Egypt’s Arab Spring: From Tyranny to Tyranny

How events can move so swiftly.

In Egypt, following the overthrow of ousted President Hosni Mubarak in a popular ‘Arab Spring’ protests in 2011, today it would seem that the same fate will befall the incumbent Mohamed Morsi.

From New York Times:

Egypt’s top generals on Monday gave President Mohamed Morsi 48 hours to respond to a wave of mass protests demanding his ouster, declaring that if he did not, then the military leaders themselves would impose their own “road map” to resolve the political crisis.

Their statement, in the form of a communiqué read over state television, plunged the military back into the center of political life just 10 months after it handed full power to Mr. Morsi as Egypt’s first democratically elected leader.

The communiqué was issued following an increasingly violent weekend of protests by millions of Egyptians angry with Mr. Morsi and his Muslim Brotherhood backers. It came hours after protesters destroyed the Brotherhood’s headquarters in Cairo.

In tone and delivery, the communiqué echoed the announcement the Supreme Council of the Armed Forces issued 28 months ago to oust President Hosni Mubarak and seize full control of the state. But the scope and duration of the military’s latest threat of political intervention — and its consequences for Egypt’s halting transition to democracy — were not immediately clear, in part because the generals took pains to emphasize their reluctance to take over and the inclusion of civilians in any next steps.

For Mr. Morsi and his Islamist allies in the Muslim Brotherhood, however, a military intervention would be an epic defeat. It would deny them the chance to govern Egypt that the Brotherhood had struggled 80 years to finally win, in democratic elections, only to see their prize snatched away after less than a year.

“We understand it as a military coup,” one adviser to Mr. Morsi said, speaking on condition of anonymity to discuss confidential deliberations. “What form that will take remains to be seen.”

The military’s ultimatum seemed to leave Mr. Morsi few choices: cut short his term as president with a resignation or early elections; share significant power with a political opponent in a role such as prime minister; or attempt to rally his Islamist supporters to fight back for power in the streets.

Populist revolts that results to a powershift from one tyrant to another has been no stranger in the world of democratic politics. This applies even to the Philippines (which had two popular revolts) 

Lord of the Ring’s Gollum’s image 

In a letter to Bishop Creighton, the great historian and writer John Emerich Edward Dalberg, popularly known as the Lord Acton, captured the essence of politics: (bold mine)

I cannot accept your canon that we are to judge Pope and King unlike other men, with a favourable presumption that they did no wrong. If there is any presumption it is the other way, against the holders of power, increasing as the power increases. Historic responsibility has to make up for the want of legal responsibility. Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and not authority, still more when you superadd the tendency or the certainty of corruption by authority. There is no worse heresy than that the office sanctifies the holder of it.

Food Crisis Watch: World Food Prices at 6 month High

For the mainstream’s view of the world, price inflation has hardly been a concern.

Yet in reality, price inflation appears to be seeping into the global economy mostly channeled through the commodity spectrum (one must add health, education costs among the other contributors).

A particular cause of concern has been rising international food prices which according to the FAO is at a 6 month high.

chart from FAO

From Businessweek/Bloomberg 

World food prices rose in September to the highest in six months as dairy and meat producers passed on higher feed costs to consumers, the United Nations’ Food & Agriculture Organization said.

An index of 55 food items tracked by the FAO rose to 215.8 points from a restated 212.8 points in August, the Rome-based agency reported on its website today. Dairy costs jumped the most in more than two years.

Livestock breeders and dairy farmers are passing on the higher cost of feed, after grain prices jumped in June and July, according to Abdolreza Abbassian, an economist at the FAO in the Italian capital. Higher prices don’t mean a food crisis is imminent, he said today by phone.

“Despite a very difficult market, the fundamentals that suggest a food crisis are just not there,” Abbassian said. “Market sentiment is now accepting high prices more as a rule than as an exception.”

