Last Friday's crash of global IT systems was a stark reminder of our vulnerability. This was followed by President Biden's sudden collapse, just days after the assassination attempt on former President Trump. Kamala Harris now appears to be advancing without impediments, signaling potential shifts in US leadership. Meanwhile, Israel’s aggressive actions against Houthis’ port and oil storage facilities have escalated Middle East tensions, with Russia potentially arming the Houthis, raising the stakes for a broader conflict. The fragmentation of global governance and the intensification of international violence are becoming increasingly apparent, with major wars and even global conflict looming larger. The US, while still a dominant force, displays erratic behavior amid growing domestic political instability. This situation harks back to 80 years ago, when the Bretton Woods agreement established a gold-backed US dollar-centric system, now showing signs of faltering. Unlike a simple IT reset, the global economy and political structures cannot be rebooted with a switch.
The Western Dilemma
The West is besieged by numerous challenges. Inflation remains problematic in key sectors despite some reduction. Real GDP per capita has stagnated or declined, with median GDP faring worse. Housing affordability continues to be an issue, yet making it more accessible hampers growth. Aging populations contribute to poorer health, higher costs, and labor shortages, while mass immigration lacks support. Debt levels are unsustainable, despite rising taxes. Deindustrialization is ongoing, energy costs are prohibitive, and the green transition requires trillions. Defense budgets must increase, but resources, supply chains, and willing young recruits are scarce. China’s dominance in global production is a concern, as every nation seeks to reclaim manufacturing capabilities. Ongoing wars and the fear of new conflicts persist, with political polarization amplifying far-right and far-left voices. Europe struggles to progress, and conspiracy theories swirl around the assassination attempt on one US presidential candidate and what some perceive as a potential ‘palace coup’ against another.
Historical Reflections and Modern Parallels
The sentiment that "We’re all Soviets now" resonates strongly with the current situation. Neoliberalism’s failures have led to socio-political and geopolitical chaos. The West, much like the late Soviet bloc, seems incapable of embracing necessary political-economic reforms, hoping for change without addressing the root causes. The current global power struggle involves nations reshaping international norms to secure their autocratic regimes, believing their systems can foster greater discipline and strength compared to what they see as decadent democracies.
In China, Xi Jinping consolidates his role, limiting economic debate, and focusing on state-led goals. The CCP’s Plenum discussions on public ownership suggest a future of mixed-ownership economies, with private capital aligning with state objectives. The Plenum also acknowledges the need for affordable housing and accepts deflation if it lowers prices, boosting exports. Despite a minor PBOC rate cut, domestic demand remains weak, while the yuan devalues to support export growth.
The West’s Path Forward
The West faces critical decisions on its future direction. Historically, there have been parallels, such as the post-Bretton Woods era of the 1970s, marked by economic upheaval and geopolitical strife. Observations from ex-Soviet dissidents remain relevant, highlighting the West’s loss of civic courage and the struggle to maintain societal values amidst decadence and legalistic constraints. Critics emphasize the West’s inability to defend itself robustly and the dominance of mediocrity under democratic restraints.
Despite these challenges, the US rebounded in the 1980s, leading to the Cold War’s end. However, repeating this success formula is unlikely now. The old playbook of increased freedom, lower taxes, or higher state spending and lower rates alone will not suffice against a manufacturing-dominant 'USSR.' The current global landscape demands innovative approaches, beyond conventional economic and political strategies.
Navigating Future Economic and Political Realignments
Comparing current and past leaders, some analysts suggest that Trump might destabilize the post-1945 international order while reinforcing US dominance, drawing parallels with Gorbachev’s impact on the USSR. Despite resistance, Trump’s policies on China and trade might lead to significant global shifts. It’s posited that Western democracies, unlike rigid Soviet systems, can adapt and pivot as needed.
Critical questions arise about the future global economy: Will it be unified or fragmented into various blocs? How will nations choose and interact within these blocs? The global dominance of the US dollar, US Treasuries, and the alignment of energy policies will play significant roles in shaping future economic and political landscapes. Moreover, the strategic approaches to monetary, fiscal, industrial, trade, housing, transport, labor, and defense policies must align with broader geopolitical realities to ensure stability and growth.
The West must confront these challenges with a comprehensive and adaptable approach, recognizing that previous solutions may not suffice in the current geopolitical and economic climate.
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