Is China’s economy headed for a crash?

In his assessment of the global economy’s performance 2013, legendary financier George Soros warned of dangers in the Chinese economy:

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35 percent of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008. [Project Syndicate]

That, as William Pesek notes, is a rather ominous conclusion. So is China due a crash?

Read More At TheWeek.com

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Israel and Russia At Odds Over Syria

Syria-articleLarge-v2

Times of global economic disruption or depression have often historically been preludes to war. So too have been periods of geopolitical instability, where new economic powers are rising, and old ones falling. Back in 2008 the United States’ tenture as the sole global superpower appeared to be endangered, and we appeared to be on the cusp of a new multipolar world order.  And at the same time a new demand-side depression bearing some eerily similar characteristics to the Great Depression surfaced. So — even though we were sitting on the back of a huge trend of decreasing war and violence — I was to a small degree worried that this slump might be a prelude to another global conflict.

Luckily — with the exception of a few skirmishes in the middle east following the Arab spring — no such wide-scale global conflict has broken out. The forces of peace have kept the forces of war and chaos mostly at bay. No direct war between the great powers has broken out. Given the high level of trade interdependency and global economic integration that now exists — factors which play a great role in discouraging conflict — that is very good news. Avoiding a new global conflict should be a top priority for policymakers, corporations, and individuals worldwide.

Hopefully, then, the latest friction in the middle east — this time between Israel and Russia — will amount to nothing:

 Israel’s defense chief said Tuesday a Russian plan to supply sophisticated anti-aircraft missiles to Syriawas a “threat” and signaled that Israel is prepared to use force to stop the delivery.

The warning by Defense Minister Moshe Yaalon ratcheted up tensions with Moscow over the planned sale of S-300 air-defense missiles to Syria. Earlier in the day, a top Russian official said his government remained committed to the deal.

Israel has been lobbying Moscow to halt the sale, fearing the missiles would upset the balance of power in the region and could slip into the hands of hostile groups, including the Lebanese militia Hezbollah, a close ally of the Syrian regime.

Israel has carried out several airstrikes in Syria in recent months that are believed to have destroyed weapons shipments bound for Hezbollah. Israel has not confirmed carrying out the attacks.

The delivery of the Russian missiles to Syria could limit the Israeli air force’s ability to act. It is not clear whether Israeli warplanes entered Syrian airspace in these attacks.

Attacking Syrian bases and weaponry is one thing. Attacking Russian attempts to aid the Syrian government is quite another — and could very easily have dark consequences. Perhaps Russian interests in Syria — including their naval base there — are a lost cause. Perhaps Russian attempts to help the Syrian government are misguided. And perhaps Western attempts to aid the Syrian rebels — who  have some have affiliations with al-Qaeda and radical Islamism, and who have reportedly used chemical weapons — overthrow Assad are even more misguided and even more dangerous. Neither side can really claim the moral high ground in what is effectively a proxy war between the Russian-backed government and Western-backed rebels. Both sides have committed atrocities and killed civilians and journalists. All that has been achieved is massive disruption to millions of ordinary Syrians who have had to flee the country.

Ideally, a peace based around compromise, power-sharing  and democracy can be brokered by the UN Security Council to avoid any further escalation. But unfortunately, both the Russians and the West are continuing to provide material support to their favoured sides. That has been bad for the Syrian people, whose country lies ruined and abandoned and while they now populate refugee camps in Jordan, Lebanon, Turkey and Egypt. But it could even worse for the region and the world with further escalation.

Hopefully, there will be no escalation. Hopefully, the Syrian Civil War will wind down to a stalemate, peace terms will be brokered and the refugees will be able to go home. Hopefully the great powers who have so far allowed this proxy war to continue will realise that fighting a proxy war in Syria is a very dangerous thing. The likeliest outcome is that the forces of inertia, peace and economic development will triumph over the forces of chaos. But this is not assured so long as this dangerous proxy war goes on.

Why Europe Is Still In Peril, In Two Charts

A lot of analysts, including myself, have given the European situation a rest since last year. There were certainly some signs that the ECB and IMF had slowed (if not stopped) the deterioration by providing liquidity backstops to the addled banking system. But perhaps that was just the calm before the storm.