Surging food crisis has been associated with social strife, particularly as one of the major trigger to the recent Arab Spring revolts. (chart from Sovereign Man)

While changes in weather patterns have proven to be a catalyst, many other policies such as tariffs, subsidies (agri and bioethanol) and others plays a role in exacerbating the supply side situation.

Importantly, massive inflationism by global central banks has been a key contributor to the demand side.

A continued ascent in food prices will amplify the risks of stagflation especially pronounced for emerging markets.

This is one very important dynamic to keep an eye on.

Have some steak today before they become pricey.

How Empires Die and the End of Centralization

Professor Gary North has a splendid article on the coming end of the empire states and of the centralized form of governments…

Death of the Empire

Empires disintegrate. This is a social law. There are no exceptions.

The first well-known social theorist to articulate this law was the prophet Daniel. He announced it to King Nebuchadnezzar. You can read his analysis in Daniel 2. Verses 44 and 45 are the key to understanding the law of empires.

The Roman Empire is the model. But there is a serious problem here. There are at least 210 theories of why it fell. There are so many that even my 1976 Ron Paul office colleague Bruce Bartlett gets credit for one of them – on Wikipedia, no less. He has made the big time!

In any case, Rome did not collapse. It wasted away over several centuries, wasting the treasure of its citizens along with it.

I suppose there were highly educated people who came to the voters in the late Roman republic and said something like this: "Unless decisive action is taken now, Rome will go bankrupt." If so, they were right. But it took a lot longer than they thought.

These days, it does not take nearly so long.

An empire grows at first almost unconsciously. No one goes to the powers that be and says, "Hey! Why don't we create an empire?" It is more like the person who says this: "I'm not greedy. All I want is to control the land contiguous to mine."

In military affairs, there are economies of scale. An army of warriors makes conquest cost-effective. There are also taxation advantages. An army of tax collectors makes tax collection cost-effective. "Hand over your money" is more effective. Pretty soon, you've got an empire.

But there is a law of bureaucracy that applies to empire. At some point, it costs more to administer the bureaucracy than the bureaucracy can generate through coercion. Then the empire begins to crack. It cannot enforce its claims.

So, the growth of empire has economics at its center: economies of scale. The fall of empire also has economics at its center: economies of scale.

I think this process is an application of the law of increasing returns. In the initial phase of the process, adding more of one factor increases total output. But, as more of it is added, another law takes over: the law of decreasing returns.

Example: water and land. Add some water to a desert, and you can grow more food. Add more water, and you can grow a lot more food. There is an accelerating rate of returns. The joint output is of greater value than the cost of adding water. But if you keep adding water, you will get a swamp. The law of decelerating returns takes over. Add more water, and the land is underwater. You might as well have a desert.

This law applies to power. Add power, and you generate more income. But if you keep adding power, expenses of the bureaucracy will begin to eat up revenues. Resistance will also increase: internal and external. The system either implodes or withers away.

With only one exception in history – the Soviet Union in 1991 – empires have not gone out of business without bloodshed.

In the case of the Soviet Union, the senior politicians privatized the whole system in December 1991. They handed over the assets to what immediately became the ultimate system of crony capitalism. They divvied up the Communist Party's money and deposited it in individual Swiss bank accounts. The suicide of the USSR was "Vladimir Lenin meets David Copperfield." Now you see it; now you don't. In the history of Marxism, no event better illustrates Marx's principle of the cash nexus. It seduced Lenin's vanguard of the proletariat.

Notice the pattern of empire. It begins slowly, building over centuries: the Roman Empire, the Russian Empire, the French Empire. Then the empire either erodes or else it is captured by revolutionaries, as was the case in France (1789-94) and Russia (1917). But this only delays the reversal. It does not overcome it.

Death of the Modern Centralized States

Economies of scale shaped the development of the modern nation-state. In 1450, the governments of Western Europe were small. They controlled little territory. They were remnants of the medieval world, which had been far more decentralized.

