, November 29, 2022

Revolution is the air— it may be good, but I'm scared


  •   12 min reads
Revolution is the air— it may be good, but I'm scared

From China to British rail workers, there is revolution in the air; the consequences might be good, they might be disastrous

Do you smell it? It is a smelly smell, and I am getting the aroma of revolution. Or is it civil war? Or maybe it's war; it's that last smell that has got my nose twitching, not to mention, created an acute sense of nausea.

I'm not necessarily worried about a revolution per se, providing it is bloodless. But I am worried about the power vacuum revolutions create, and I am worried about what governments might do to avoid revolution. I fret about China, but I fret about the move to the right in British politics; I see parallels with Germany before the Nazis came to power. The shift right (and maybe there is a shift left too, a foul dance in which polarisation plays the tune) is not the problem; it is a symptom, but the result could be awful.

Before we look forward, let's look back.

The common factors behind revolutions


Consider revolutions and civil wars in history. The definitive study was authored by James C Davies. . He drew several conclusions; perhaps the two most relevant are:

  • Revolutions in history have often followed a two-phase build-up. In phase one, average wages or wealth rose. In phase two, the growth reversed. For example, both the Russian and French revolutions and even the US revolution followed a period of rising wealth and then a reversal.
  • To be successful, a revolution needs support across society. Davies states: "Well-fed, well-educated people who rebel in the face of apathy among the objectively deprived, can at best expect a coup d'etat. The objectively deprived, when faced with solid opposition from people of wealth, status and power, will be smashed in their rebellion."

Civil wars are slightly different, mainly because they are symptomatic of a divide across society. The English civil war divided England between the aristocracy and rural workers on the one hand, and the merchant class and urban workers on the other hand. Its superficial cause was a religious divide between Protestants and Catholics. Its deeper cause was agricultural reform and the end of enclosures — or the medieval way of farming. The end of enclosures created a new entrepreneurial class, creating a new type of economy with jobs in towns and cities. It also had a devastating effect on rural workers.

The US civil war was more about economics. The South's economic model revolved around slavery. The North, with an industry-based economy employing cheap migrant labour, wanted to end the practice. A more nuanced explanation holds that the South was not so much fighting to preserve slavery but more the right for each state to choose — a somewhat perverse interpretation of state autonomy and the tenth amendment.

But I think a common factor in all of the above — revolution and civil war — was economic change and upheaval.

I will add another factor to go on top of the two drivers Davies described. A previous revolution in communication technology, namely the printing press, can create conditions for revolution or civil war. In Europe, the printing press spread new religious thinking, leading to the Protestant movement and the spreading of new ideas. A religious divide helped underpin the English Civil War, new philosophical ideas helped underpin the French Revolution, and the printing press via books such as Uncle Tom's Cabin helped spread the anti-slavery message.

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Compare with today

In China, a banking crisis emerges that makes the 2008 financial crisis seem mild. As tanks are sent to protect banks from people protesting about their inability to withdraw money, the risk of popular discontent becomes real. Recent Covid lockdowns have fuelled the popular sense of unease.

Truth is, the Chinese economy has looked to have all the hallmarks of a bubble for several years. Even the previous premier Wen Jiabao, warned about the risk of a bubble as far back as 2010.

China has seen a private sector and local government boom funded by debt, perhaps like nothing seen in history before. The result has been to pull hundreds of millions of people out of poverty which is good but has also created an enormous waste of resource — unoccupied buildings and shopping centres, new roads to nowhere, devoid of traffic. It is not sustainable — it was obvious this was not sustainable half a decade ago. President Xi Jinping has not dealt with this huge crisis in the making. Covid exacerbated the problem.

The reaction. There is nothing like a war to take the people's minds off economic woes and nothing like the spectre of a common enemy to fire the people up. Nancy Pelosi's recent visit to Taiwan has provided the ammunition.

Tariffs imposed on China and the general anti-Chinese-sentiment of the Trump regime — aided by Covid and conspiracy theories involving China — created an environment of growing hostility between China and the US. (Not that Democrats during the time of Obama were much more supportive of China; they tended to blame China for every economic ill.) ) Thanks to US hostility toward China, the Chinese economy reduced reliance on the US and lost its main incentive to appease the West.

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It is not just China

In the UK, we see something less radical but radical by the standards of Britain. The Trade Union movement is flexing its muscles, and now the RMT — National Union of Rail, Maritime and Transport Workers — seems to be fighting for the NHS and the pay of nurses and carers, etcetera.

UK politicians propose to respond with new anti-union legislation.

Have the Tories got popular support? Or is the weight of popular opinion with the unions this time? The last time we saw such a clash was in the era of Margaret Thatcher, but back then, the Unions exerted much more power than they do today, and regulation has curbed their influence. Some say the anti-union pendulum has swung too far, but many Conservative party members want it to swing even further.

In the US, we see a well-publicised growing divide — although maybe the impetus is draining out of the 'Trumpists' with Rupert Murdoch turning against the former US President.

The new printing press

I believe that for spreading ideas, there have been three great innovations/inventions:

  • Writing
  • Printing press
  • The Internet

Just as the printing press underpinned a flow of ideas in the past, the internet is doing so again. However, there is no doubt that the internet and social media, in particular, are creating groupthink and group polarisation. There is much danger in this.

Interest rates

There is also the role of interest rates.

Interest rates were cut sharply for a few years but then abruptly raised during periods leading up to the 1997 Asian crisis and 1998 Russian crisis (and collapse of LTCM), the dotcom bubble and crash, and the 2008 crash.

It has happened again. Quelle surprise, the result is not going to be pretty.

