quarta-feira, julho 20, 2011

Are We Entering Into Revolutionary Times?

GaveKal Research

In "A Study of History", Toynbee explains that the role of a society's elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past. Meanwhile, the modus operandi for most leaders is to try and maintain the status quo, and restore the "old order" that prevailed before the disruption. But if the problems are large enough, this does not work, and the same challenges reappear until either a solution is found (e.g., the European Union project as the solution to Franco-German rivalry), the elite is replaced by a new elite (i.e., revolution), or the country, system or civilization disappears (e.g., end of the Soviet Union). Now if one buys into Toynbee's grid of reference (and a number of us do), then it is possible that welfare states everywhere around the world are entering revolutionary times.

Indeed, eighteen months ago when we drew our first decision tree to review the possible scenarios for a denouement in the Greek crisis, we indicated that the worst possible outcome would be the "fudge." But of course, this is what we got and a year and a half later, we are none the wiser as to who will carry the losses on the Greek loans that everyone knows have been wasted. Worse yet, Spain and Italy are now coming into play.

Over that period, a number of our papers have been centered on the idea that negative real rates, increases in government spending, devaluations and transfers of debt from banks to taxpayers would not work. Worse yet, the very low nominal rates of the past decade have led to a huge expansion of what can be best described as "social clientelism," i. e., governments wasting money as never before in peace time through social transfers to "buy" votes. We now seem to be reaching the logical end to this process, though there are few signs emanating from the elite of a will to tackle this issue (witness how the French socialists and centre right are patting themselves on the back for agreeing to reduce the French budget deficit to -3% of GDP by 2013 if GDP growth continues to remain above trend -- as if the market will give French technocrats that kind of time and leeway!).

Now if today's elites cannot fathom confronting the imbedded benefits of civil servants and pensioners anymore than Louis XVI could take on the privileges of French aristocrats, then following Toynbee's grid, we have to fear that elites will be changed forcefully.

Of course, this is exactly what the US Tea Party is all about which is why we find the movement encouraging; at the very least, it offers a democratic alternative. Meanwhile, in Europe, where the economic and budgetary situations are arguably worse in a number of countries, nothing has emerged on the political scene. When a challenge as pressing as the one Europe is currently facing is obvious for all to see and yet nothing is done as politicians try to stay the course until the next election (for what?), this leaves an open field to the demagogues.Of course, demagogues are a great European tradition when the going gets tough. Historically, foxes are replaced by lions in the US and the UK, by demagogues elsewhere. We fully expect that coming elections across the Western world will produce some hair-raising outcomes.

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