In truth, things were still was probably just as perilous as ever up until yesterday when the ECB and IMF decided to start a banking panic by enforcing a haircut of up to 10% on bank depositors. That was literally the stupidest thing that anyone has done since the Euro crisis began, and while it may not lead to utter disaster, there is a significant chance that it will. Not only is it excruciatingly unjust (it’s theft!), it is also incredibly suicidal. Many, many Spaniards, Italians, Greeks and Portuguese will have looked at the Cyprus haircut in horror, and wondered “Am I next?” Some of those will withdraw their money from the bank and stuff it in a mattress or into tangible assets, furthering stressing the already-fragile and highly-leveraged European banking system. Even a 1% drop in European deposits would lead to over €100 billion of withdrawals.

The background to this is soaring European unemployment:

EuroUnemployment

The people running the European financial system and engineering the bailouts and austerity (ECB, EU, IMF, Germany) have ploughed on through with more and deeper austerity even as European countries (other, of course, than Germany) have run up to higher and higher unemployment levels. Spain and Greece are above 25%. Italy is above 10%, and Portugal above 15%. Hiking taxes and cutting spending is leading to more and more people in unemployment oblivion. That isn’t healthy. Let’s not forget what happened to Germany the last time when over 25% of its people found themselves unemployed:

Chart-German-Unemployment-and-Nazi-Links

If bank runs materialise across Europe next week, the unemployment situation is most likely to worsen even further. If that happens, expect more and more unemployed, underemployed and angry Europeans to start voting for increasingly radical political parties. This is suicidal. Europe needs to not only reverse the awful, stupid Cypriot haircut, but also to put fiscal consolidation on hold (it has, lest we forget, so far been counterproductive) and start worrying about unemployment levels.

Kim Jong-Un: Crazy, or Crazy Like a Fox?

This undated picture released by North K

It pains me to say this, but I think that today for the first time since the breakup of the Soviet Union in 1991 (a great year for music, as well as geopolitics) we have a greater than 10% chance of a nuclear war this year.

---EDITORS NOTE--- RESTRICTED TO EDITORI

Why? Well an unpredictable leader of a poor and desperate nation has ripped up the fragile armistice that ended the Korean War, and  is literally threatening pre-emptive nuclear war in language more often seen in cliched B-movies:

If we push the button missiles will turn Washington, the stronghold of American imperialists, and the nest of evil, into a sea of fire.

While estimates of North Korea’s nuclear capabilities remain low, meaning that it is highly likely that any nuclear attack on South Korea or Japan or America would be intercepted and retaliated — and while the United States remains totally dismissive of North Korea’s threats — the fact that the global intelligence communities got Iraq so devastatingly wrong is worrying. What if our estimates of North Korea’s nuclear capabilities are equally wrong, but in the other direction?

Is it possible that Kim Jong-Un has some cards up his sleeve, or are his threats just the ravings of a madman? For example, most American estimates of North Korean nuclear capability focus on the limited range of their intercontinental ballistic missiles. But what about the possibility that they could have already placed nuclear devices in the United States as an insurance policy against future events? After all, if it is possible that drug cartels can successfully ship billions of dollars of drugs through the porous US-Mexican border, is it not possible that other contraband could have been shipped through including North Korean bombs? (One problem with this theory, however, may be that North Korea may have great difficulty maintaining an external intelligence network, as North Koreans tend to defect at any opportunity they get)

And could North Korea have armed Iran as an insurance policy? After all, recent reports suggest that Iranian officials have apparently been present for recent North Korean nuclear tests. While Iran’s own nuclear program is a totally unsuited to the manufacture of nuclear weapons, and while there is no evidence that Iran is pursuing nuclear weapons, it stands to reason how both nations might be prepared to share resources as an insurance policy against common enemies.

However, it seems extremely unlikely that any North Korean insurance policy could prevent its destruction if it chose to attack the United States, Korea, or Japan, especially with nuclear weapons. Yes, it may be possible for them to cause damage especially on the Korean peninsula, and perhaps even on the North American continent, but this will probably be limited by the United States’ overwhelming force. And even if Kim Jong-Un is totally irrational and prepared to die in a storm of hellfire, it seems unlikely that the North Korean military structure will just let that happen. While I am no expert on the inner workings of the North Korean military, for reasons of rational self-preservation, it seems more likely that Kim Jong-Un would be removed by military coup — or perhaps even by China — before a unilateral pre-emptive nuclear strike on South Korea, Japan or the United States was carried out.

