World Politics

[rhubroma]

Right to be bleak, wrong to use the term 'Liquidity Trap'.

Although the term 'Liquidity Trap' could be very loosely applied to current conditions, it's wrong because it implies that the problem is one of liquidity. It's not, it's one of solvency. There are hundreds of trillions of dollars worth of, for want of a better word, paper, sitting on banks' and Governments' asset columns. This paper is worthless because it is not backed by any income, now or in the future, or collaterol, now or in the future. This renders those institutions insolvent. It doesn't matter how much liquidity is pumped in or how low interest rates are pushed, no-one is going to lend long term to anyone that's insolvent.

Hence we have what might be termed a Solvency Trap. And the resolution of a 'Solvency Trap' is mindblowingly simple as the people of Iceland proved. But only if you have control of your own currency and interst rates.

Not bleak enough maybe.

I think that's precisely what the article, in reference to Keynes, meant by the term "liquidity trap" though: that is, in quoting a report from High Frequency Economics (Carl Weinberger), when consumers and venders are paralyzed by a lack of trust by the banks (due to a risk of insolvency), it's useless to lend money. Rather it's better to stock pile the cash till better times. However, as Keynes argued during the Great Depression, the great quantity of uninvested capital results in an economy that literally drowns in itself, hence "liquidity trap."

According to the HFE report Europe is experiencing all the symptoms of such a "trap" in the accumulation of "worthless" cash reserves, which amounts to a kind of poisoned hidden treasure because unused and "unuseable."

At any rate you can bring a horse to water, but you can't make him drink I guess.

In fact the article mentioned the futility of offering cheap money on the markets in times such as these, even at 0% interest rates, for the same reason you indicate. Ultimately, it seems, the EU must become like Iceland, or else go bust.

 

[Captain_Cavman]

I think that's precisely what the article, in reference to Keynes, meant by the term "liquidity trap" though: that is, in quoting a report from High Frequency Economics (Carl Weinberger), when consumers and venders are paralyzed by a lack of trust by the banks (due to a risk of insolvency), it's useless to lend money. Rather it's better to stock pile the cash till better times. However, as Keynes argued during the Great Depression, the great quantity of uninvested capital results in an economy that literally drowns in itself, hence "liquidity trap."

According to the HFE report Europe is experiencing all the symptoms of such a "trap" in the accumulation of "worthless" cash reserves, which amounts to a kind of poisoned hidden treasure because unused and "unuseable."

At any rate you can bring a horse to water, but you can't make him drink I guess.

In fact the article mentioned the futility of offering cheap money on the markets in times such as these, even at 0% interest rates, for the same reason you indicate. Ultimately, it seems, the EU must become like Iceland, or else go bust.

You're quite right on reflection. I've just got a bee in my bonnet about the word 'liquidity'.

 

[rhubroma]

You're quite right on reflection. I've just got a bee in my bonnet about the word 'liquidity'.

I hate it when there's a bee in my bonnet.

 

[Cobblestones]

Hence we have what might be termed a Solvency Trap. And the resolution of a 'Solvency Trap' is mindblowingly simple as the people of Iceland proved. But only if you have control of your own currency and interst rates.

Whether one might call it liquidity or solvency trap is a bit of semantics. You are right that banks have a bunch of worthless/non-liquid assets. They might become liquid in the future in which it would be more appropriate to call it a liquidity trap, or not (in which case it is a solvency issue). Right now, we don't know, and it doesn't matter so much anyway. ETA: I see this question had resolved itself in the meantime.

I don't think having their own currency and central banks would have helped Greece or will help in the future. I think now that the only solution for Greece is to have a 'haircut', meaning not paying 100% on (some of) their debt. That, they can do no matter what. The problem in that case will be the bond market. Ironically, I think Greece wouldn't suffer so much because after the haircut, Greece might be an attractive country for investors, since the debt/GDP ratio and other numbers might look pretty sane. On the other hand, countries like Spain, Italy, Portugal, and Ireland might pay the price, because the market might expect a similar haircut taking place there. No wonder the EU tries to avoid this course of action for Greece. However, pouring money into the black hole which Greece has become now, is simply making the situation worse. I now believe that we are at a point where the credit rating of countries like France and Germany will suffer because of that. My feeling is the European financial system will be damaged greatly in 2012.

