When tyrants feel threatened with loss of power, they are apt to do just about anything. Pushed to the wall, what is the worst they might do?
Over the last two years, President Vladimir Putin has confirmed his legitimacy through the use of extraordinary measures — war and the mobilization of public opinion. But that type of legitimacy desensitizes a society that requires ever more frequent and grandiose “feats” to evoke a comparable response. Russia’s dealings with Crimea, Novorossiya, Syria and Turkey being the most recent government actions to a rouse public response.
Another pocket war in Eurasia is not among the worst things that might happen should nuclear-armed tyrannies find their economies collapsing beneath them. Not unless it is a war that triggers NATO defence guarantees.
China’s days of easy growth are over; ten million people enter the labor force every year, and there’s nowhere for them to go. Like Russian President Vladimir Putin, Xi has found it easier to distract his people by stirring up trouble abroad rather than fixing problems at home.
… Even in a police state, the citizenry can erupt. In 1962, the Red Army mowed down scores, including children, during a labor strike. Does anyone doubt that Putin, the former KGB officer who called the collapse of the Soviet Union one of the great geopolitical catastrophes of the 20th century—a man who now praises Stalin—would do whatever he felt necessary to cling to power?
The Soviet Union went quietly in 1991; Vladimir Putin will not.
The two largest nuclear-armed tyrannies have economies that are dominated by corrupt state owned enterprises, which make up over 70% of Russia’s economy and roughly 50% of China’s industrial economy by certain measures. These tyrannies protect state owned enterprises from their own corruption, mismanagment, and chronic capital misallocation — which only serves to hasten the downfall of the economies.
85 percent of loans in 2009 were issued to SOEs, because banks themselves are state-owned, and are directed to let credit flow to other state-owned businesses. SOEs can get money more cheaply, paying lower rates for borrowing, and are more blasé about repaying these loans: SOE borrowing was a major source of non-performing loans in past crises. __ State Owned Enterprises Too Big to Fail
The despots are painting themselves into a corner. If, to a hammer, everything looks like a nail, then these tyrannical governments are morphing into state-sized nuclear weapons — where everything looks like a nuclear target.
Signs of Distress are Growing Harder to Conceal
… why will things in China continue to get worse? Because China hasn’t learned anything.
Wakeup Call: Financial Problems Inside Nuclear Tyrannies Threaten Everyone
China has a difficult policy problem on its hands. It is trying to so-called rebalance its economy, shift toward more reliance on consumers and household spending, which is only about 40-45 percent of GDP, and to raise household incomes. At the same time, it needs to worry about its massive debt, as a fraction of GDP is about 200 percent. So a lot of people who are not that savvy about China, don’t watch it every day, were called all of a sudden to wake up. It’s like the big short in 2007, when suddenly people woke up and said, hey, let’s take a look at those subprime mortgages. Are they real? And people are now invited to take a much closer look at China, at where all the debt that’s been financing its growth have grown, has gone. A lot of state-owned companies have done a lot of spending and may be insolvent, technically.
So this is a wakeup call for the world economy.
Things are not going as smoothly for China as the CPC and its puppet illusionists are trying to make them appear.
There are at least two known unknowns that could disrupt China’s smooth glide path. The first is what happens to rust-belt regions that have plenty of the old economy but not much of the new. “It will be very difficult for those who work in the old economy to transition into the new economy,” says Chen Long, China economist at Gavekal Dragonomics. “Coal miners do not become internet programmers overnight, or even delivery men.”
The second is a potential debt crisis of historic proportions, stemming in part from the government’s fears about the consequences for coal country if they were to turn off the credit taps. In 2007, on the eve of the global financial crisis, China’s overall debt to GDP ratio was 147 per cent. Now it is at 231 per cent and climbing.
“They absolutely have no room left for further debt accumulation,” says Rodney Jones at Wigram Capital, an economic advisory firm. “That’s the central issue — not the exchange rate, not the stock market. These are symptoms. The problem is unsustainable growth and continued rapid accumulation of debt, leverage and credit.”
China’s tyrants do not want to face any reckoning for all the mismanagement and capital misallocation. As a result, they continue to dig the financial hole ever-deeper beneath China’s economic foundations.
China is adding debt at a pretty fast pace even though it’s already done too much of that the last seven years. And it’s doing it even though the economy is slowing – on Tuesday, the country reported that its economy expanded at 6.9 percent in 2015, the slowest pace in a quarter century.
Despite that slow growth – which many analysts say actually is better than the reality – new borrowing has climbed to its highest level in six months. It’s enough that China now has more total debt – including the government, households and corporations – relative to the size of its economy than we do to ours.
In other words, for China “it’s the debt, stupid!”
Russia is a Member of the Same Nuclear Tyrant Club as China
China is not the only nuclear-armed tyranny skating on thin ice. The Kleptocrats of the Kremlin seem to be willing to destroy Russia to save their own power and wealth.
The greedy growth of the Russian state was already choking the life out of Russia’s economy before Putin came unhinged in 2014:
The state, being what it is in Russia, a living creature with aspirations and idiosyncrasies of its own, may start saving itself, rather than saving the nation.
While the state was expanding, the economy was showing a more complicated dynamic. The oil windfall had two peaks: the first happened between 2004 and 2008, the second between 2010 and 2013. Russia entered the first wave of high-price oil when its oil sector was predominantly private, but by the time the second wave came about, two-thirds of the oil export revenues were accrued by state-owned companies. The second instance of the oil boom brought in almost $2 trillion in revenue as opposed to the first instance’s $1.5 trillion, and yet economic growth was much better under the first wave than under the second, analyst Kirill Rogov pointed out in 2014.
The state sector comprises, according the IMF, more than 70 percent of the Russian economy. State-owned enterprises take up 80 percent of the country’s top-ten firms’ shareholder capital.
Back in the early 2000s, Putin offered much promise for the future of Russia. Then, it was still possible to hope that Russia might choose a prosperous opportunity society, rather than attempt to recreate the brutal and barbaric Soviet empire. Now it is clear that Putin was not up to the task of making the lives of Russians better. But his regime creates excellent propaganda for the purposes of controlling Russian opinion polls. At this point, that is his most crucial benchmark.
Cyber-Thieving is not the worst thing that might happen if tyrants feel threatened with loss of power. The current crop of nuclear-armed tyrant is apt to start a big war — a war to end all wars — if they feel it all slipping away.
Hope for the best. Prepare for the worst. It is never too late to have a Dangerous Childhood.
Criminal anarchy sits just beneath the surface of both China and Russia, waiting to be unleashed. There is no telling who will eventually have control of nuclear weapons after all of this washes out.