Nonetheless, the United States may wish to change direction. It is clear that sanctions have failed both in preventing North Korea acquiring nuclear weapons, and in easing the suffering of the starving and impoverished North Korean people. Given the huge potential costs of a nuclear skirmish in East Asia (specifically, potential loss of economic activity in Korea, Japan and China — three of the largest economies in the world) perhaps the United States and South Korea should consider carrots instead of sticks — offering large-scale business investment, technology, amnesty and support in exchange for North Korea giving up its nuclear arsenal and moving away from belligerence.

Explaining The WTI-Brent Spread Divergence

Something totally bizarre has happened in the last three years. Oil in America has become much, much cheaper than oil in Europe. Oil in America is now almost $30 cheaper than oil in Europe.

This graph is the elephant in the room:

3 year brent spread

And this graph shows how truly historic a move this has been:

brent-WTI-spread

Why?

The ostensible reason for this is oversupply in America. That’s right — American oil companies have supposedly been producing much, much more than they can sell:

This is hilarious if prices weren`t so damn high, but despite a robust export market for finished products, crude oil is backing up all the way to Cushing, Oklahoma, and is only going to get worse in 2013.

Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage.

But there’s something fishy about this explanation. I don’t know for sure about the underlying causality — and it is not impossible that the oil companies are acting incompetently — but are we really supposed to believe that today’s oil conglomerates in America are so bad at managing their supply chain that they will oversupply the market to such an extent that oil sells at a 25% discount on the price in Europe? Even at an expanded capacity, is it really so hard for oil producers to shut down the pipeline, and clear inventories until the price rises so that they are at least not haemorrhaging such a huge chunk of potential profit on every barrel of oil they are selling? I mean, that’s what corporations do (or at least, what they’re supposed to do) — they manage the supply chain to maximise profit.

To me, this huge disparity seems like funny business. What could possibly be making US oil producers behave so ridiculously, massively non-competitively?

The answer could be government intervention. Let’s not forget that the National Resource Defence Preparedness Order gives the President and the Department of Homeland Security the authority to:

(c)  be prepared, in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements;

(d)  improve the efficiency and responsiveness of the domestic industrial base to support national defense requirements; and

(e)  foster cooperation between the defense and commercial sectors for research and development and for acquisition of materials, services, components, and equipment to enhance industrial base efficiency and responsiveness.

And the ability to:

(e)  The Secretary of each resource department, when necessary, shall make the finding required under section 101(b) of the Act, 50 U.S.C. App. 2071(b).  This finding shall be submitted for the President’s approval through the Assistant to the President and National Security Advisor and the Assistant to the President for Homeland Security and Counterterrorism.  Upon such approval, the Secretary of the resource department that made the finding may use the authority of section 101(a) of the Act, 50 U.S.C. App. 2071(a), to control the general distribution of any material (including applicable services) in the civilian market.

My intuition is that it is possible that oil companies may have been advised (or ordered) under the NDRP (or under the 1950 Defense Production Act) to keep some slack in the supply chain in case of a war, or other national or global emergency. This would provide a capacity buffer in addition to the Strategic Petroleum Reserve.

If that’s the case, the question we need to ask is what does the US government know that other governments don’t? Is this just a prudent measure to reduce the danger of a resource or energy shock, or does the US government have some specific information of a specific threat?

The other possible explanation, of course, is ridiculous incompetence on the part of US oil producers. Which, I suppose, is almost believable in the wake of Deepwater Horizon…

America Loves Drone Strikes

This graph shows everything we need to know about the geopolitical reality of Predator Drones (coming soon to the skies of America to hunt down fugitives?).

The American public loves drone strikes:

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The American public does not approve of the extrajudicial killing of American citizens. But for everyone else, it’s open season.

But everyone else — most particularly and significantly, the countries in the Muslim world — largely hates and resents drone strikes.