 

[rhubroma]

Whether one might call it liquidity or solvency trap is a bit of semantics. You are right that banks have a bunch of worthless/non-liquid assets. They might become liquid in the future in which it would be more appropriate to call it a liquidity trap, or not (in which case it is a solvency issue). Right now, we don't know, and it doesn't matter so much anyway. ETA: I see this question had resolved itself in the meantime.

I don't think having their own currency and central banks would have helped Greece or will help in the future. I think now that the only solution for Greece is to have a 'haircut', meaning not paying 100% on (some of) their debt. That, they can do no matter what. The problem in that case will be the bond market. Ironically, I think Greece wouldn't suffer so much because after the haircut, Greece might be an attractive country for investors, since the debt/GDP ratio and other numbers might look pretty sane. On the other hand, countries like Spain, Italy, Portugal, and Ireland might pay the price, because the market might expect a similar haircut taking place there. No wonder the EU tries to avoid this course of action for Greece. However, pouring money into the black hole which Greece has become now, is simply making the situation worse. I now believe that we are at a point where the credit rating of countries like France and Germany will suffer because of that. My feeling is the European financial system will be damaged greatly in 2012.

Question: who covers the unpaid Greek debt? Which is to say, who sweeps up the fallen locks?

 

[Cobblestones]

Question: who covers the unpaid Greek debt? Which is to say, who sweeps up the fallen locks?

There's no cover. It's going to be a loss. A write-off. It's carried by whomever has invested in these bonds. It will mostly be institutional investors, but clearly there could be quite a few pension funds and others involved for which the haircut might be a hardship. There's just no way to make everybody happy. The one golden rule of investment is: spread the risk. If Greek bonds represent more than a few % of your investment, you're either not doing it right, or you're speculating and know precisely what the risks are.

 

[python]

the newly announced unilateral economic sanctions on iran are now the us law. the law says that ANY country not complying with the us law will be punished.

when we strip the situation to its bare essentials the new law means that the energy security of china and india and many other countries (and thus an essential element of their national security) will be unilaterally decided in washington.

can anyone imagine americans passively acceding to the us national security UNILATERALLY and without any prior consultations decided in dehli or beijing by passing similar laws ?

in my sincere opinion, the question above contains an automatic answer to so many american political failures that directly lead to failed military solutions.

the imperial arrogance of the fading superpower refuses to acknowledge the simple fact that intimidation times have long passed, that young emerging powers have the means and resources to ignore or bypass such methods. when necessary, they are cooperating both overtly and covertly to achieve their goals.

Some examples (based on open sources like the official us congress research service paper rs20871 and semi-official irantracker.com)

(i) while officially sending conciliatory signals, india quietly and way before the new sanctions came into force, switched from iranian to turkish banks to pay for iranian oil. not to mention that despite the sanctions, india decided in november and december to go ahead with investing in the exploration of iran’s natural gas deposits and re-invigorated negotiations on the gas pipeline. irantracker reports that gazprom bank is also involved in india-iran payments clearance. the details are unknown.

(ii) china is even more eager to fill the gap left by the west sanctions. in 2011, china bought $16 billion worth of oil from iran and exported $12 billion in goods. the cr20871 paper mentions that the $4 billion trade balance is settled NOT through any sanctioned banks but in the words of the treasury dept ‘an alternative mechanism that is unclear’.