By 1550, this had begun to change. The beginnings of the modern nation-state were visible.

Tax revenues flowed into the centralizing kingships. Trade was growing. Revenues were increasing. Weaponry was advancing. All of this had been going on for half a millennium. But, like an exponential curve, the line began to move upward visibly around 1500.

Maritime empires grew: Spain, Portugal, England. They challenged each other on the seas. Then came the Netherlands and France. The fusion of naval power and trade monopolies lured nations into competition for trade zones. The idea of free trade was centuries away, except in the academic enclave of the school of Salamanca.

The law of increasing returns was evident in this process. It paid rulers to tax more and extend the jurisdiction of the nation-state at the expense of local governments internally and foreign governments externally. The benefits accrued mostly to the political hierarchy and its system of connected families.

Economies of scale drove the process. The division of labor favored centralization. Local units of civil government could not compete.

Let me give an example from the field of historiography. The historian of colonial America can write about lots of topics: immigration, technology, family structure, town planting, economic development, intellectual trends, and so forth. He writes about the issues of life that affected people's daily lives. He cannot write about national politics until after May of 1754: the "battle" of Jumonville Glen.

The Battle of Jumonville Glen is unknown to all historians except specialists in colonial America. This is a pity, because that battle was the most important military event in the history of the modern world. It literally launched the modern world. It led to (1) the French & Indian War (Seven Years' War), (2) the Stamp Act crisis, (3) the American Revolution, (4) the French Revolution, (5) Napoleon, (6) nationalism, (7) modern revolutionism, (8) Communism, (9) Fascism, and (10) the American Empire. It was started by Virginia militia Major George Washington, age 22.

Before the ratification of the U.S. Constitution, it is both possible and wise to write about America without tying the narrative to politics. After 1788, every textbook writer is drawn like a moth to the flame: Presidential elections. He cannot narrate the text without hinging everything on the outcome in the four-year system of national covenant renewal-ratification.

We are fast approaching a day of judgment. It has to do with economies of scale. It has to do with the law of decreasing returns.

The best account of this process is a book by Israeli military historian Martin van Creveld: The Rise and Decline of the State (Cambridge University Press, 1999). He traces the history of the Western nation-state from the late Renaissance until the late twentieth century. He argues that there will be a break-up of nation states and a return of decentralization.

Read the rest here.

The transition from the decaying centralized social structures out of the law of decreasing returns is presently being compounded by the widespread adaption of massive advances from technology.

People will need ideological justifications for such transition. Remember, the world does not operate on a vacuum.

And with the democratization of knowledge through the web or the cyberspace, people’s perception, mentality and attitudes will likely adapt to favor decentralized social orders.

Futurist Alvin Toffler calls this the Third Wave. From his 1980 book,

The Third Wave thus begins a truly new era--the age of the de-massified media. A new info-sphere is emerging along-side the new techno-sphere. And this will have a far-reaching impact on the most important sphere of all, the one inside our skulls. For taken together, these changes revolutionize our images of the world and our ability to make sense of it

The Arab Spring revolts of 2011 has partly been manifestations of the combination of the law of decreasing returns on centralized social orders and of technology facilitated knowledge revolution in process.

Several welfare states in the Eurozone are in the process of a monumental collapse from a debt trap.

This will deepen overtime.

Understating the Internet’s Contribution to the Global Economy

The Economist writes,

MUCH of the world may still (or again) be in recession, but the internet keeps growing—and so does its economic weight. In the G20 countries, the internet economy will grow at more than 10% annually for the next five years and by 2016 reach $4.2 trillion, or 5.3% of GDP—up from $2.3 trillion and 4.1% in 2010, according to a recent report by the Boston Consulting Group (BCG). But there are big differences between countries. Britain leads the pack. Its internet economy is now bigger than its construction and education sectors, mainly thanks to the popularity of e-commerce. To paraphrase Adam Smith, the country has become a nation of digital shopkeepers. China and, to some extent, India stand out thanks to internet-related exports in goods and services, respectively. South Korea and Japan are also strong in both e-commerce and exports. Europe punches below its weight, mainly because its internet economy is held back by a lack of a single digital market. If the European Commission succeeds in creating one, the old continent may be able to pull ahead of the new one by 2016.

