Global Contextual Framework
Global Contextual Framework

Three excellent articles provide the much of the contextual framework needed to understand what is going on in the world today.

  • The first explains some of the longer geopolitical trends shaping the world – the loss of Western dominance.
  • The second expands on some of the overarching economic factors constraining the range of potential futures – indebtedness of Western civilisation.
  • The third uses the activities of financial sector vested interests and their enablers to demonstrate just how corrupt our systems have become.

The first of these contextual framework enhancing reports is George Friedman Europe, the International System and a Generational Shift. It highlights just how historic the current realignment of world’s power structures and operational framework are. As a species we tend to extrapolate from the recent past to the near future. This makes us all particularly susceptible to poor decision making when key aspects of the future no longer resembles the past. Even if George is only partially right,  his analysis suggests it is even more important than usual that we continually check our conceptual framework against reality and adjust it as necessary.

Europe, the International System and a Generational Shift

Change in the international system comes in large and small doses, but fundamental patterns generally stay consistent. From 1500 to 1991, for example, European global hegemony constituted the world’s operating principle. Within this overarching framework, however, the international system regularly reshuffles the deck in demoting and promoting powers, fragmenting some and empowering others, and so on. Sometimes this happens because of war, and sometimes because of economic and political forces. While the basic structure of the world stays intact, the precise way it works changes.

The fundamental patterns of European domination held for 500 years. That epoch of history ended in 1991, when the Soviet Union — the last of the great European empires — collapsed with global consequences. In China, Tiananmen Square defined China for a generation. China would continue its process of economic development, but the Chinese Communist Party would remain the dominant force. Japan experienced an economic crisis that ended its period of rapid growth and made the world’s second-largest economy far less dynamic than before. And in 1993, the Maastricht Treaty came into force, creating the contemporary European Union and holding open the possibility of a so-called United States of Europe that could counterbalance the United States of America.

and

But the financial crisis had its greatest impact in Europe, where it is triggering a generational shift…  the issue is not simply whether the euro survives or whether Brussels regulators oversee aspects of the Italian economy. The fundamental issue is whether the core concepts of the European Union remain intact…. The European Union emerged with the goal of creating a system of interdependency in which war in Europe was impossible… Underpinning this idea was the concept that the problem of Europe was the problem of nationalism. Unless Europe’s nationalisms were tamed, war would break out.

and

The Germans have little patience for paying Greek debts. The Greeks have little interest in shouldering austerity to satisfy German voters. On one level, there is collaboration under way — problem solving. On another level, there is distrust of the elites’ attempts to solve problems and suspicion that it will be the elites’ problems and not their own that will be addressed. But the problem is bigger than Greco-German disputes. This system was created in a world in which European politics had been declared in abeyance. Germany was occupied. The Americans provided security and inter-European fighting was not allowed. Now, the Americans are gone, the Germans are back and European international politics are bubbling up to the surface.

In short, the European project is failing at precisely the point that it had been attempting to solve — nationalism.

The report goes on to discuss the USA, China and Russia but I can’t in good conscience extract more. Read the whole thing here

The second article is Mauldin newsletter It’s All Greek To Me, in which he quotes extensively from Michael Lewitt‘s latest paid subscriber only newsletter. The extracts do an excellent job of pulling together a variety of reports that show how indebted Western Civilisation is. It also shows that banking sector assets (debts) often dwarf their host countries GDP, with implications for sovereign solvency and growth in the event of more financial sector bailouts.

The level of Western indebtedness suggests the option of re-instigating a credit induced façade of real growth is probably not possible. Developed countries face a  severely constrained range of possible futures.  It is hard to see how any of these futures have Western civilisation turning around the geopolitical shifts identified in the Stratfor document unless others follow very suboptimal paths. That Western civilisation is no longer master of its destiny confirms just how much the world has changed.

It’s All Greek To Me

Institutional funding has a three-year average life, so European banks need to generate more than $800 billion each month to fund maturing institutional borrowings. This is, in Mr. (Oliver) Sarkozy’s words, unsustainable….. There is also increasing evidence that the sheer amount of debt has reached the point where it is retarding growth and that additional debt will place additional downward pressure on the economy.

and

One thing to focus on in Figure 3 above and in Figure 4 below is the fact that Germany, the country on which the economic fate of Europe largely rests, is itself heavily indebted. Germany carries a total non-financial debt-to-GDP ratio of 241 percent (government – 77 percent; corporate – 100 percent; household – 64 percent). One can see why it is far from certain that Germany will have the economic or political wherewithal to bail out its weak European neighbors even if it musters up the political will to do so

and

The “ Occupy Wall Street” movement has received more than its fair share of media attention. There is no doubt that the protestors are emitting a primal scream against the system of “ capitalism for the poor, socialism for the rich” that characterized the steps that both led to the 2008 financial crisis and those that were taken to stem it. A growing percentage of the citizenry is coming to believe that a system that privatizes profits and socializes losses lacks legitimacy.

At the same time that protestors are railing against the current capitalist regime, and European leaders are doing everything in their power to perpetuate it, legal authorities in the United States are doing their part to insure that little will change.

The third post reveals the extent of crony capitailsm and outright theft occurring across the developed world.  Jesse’s Café Américain’s posts on MF global are devastating:

MF Global’s Customer Assets – STOLEN – And Nothing You Hold In This System Is Safe

As suspected, MF Global brazenly took liquid assets like Treasuries and warehouse receipts, but not cash which would have been more quickly missed, from customer accounts to post as illegal collateral for emergency funding with a lender who must have known that they were receiving stolen goods.

When things fell apart, the lender simply took the collateral and liquidated it, and kept the money.

And now they are refusing to even acknowledge this transaction, and apparently the management of MF Global is not yet talking. Why? Because it was an insider deal, and they don’t want to give back the stolen money.

When ‘non-consequential’ customers were requesting their funds, they were issued checks instead of wire transfers. The checks of course were not honored and bounced. But days later, and just hours before the bankruptcy filing, MF Global was paying BONUSES to its UK traders.

Read the Whole thing. Also his subsequent post:

It’s Official: Wall Street Firms May Legally Steal From Their Customers – Rationalizations to Follow

If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be ‘socialized’ and haircuts received.

This is most likely a distortion of the principle known as ‘rehypothecation’ in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan.

The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them.

In a way it is just making the unbalanced relationship between Wall Street and its customers official.

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.

It means that brokers can go beyond the mere provision of funding for loss, and use customer accounts to fund their own leveraged speculation under exemptions duly granted by their ‘regulators.’

This sort of systemic abuse is typically exposed when there is a market dislocation. It is what finally exposed Madoff, for example, despite the many years that the regulators were turning a blind eye to his scheme.

It appears that the little Aussie battler, Opes Prime, may prove to be a global trend setter:

Fallout from Opes Prime collapse difficult to quantify

But when the Ferrier Hodgson senior partner saw that $1 billion-plus portfolio of stock pledged by clients as security over their margin loans was beneficially owned by the banks, he realised the enormity of the situation.

Taken together the three articles provide an excellent basis for understanding much of what is happening in the world today. We need to be particularly careful for so many reasons. Not least of which is the fact that our mental heuristics are particularly likely to lead us astray during times of change, such as these. It’s somewhat akin to the errors economists make when they extrapolate past trends to predict the future, and the trends change.

That said, it’s great that three such excellent posts came to my attention in quick succession. Sometimes one just has to love the internet, even if despairing about the world more generally.



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