And it is the Muslim world that produces the radicalised extremists who commit acts like 9/11, 7/7, the Madrid bombings, and the Bali bombings.  With this outpouring of contempt for America’s drone strikes, many analysts are coming to believe that Obama’s drone policy is now effectively a recruitment tool for al-Qaeda, the Taliban and similar groups:

2_Hands

Indeed, evidence is beginning to coalesce to suggest exactly this. PressTV recently noted:

The expanding drone war in Yemen, which often kills civilians, does in fact cause blowback and help al-Qaeda recruitment – as attested to by numerous Yemen experts, investigative reporting on the ground, polling, testimony from Yemen activists, and the actual fact that recent bungled terrorist attacks aimed at the U.S. have cited such drone attacks as motivating factors.

After another September drone strike that killed 13 civilians, a local Yemeni activist told CNN, “I would not be surprised if a hundred tribesmen joined the lines of al-Qaeda as a result of the latest drone mistake. This part of Yemen takes revenge very seriously.”

“Our entire village is angry at the government and the Americans,” a Yemeni villager named Mohammed told the Post. “If the Americans are responsible, I would have no choice but to sympathize with al-Qaeda because al-Qaeda is fighting America.”

Many in the U.S. intelligence community also believe the drone war is contributing to the al-Qaeda presence in Yemen. Robert Grenier, who headed the CIA’s counter-terrorism center and was previously a CIA station chief in Pakistan, told The Guardian in June that he is “very concerned about the creation of a larger terrorist safe haven in Yemen.”

“We have gone a long way down the road of creating a situation where we are creating more enemies than we are removing from the battlefield,” he said regarding drones in Yemen.

Iona Craig reports that civilian casualties from drone strikes “have emboldened al-Qaeda” and cites the reaction to the 2009 U.S. cruise missile attack on the village of al-Majala in Yemen that killed more than 40 civilians (including 21 children):

That one bombing radicalized the entire area,” Abdul Gh ani al-Iryani, a Yemeni political analyst, said. “All the men and boys from those families and tribes will have joined [al-Qaeda] to fight.

And al-Qaeda’s presence and support in Yemen has grown, not shrunk since the start of the targeted killing program:

Meanwhile Yemen Central Security Force commander Brig. Gen. Yahya Saleh, nephew of ousted president Ali Abdullah Saleh, told Abdul-Ahad that al-Qaeda has more followers, money, guns and territory then they did a year and a half ago.

All at a time when Yemen is facing a “catastrophic” food crisis, with at least 267,000 children facing life-threatening levels of malnutrition. Hunger has doubled since 2009, and the number of displaced civilians is about 500,000 and rising.

As U.S. drones drop bombs on south Yemen villages and AQAP provides displaced civilians with “free electricity, food and water,” tribes in the area are becoming increasingly sympathetic to AQAP.

Let’s be intellectually honest. If a country engages in a military program that carries out strikes that kill hundreds of civilians — many of whom having no connection whatever with terrorism or radicalism — that country is going to become increasingly hated. People in the countries targeted — those who may have lost friends, or family members — are going to plot revenge, and take revenge. That’s just how war works. It infuriates. It radicalises. It instils hatred.

The reality of Obama’s drone program is to create new generations of America-hating radicalised individuals, who may well go on to be the next Osama bin Laden, the next Ayman al-Zawahiri, the next Abu Musab al-Zarqawi. The reality for Obama’s drone program is that it is sowing the seeds for the next 9/11 — just as American intervention in the middle east sowed the seeds for the last, as Osama bin Laden readily admitted.

Is War Coming Between China And Japan?

Last month, I looked at the legal implications of a conflict between China and Japan, concluding that the likelihood remains low, and that America would not be legally bound to defend Japan:

First of all, it is critical to note that the United States is not legally obligated under its with Japan treaty to intercede on Japan’s behalf. The treaty states that the United States is required to report any such event to the UN Security Council, instead:

Each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes. Any such armed attack and all measures taken as a result thereof shall be immediately reported to the Security Council of the United Nations in accordance with the provisions of Article 51 of the Charter. Such measures shall be terminated when the Security Council has taken the measures necessary to restore and maintain international peace and security.