My research is done principally through the internet and this has been facilitating much of my transactions executed on a traditional non-internet based platform. The newsletters I send to my clients have also been internet based.

Aside from my newsletters, the web perhaps also plays a role in the information acquisition of my clients for them to decide on their financial markets transactions—but the degree of application may likely to be different.

Have these been captured by statistics? Apparently not.

Attempts to quantify the internet’s contribution to the economy has been grossly misleading for the simple reason that much of what the internet contributes—access to information, knowledge, connectivity, communications and the ensuing productivity it brings—cannot be measured.

Testament to these has been the impact of the internet to the Arab Spring or popular Middle revolts of last year.

Professor of business and technology Soumitra Dutta in an interview with Knowledge@wharton says that the internet has enabled changes in people’s social relationships and norms that has contributed to last year’s Arab Spring upheavals.

Technology has empowered individual citizens, and of course this pushes against various constraints, whether it is political constraints, or gender constraints. The same thing is happening in the rest of the world, by the way, the Middle East is not unique in this. So what this calls for is not a retreat from technology, but a more enlightened approach to understanding how technology interweaves with social values and norms. Eventually, social norms are going to be influenced and changed by widespread use of technology, but that's the way society largely develops.

And to repeat a quote which I earlier posted from Jeffrey Tucker,

That the Internet has vastly increased productivity is the understatement of the century. The Internet has given birth to products and services that have never before existed — search, online advertising, video games, web-based music services, online garage sales, global video communications. Moreover, the main beneficiaries have been old-line industries that seem to have nothing to do with the Internet.

The most difficult-to-quantity aspect of digital media has been its contribution to the sharing of ideas and communication throughout the world. This has permitted sharing and learning as never before, and these might be the single most productive activity in which the human person can ever participate. The acquisition of information is the precondition for all investing, entrepreneurship, rational consumption, the division of labor and trade…

No amount of empirical work can possibly encapsulate the contribution of the Internet to our lives today. No supercomputer could add it all up, account for every benefit, every increase in efficiency, every new thing learned that has been turned to a force for good. Still, people will try. You will know about their claims only thanks to the glorious technology that has finally achieved that hope for which humankind has struggled mightily since the dawn of time.

The appeal to quantify the internet into statistical accounts falls into the same fallacious trap as in the treatment of human action as natural sciences.

As Mark Twain scornfully said,

Lies, damned lies and statistics.

OPEC’s Welfare State: Buying Off the Populace to Maintain Political Power

From Bloomberg, (bold highlights mine)

Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150 billion in additional spending this year on their citizens. They will need to keep U.S. benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp…

OPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the U.S. government said…

This time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency KUNA said in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.

“As soon as the government announced handouts, people went out and bought cars,” said John Stadwick, managing director of General Motors Co. (GM)’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20 billion for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20 billion from Qatar and $4 billion from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

Of OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the U.A.E. doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1 billion wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

For many of the incumbent political leaders of OPEC nations, buying off the population with expanded welfare spending extracted from oil revenues will only buy them sometime to preserve their grip on power.

With the growth of welfare spending increasing the cost of oil, OPEC’s welfare state has increasingly been dependent or sensitive to ascendant levels of the prices of oil.

Anytime oil prices don’t keep up with the cost of maintaining the system heightens the risks of political upheaval (Arab Springs).

So we can expect welfare states even among resource rich (resource curse) nations to continue to yearn for inflationism. As this should keep commodity prices elevated, as well as, depreciate the purchasing power of money used to finance the current welfare spending.

Again inflation is a policy that won’t last.