another land war slim, we can afford to rethink the military. The move towards a higher tech, mobile force allows to reassess the need for platforms more suited to the Cold War. And then there is the issue of waste – both within the Pentagon as well as within industry. Efficiency was never at a premium when budgets were flush.

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Despite the cuts mentioned above, there is clearly a point whereby we seriously start cutting into the muscle of the military. There are those, on both the left and the right, who think that this is fine – that we are no longer at war. The reality is, however, quite different. The “War on Terror” may be over but the threat posed by terrorists is far from done. Add to this, other non-state actors ranging from drug cartels, to organized crime and professional cyberterrorists, and we still have serious asymmetric threats facing us. Far more profoundly, the rise of China poses a fundamental and direct threat to our interests. First, we face the very real possibility of being pushed out of Asia – the locus of trade, manufacturing and oil. We cannot remain a superpower and not be the preeminent power there. Secondly, for the first time since World War Two, we are being challenged in the Pacific Ocean itself, which directly abuts the Continental US. Given China’s rapid military build up, we cannot fail to notice the threats.

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I suspect that when all is said and done, Congress will end up cutting real muscle out of the military. Simply put, it is easier to make cuts in a loyal service that will take it on the chin than to cut Medicare and Social Security. I believe this is short sighted, as it is only delaying the day when those two programs will have to be cut, as it is in fact those (and not defense) that will drive the budget out of all balance. But assuming that my hypothesis is correct, we need to start planning now on how a smaller military can fulfill its obligations to defend the country and to preserve our role as the world’s preeminent power. The clearest answer lies in developing a new global security strategy realigning our overseas posture and alliances with the threats at hand.

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I have been arguing for some time that we transform our individual treaty alliances in Asia into a multilateral security architecture – an Asian NATO-lite – that can preserve the peace by balancing China. This does not need to be a provocative gesture. We are not recreating the NATO of the Cold War, although the threat is clearly there. As part of this, we must press our Asian allies into cost sharing. Simply put, they need to contribute to their own security. Many countries are already expanding their defense budgets in any event. This can be made far more effective by avoiding duplicative tasks. On the other side of the world, we need to reassess the current NATO. As it stands, it overcommits us to the defense of over a score countries – often in places where we have no strategic interests. Adding insult to injury, most of these countries can afford to defend themselves but have no incentive so long as NATO exists. If singular alliances in Asia can give way to one multilateral one, the exact opposite is possible in Europe.

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Whatever you think of the above changes in US defense posture, one thing is clear. It needs updating both for the new security environment and also for the new budgetary environment. In fact, the bigger the cuts in our defense budget, the more urgent the need for a new global security strategy.

Defense spending should be more than the output of budget math

The recent budget deal in Congress, for what it is worth, has kicked the tough decisions of who will bear the pain of cuts down the road to a later point in time. Just what will get cut will be decided by a super-committee of Congressmen drawn from both parties. If the committee cannot agree, there will be automatic cuts, with the defense & security agencies bearing the largest brunt of up to $600 billion. Such a heavy handed approach to the national security sector is shocking given that providing for the common defense is the first function of government. Furthermore, it denies the basic truth that it is not defense spending that will cause the explosion in deficits over the coming years and decades. Defense did not cause the deficit crisis, and it will not be the solution to it.

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There is no question that the Pentagon will need to bear its share of the pain as the nation seeks to solve its fiscal woes. Even though defense as a percent of GDP is not high historically, real spending is high – and there is plenty of room for efficiency gains and canceling of non-central programs. But defense budgets cannot be set in isolation to the threats the nation is facing, and to the ability to share costs with our allies. Simply setting defense as an output of budget math is nonsensical. Rather, we should rationally seek to articulate what we want our role in the world to be, and what we honestly believe are the threats we face. Based upon this we can determine what is a realistic size of defense spending should be. If this is out of line with what we can afford, we need to debate our role in the world and what threats we believe are worth ignoring.

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Defense spending must be a function of what we need to protect ourselves and what we believe is the role of a superpower, not a function of how much we will or will not cut in entitlements at any point in time. The candidates for President therefore need to articulate their vision for America’s place in the world. We need to address this now, and not hit a sudden realization in 10 years, that we no longer have the global reach that we are now accustomed to. The debate about America’s role in the world needs to be made central to our national dialog in the upcoming election season. We deserve no less.