Very simply, this means that China can attack Japan without fearing an inevitable American retaliation. That fact alone makes a small skirmish fairly likely.

So what if China successfully captured the islands — and perhaps even more Japanese territory — as we can perhaps assume given China’s overwhelming size and military-spending advantages? Well, the United States and presumably the international community other than China’s allies would seek to diplomatically pressure China to stand down and reach a peaceful arbitrated resolution via the UN.

If China refused to stand down and accept a diplomatic solution — that is, if China was absolutely set on staring down the United States — then the United States would be forced to choose between providing military support to Japan — and possibly ultimately escalating up to a global war between China and her allies and the United States and her allies — or facing a humiliating climbdown, and accepting both Chinese sovereignty over the islands, as well as any other Japanese territory that China might have captured, as well as face the possibility of further Chinese incursions and expansionism in the Pacific in the future.

In the last day it has been reported that Chinese forces have been mobilising.

Mobilising

A report out of China by NTDTV (in very broken English) notes:

February 3, Nan’an, Fujian Highway 308, artillery units practical exercise for several days.

February 3 to 6, Fujian, Xiamen, Zhangzhou, Huzhou, a large troop movements, nearly 100 vehicles of various types of military vehicles, armored vehicles, artillery filled the entire road, endless, Xiamen and even the scene of a traffic jam 10 kilometers.

In addition, on February 3 in Shiyan, Hubei, a large number of tanks, wheeled military base from Shiyan room counties is delivered to the coastal areas. Many local residents of the tense situation of some concern.

Prior to this allegation, January 15 and 30, the Chinese navy guided missile frigate, twice the fire control radar lock frigates and ship-borne helicopters of the Japanese Maritime Self-Defense Force, is also considered to enter a combat state.

According to mainland media quoted the “People’s Daily” front-page article claiming that China will not change in point of view on the issue of the Diaoyu Islands , and have to prepare to win the war.

The international media alleged that China has purchased from Russia 239 engine, used in the manufacture of the H-6K. Combat covering the Diaoyu Islands, in this model, the engine can also be used to manufacture transported -20 transport aircraft purchased.

If the engine assembled, will greatly enhance China’s military power.

This may turn out to be much ado about nothing, propaganda released to make a hullabaloo. With China gradually growing relatively stronger, and the United States and her allies growing relatively weaker, China on the surface may seem to have very little incentive to do much other than wait. But with global economic conditions worsening, and both China and Japan becoming more fierce in their rhetoric, it becomes likelier and likelier that China may choose to project its economic problems outward by starting a hot war. Most importantly, with the United States not committed to materially defend Japan, it appears to me like China may see this as a golden opportunity to impose itself on the region, to humiliate the already overstretched United States, and make a statement by pushing Japan out of the islands, or perhaps even by going postal and invading other Japanese islands or even Taiwan. With the world dependent on goods and components produced and assembled in China, China already has a lot of leverage to push the rest of the world into accepting a Chinese-dominated regional order.

Still I would say that by far the most rational course for China is to not start a war. But if China starts, it becomes increasingly likely that the United States will respond.

Governments around the globe are advised to remember that while war may increase GDP, and while it may lower unemployment, it destroys an unquantifiably larger amount of real wealth — lives, businesses, physical capital, social capital.

Could America Get Sucked Into a China-Japan Conflict?

So China and Japan are both threatening conflict in their fairly brutal ongoing argument over a few tiny disputed islands (and their mineral rights):

Senkaku islands

With global growth slowing, both countries’ leaders might look to a war as a way to distract from economic woe. While a limited war between China and Japan over the islands — perhaps of the scale of the Falkland War between Britain and Argentina in the 1980s — would be unsettling for the global economy, the real question is whether or not such a conflict could spiral into something bigger. 

The first critical point to note is that both countries’ leadership are increasingly hawkish in tone and character. China is in many ways seeking to establish itself on the world stage as a global military and economic powerhouse. Countries seeking to establish themselves on the global stage have traditionally sought out conflict. Japan is an ideal candidate for Chinese hostility. There is a lot of resentment — Japan’s invasion and occupation of Manchuria was brutal, and filled with war crimes (war crimes that the Japanese continue to deny). But more than that, Japan is an American protectorate, dotted with American bases, and subject to a mutual defence treaty. If China is to eclipse the United States as a global superpower, China must be able to show that she can impose her will on America.