Quantitative easing, in which central banks created funding to buy medium and longer-term bonds, pushed up asset prices. The policy was designed to create a new flow of credit across the economy. And it worked; asset prices soared, and private, and public sector debt soared with them.

But as interest rates rise, asset prices fall — at least shares have crashed, and a housing market crash may or may not follow. For millions of indebted households and businesses worldwide, high-interest rates at a time of falling asset prices may be unaffordable.

In this way, we see another condition of revolutions of the past revealed:

  • Real wages are falling — they have been falling for much of the period since 2008 and are now apparently in free fall. This decline follows a period of steady growth. To an extent, the damage of falling wages was counteracted by rising asset prices. Now, even these are either falling or are likely to. So one condition of revolution in the past is repeated.
  • The internet spreads ideas just as the printing press once did, so we see the repetition of another condition of the past.
  • Opinion across much of the West is polarised — such polarisation is closer to the conditions that led to civil war than revolution.
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Global problem

In 2020 global debts hit $226 trillion, or 256 per cent of global GDP; to put that number in context, in 2007, on the eve of the greatest banking crisis in almost 80 years, global debts to GDP were 195 per cent.

The strength of the dollar adds to the problem worldwide — when the dollar is high, the US effectively exports inflation. As a result, the rest of the world may be forced to respond with higher interest rates.

At a time of record debts, higher interest rates may not be affordable.

There is another danger. The current cost of living crisis sees a backlash against central banks and money printing which is increasingly perceived as a fools' errand. But the cost of living crisis will probably be temporary. Later this decade, technology changes (such as autonomy) will be forces for deflation, and at such a time, we will need central banks to create money, just as people think the lesson of the 2022/23 crisis is that money printing creates chaos.

Central banks were right to print money post-2008 and for much of the last decade. The problem was that quantitative easing was a blunt tool and had exacerbated inequality fuelling a sense of unease.

Instead, governments should have used central banks to fund a modest level of universal basic income — in that way, central banks would not have needed to create so much money, and inequality, which may well have fuelled popular unease, would not have been so great.

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Corporate profits

So we see an economy riddled with high debts. Asset prices reach extraordinarily high levels, often disconnected from any sense of reality.

Business appears to flourish, with US corporate profits to GDP hitting an all-time high at the beginning of 2022. In the UK, corporate profits have also reached a new all-time high; they have increased by roughly 40 per cent since 2014.

High profits to GDP are potentially a good thing if they are correlated with rises in investment, but in the US, investment to GDP  is not especially remarkable.  In other words, whilst profits surge, investment limps forward.

The flip side to higher profits to GDP is lower wages to GDP.

This is an unfortunate cocktail — surging profits, lacklustre growth in investment, weak growth (or decline in wages).

No wonder there is discontent.

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Climate change

Adding to the issues is climate change. Anyone who denies climate change after such a summer has brought record temperatures across much of the northern hemisphere is deluded.

But just as deluded is the reaction against net zero.

There is every reason to believe net C02 emissions can be reduced all the way to zero without a prohibitive economic cost. Indeed, such are the remarkable strides in the technology behind renewables we may find the fight against climate change will lead to lower energy costs and economic gain. Yet still, we see resistance to renewables, with the right seeming preferring anything over onshore wind even though across much of Northern Europe, onshore wind represents the cheapest source of energy and the quickest of all forms of energy to scale.

The clash over climate change is another pressure point lying behind much of the political polarisation.

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Anti-Woke

A popular political movement of the moment could be characterised as anti-woke. It could also be characterised as anti-rights for minorities.

Anti-woke and cancel culture has become a rallying cry of the right, although I wonder how much the majority of the public really cares.

I fear that wokeness (and net zero) have been scapegoated by the right as a distraction from deeper issues such as rising corporate profits at a time of growing inequality. The reaction against woke follows a reaction against immigration.

Is political correctness or immigration really the cause of today's economic woes or a distraction encouraged by vested interests?

Lying politicians versus business leaders

The current batch of politicians have done democracy enormous harm with the scant regard they pay to the truth. In the UK, the backlash against politicians began with an expenses scandal, but the failure has mutated into a lying curse upon the upper echelons of the body politic. Yet not everyone agrees that President Trump and Prime Minister Johnson illustrate the lying disease — some say that their distortions of the truth were so extreme and obvious they have become a form of truth. So is extreme exaggeration lying or a way to make a point?

Either way, trust in politicians is evaporating, and across social media, people call for President Musk — maybe Elon can save us? But an economy run like a business may put democracy on the back-burner, corporate might replacing the state, especially when the people's hero is the ethical equivalent of an abacus.

Be under no doubt, democracy is under threat even in countries with the richest tradition in democracy.

Lesson of the 1920s and 1930s

Policymakers made multiple mistakes between the two world wars: among them:

  • Lack of commitment to the League of Nations leading to its failure. The US didn't even join it;
  • Reversal of globalisation; with, for example, the US Smoot–Hawley Tariff imposing tariffs on 20,000 imported goods;
  • Return to the gold standard and far too conservative monetary policy.

Today we risk repeating all of the above errors. The UK, a country that in the past was seen as a great exponent of global cooperation and human rights, plans to pull out of the European Convention on Human Rights and break international treaties and laws. This could set a dangerous global precedent.

Ever since the invasion of Iraq, the UN has been reduced to irrelevance, a tragic error after a period in which a global consensus created an opportunity to cement to UN's influence.

The backlash against central banks threatens the return to something akin to the gold standard.

We seem unable to learn the lessons of the past.

The future


So what will it be: revolution, civil war, global war, or all three?

We can say for sure one revolution is occurring — a technology revolution creating the tantalising prospect of relative abundance.

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