(iii) russia… being itself an energy exporter and iran's competitor, it undermines the sanctions in other ways. for ex, while officially cancelling the delivery of mighty s-300 surface to air missiles, russia’s client state belarus
has delivered all the necessary components and support for iran’s own production.

many more developing countries are eager to jump to iran’s help without reporting back to Washington.

how many examples we need that the sanctions will fail again and that another war will be necessary ?

who in their right mind is going to believe that the old language of threats and intimidation is going to be universally effective for ever ?

 

[Cobblestones]

the newly announced unilateral economic sanctions on iran are now the us law. the law says that ANY country not complying with the us law will be punished.

when we strip the situation to its bare essentials the new law means that the energy security of china and india and many other countries (and thus an essential element of their national security) will be unilaterally decided in washington.

can anyone imagine americans passively acceding to the us national security UNILATERALLY and without any prior consultations decided in dehli or beijing by passing similar laws ?

in my sincere opinion, the question above contains an automatic answer to so many american political failures that directly lead to failed military solutions.

the imperial arrogance of the fading superpower refuses to acknowledge the simple fact that intimidation times have long passed, that young emerging powers have the means and resources to ignore or bypass such methods. when necessary, they are cooperating both overtly and covertly to achieve their goals.

Some examples (based on open sources like the official us congress research service paper rs20871 and semi-official irantracker.com)

(i) while officially sending conciliatory signals, india quietly and way before the new sanctions came into force, switched from iranian to turkish banks to pay for iranian oil. not to mention that despite the sanctions, india decided in november and december to go ahead with investing in the exploration of iran’s natural gas deposits and re-invigorated negotiations on the gas pipeline. irantracker reports that gazprom bank is also involved in india-iran payments clearance. the details are unknown.

(ii) china is even more eager to fill the gap left by the west sanctions. in 2011, china bought $16 billion worth of oil from iran and exported $12 billion in goods. the cr20871 paper mentions that the $4 billion trade balance is settled NOT through any sanctioned banks but in the words of the treasury dept ‘an alternative mechanism that is unclear’.

(iii) russia… being itself an energy exporter and iran's competitor, it undermines the sanctions in other ways. for ex, while officially cancelling the delivery of mighty s-300 surface to air missiles, russia’s client state belarus
has delivered all the necessary components and support for iran’s own production.

many more developing countries are eager to jump to iran’s help without reporting back to Washington.

how many examples we need that the sanctions will fail again and that another war will be necessary ?

who in their right mind is going to believe that the old language of threats and intimidation is going to be universally effective for ever ?

This kind of stupidity isn't even new. The US put into law (under G. Herbert W. Bush and Clinton, I believe) that it will stop participating in (and paying for) and UN body in which Palestine should become a member. Palestine just recently became a member of UNESCO. Link.

This imperial attitude will not serve us well. Maybe it was backed by believable threats after the cold war which left Russia defeated, and after the first Iraq war demonstrated the military might of the US. However, in current times, with the financial and economical downturn, and two long wars without resolution, while new economies such as China, India, Brazil prosper, it just won't work. The era of neocon dreams is definitely over. Someone should tell the imperial elite in Washington.

 

[BroDeal]

...
how many examples we need that the sanctions will fail again and that another war will be necessary ?
...

The purpose of the sanctions is to justify an attack on Iran when they don't work.

Gotta keep the Middle East safe for Israeli oppression of the Palestinians, you know.

 

[rhubroma]

There's no cover. It's going to be a loss. A write-off. It's carried by whomever has invested in these bonds. It will mostly be institutional investors, but clearly there could be quite a few pension funds and others involved for which the haircut might be a hardship. There's just no way to make everybody happy. The one golden rule of investment is: spread the risk. If Greek bonds represent more than a few % of your investment, you're either not doing it right, or you're speculating and know precisely what the risks are.

Grazie. Thanks

 

[python]

.........

Gotta keep the Middle East safe for Israeli oppression of the Palestinians, you know.