And Shinzo Abe, Japan’s new Prime Minister has made it his life’s work to change Japan’s pacifistic constitution. Japan is faced with a twenty year economic depression, falling birthrates, a population of “herbivore” males with an aversion to sexuality. Abe may see hostility against China as a gateway to greater nationalism, and greater nationalistic fervour as a gateway to a national recovery.

First of all, it is critical to note that the United States is not legally obligated under its with Japan treaty to intercede on Japan’s behalf. The treaty states that the United States is required to report any such event to the UN Security Council, instead:

Each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes. Any such armed attack and all measures taken as a result thereof shall be immediately reported to the Security Council of the United Nations in accordance with the provisions of Article 51 of the Charter. Such measures shall be terminated when the Security Council has taken the measures necessary to restore and maintain international peace and security.

Very simply, this means that China can attack Japan without fearing an inevitable American retaliation. That fact alone makes a small skirmish fairly likely.

So what if China successfully captured the islands — and perhaps even more Japanese territory — as we can perhaps assume given China’s overwhelming size and military-spending advantages? Well, the United States and presumably the international community other than China’s allies would seek to diplomatically pressure China to stand down and reach a peaceful arbitrated resolution via the UN.

If China refused to stand down and accept a diplomatic solution — that is, if China was absolutely set on staring down the United States — then the United States would be forced to choose between providing military support to Japan — and possibly ultimately escalating up to a global war between China and her allies and the United States and her allies — or facing a humiliating climbdown, and accepting both Chinese sovereignty over the islands, as well as any other Japanese territory that China might have captured, as well as face the possibility of further Chinese incursions and expansionism in the Pacific in the future.

Who will blink first is uncertain. Only the Chinese really know how strong they are, how far they are willing to push, and how much of their threats are a bluff.

On the other hand, as I wrote last year:

The relationship between China and the United States today is superficially similar to that between Great Britain and Germany in 1914. Germany and China — the rising industrial behemoths, fiercely nationalistic and determined to establish themselves and their currencies on the world stage. Great Britain and the United States  — the overstretched global superpowers intent on retaining their primacy and reserve currency status even in spite of huge and growing debt and military overstretch.

Mutually assured destruction can only act as a check on expansionism if it is credible. So far, no nation has really tested this credibility.

Nuclear-armed powers have already engaged in proxy wars, such as Vietnam. How far can the limits be pushed? Would the United States launch a first-strike on China if China were to invade and occupy Taiwan or Japan, for example? Would the United States try to launch a counter-invasion? Or would they back down? Launching a first-strike is highly unlikely in all cases — mutually assured destruction will remain an effective deterrent to nuclear war. But perhaps not to conventional war and territorial expansionism.

The chance of global war in the near-term remains very low. But so long as China and Japan continue their antagonism, the chance of global war in the long-term is rising.

The Growing Probability of a One State Solution

The unstoppable force of Israel’s settlement movement is about to hit the immovable object of Israel’s desire to be a Jewish-majority democracy.

Israeli politicians may have paid a whole lot of lip-service to the notion of a two-state solution over the years, but they continue to carve up and settle the very land that that Palestinian state would be founded upon.

Mahmoud Abbas is calling their bet. He is now threatening to disband the Palestinian authority and hand over control of the West Bank to Israel in retaliation for Israel’s ongoing settlement building activities:

Palestinian president, Mahmoud Abbas, said he will hand over responsibilty for the West Bank to Israel if peace talks are not renewed after Israel’s elections, Haaretz newspaper reported on Thursday.

In an interview with the Israeli newspaper, Abbas said he would relinquish control and disband the Palestinian authority if there was no progress after January 22.

This — if carried through — is quite literally the single smartest thing any Palestinian leader has ever done. As Jeffrey Goldberg noted back in November:

There is a strategy the Palestinians could implement immediately that would help move them toward independence: They could give up their dream of independence.

It’s a very simple idea. When Abbas goes before the UN, he shouldn’t ask for recognition of an independent state. Instead, he should say the following: “Israel occupied the West Bank and Gaza 45 years ago, and shows no interest in letting go of the West Bank, in particular.We, the Palestinian people, recognize two things: The first is that we are not strong enough to push the Israelis out. Armed resistance is a path to nowhere. The second is that the occupation is permanent. The Israelis are here to stay. So we are giving up our demand for independence. Instead, we are simply asking for the vote. Israel rules our lives. We should be allowed to help pick Israel’s rulers.”

Reaction would be seismic and instantaneous. The demand for voting rights would resonate with people around the world, in particular with American Jews, who pride themselves on support for both Israel and for civil rights at home. Such a demand would also force Israel into an untenable position; if it accedes to such a demand, it would very quickly cease to be the world’s only Jewish-majority state, and instead become the world’s 23rd Arab-majority state. If it were to refuse this demand, Israel would very quickly be painted by former friends as an apartheid state.

Israel’s response, then, can be reasonably predicted: Israeli leaders eager to prevent their country from becoming a pariah would move to negotiate the independence, with security caveats, of a Palestinian state on the West Bank, and later in Gaza, as well. Israel would simply have no choice.

This is the very best chance that the Palestinians have of getting a state, and if not a state at least equal democratic rights and some kind of peace. By accepting Israeli rule, Israel would be forced to choose between offering citizenship to the millions of Arabs living in the land it controls (endangering Israel’s status as a Jewish-majority state), or losing its status as a democracy (by denying West Bank Arabs votes) which has brought it significant international support and millions of dollars of aid. Goldberg’s theory is that Israel would choose to remain Jewish-majority, bring the settlement movement under control and relinquish land to the West Bank Arabs to found a Palestinian state.

But I don’t think that Israelis will overwhelmingly choose to abandon the settlements and retreat to the ’67 borders. The growth of Naftali Bennett’s Jewish Home party which advocates for a one state solution where West Bank Arabs are left without voting rights illustrates this very well. So too does Likud’s recent transformation into a party largely opposed to the two-state solution, under the control of hardliners like Moshe Feiglin and Danny Danon.

Indeed, the religious right in Israel appears wholly committed to the idea of not giving up an inch of the biblical land of Israel:

510px-Early-Historical-Israel-Dan-Beersheba-Judea-Corrected

The interesting thing is that Gaza is not part of that historic territory. It is often said that including the entirety of the Palestinian territories, Jews and Arabs are very close in population — according to 2007 data, there are 5,300,000 Arabs, and 6,000,000 Jews. However discluding Gaza, Jews retain a large majority — 6,000,000 against just 3,700,000 Arabs. What this means is that by withdrawing from Gaza as Sharon did, Israel could in theory annex the West Bank, grant full-citizenship to the Arab residents (and so remain a democracy), and remain heavily Jewish-majority for the foreseeable future.

This simple fact means that the likeliest compromise between Israel’s settlement movement and its desire to portray itself as a Jewish-majority democracy is the annexation of only the West Bank, leaving Gaza to either merge with Egypt — increasingly likely given the well-known ties between Hamas and the Muslim Brotherhood — or to exist as the Palestinian state.

While some like Naftali Bennett may push to keep West Bank Arabs from getting Knesset votes, Israel’s Jewish-majority status would not be threatened by every single West Bank Arab receiving a Knesset vote. This may very well be the best that West Bank Arabs can hope for — they are already under Israeli rule backed by overwhelming Israeli military superiority, and a diehard settlement movement, and have been for almost fifty years. And although there is significant discrimination against Arabs under Israeli rule — indeed, a majority of Israeli Jews openly advocate it —  a larger Arab voting bloc would minimise this.

Mahmoud Abbas’ threat is a wise acceptance of this reality. Israeli settlements are not going anywhere. The two state solution is effectively dead. Palestinians in the West Bank can either continue fighting futilely against an overwhelming enemy, or work toward equal rights in the state in which they now live.

The Interconnective Web of Global Debt

It’s very big:

article-2118152-124602BE000005DC-0_964x528

Andrew Haldane:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampli ers, not dampeners, as losses cascade.The system acts not as a mutual insurance device but as a mutual incendiary device.

A mutual incendiary device sounds about right.