‘the little satan’ and his histrionics is a separate and special subject. very special indeed …

without getting bogged down in the wider political issues of the middle east (about which , of course, i have an opinion too), it’s exceptionally educational to review the virtually unknown in the west story of how israel and the us played off of each other (as if they were trolls on the cn forums ) trying to get china to support the anti-iran sanctions.

one dutch intellectual and a scholar, willem van kemmenade, exposed it..
http://www.twq.com/10july/docs/10jul_vanKemenade.pdf

below are the quotes from willem’swork that one would hardly expect on an academic political forum say nothing of the ‘free’ main-street media or …a cycling forum

america plays ‘the israel card’

Two weeks before his mid-November 2009 visit to China, Obama pulled out the ‘‘Israel card’’ in his diplomatic struggle to get China on board the ‘‘Sanctions Express,’’ sending two senior White House officials on a special mission to try to persuade Beijing to pressure Tehran to give up its alleged nuclear weapons program. The two visitors, Dennis Ross, a senior adviser and former pro-Israel lobbyist as well as Middle East negotiator with unfavourable views toward Iran, and Jeffrey Bader, senior director of Asian affairs at the National Security Council, informed Beijing that if it would not support the P5+1 process, then the consequences could be severe. The two U.S. officials further told the Chinese that Israel regards Iran’s nuclear program as an ‘‘existential issue and that countries that have an existential issue don’t listen to other countries.’’ The implication was clear: Israel could bomb Iran, leading to a crisis in the Persian Gulf region that would almost inevitably create problems for the very oil China needs to fuel its economy


Israel plays ‘the china card’ (which is a disguised ‘america’ card)

In late February 2010, Israel decided to play its own China card against Iran. An Israeli delegation, headed by the Minister of Strategic Affairs Moshe Ya’alon and Bank of Israel Governor Stanley Fischer, visited Beijing for political, security, and economic discussions with senior Chinese officials on the Iranian nuclear program…After the return of the delegation to Israel, Ha’aretz quoted diplomatic sources disclosing that the
delegation had tried to persuade China to support sanctions on Iran by offering ‘‘the full intelligence picture available to Israel on Iran’s nuclear program. The implication was that the U.S. intelligence picture, with its disputed NIE, was not ‘‘full.’’.

iow, israel hinted to the chinese it had a ‘better information about iran than america’ and it came to beijing to tell that 'naked truth' to their chinese friends (supposedly w/o washington’s knowledge).

how many more arrogant example are there of taking the wise and ancient nation of china for idiots ?

Little satan, big satan… ?

 

[Captain_Cavman]

Whether one might call it liquidity or solvency trap is a bit of semantics. You are right that banks have a bunch of worthless/non-liquid assets. They might become liquid in the future in which it would be more appropriate to call it a liquidity trap, or not (in which case it is a solvency issue). Right now, we don't know, and it doesn't matter so much anyway. ETA: I see this question had resolved itself in the meantime.

I don't think having their own currency and central banks would have helped Greece or will help in the future. I think now that the only solution for Greece is to have a 'haircut', meaning not paying 100% on (some of) their debt. That, they can do no matter what. The problem in that case will be the bond market. Ironically, I think Greece wouldn't suffer so much because after the haircut, Greece might be an attractive country for investors, since the debt/GDP ratio and other numbers might look pretty sane. On the other hand, countries like Spain, Italy, Portugal, and Ireland might pay the price, because the market might expect a similar haircut taking place there. No wonder the EU tries to avoid this course of action for Greece. However, pouring money into the black hole which Greece has become now, is simply making the situation worse. I now believe that we are at a point where the credit rating of countries like France and Germany will suffer because of that. My feeling is the European financial system will be damaged greatly in 2012.

Investors are already factoring in a (partial) default by Greece, that's why their cost of borrowing is 37% and Germany's is 2% for essentially the same product.

Greece can't escape without devaluing their currency which is currently way too high for them to be able to compete. They can only devalue by leaving the Euro.

 

[Cobblestones]

Investors are already factoring in a (partial) default by Greece, that's why their cost of borrowing is 37% and Germany's is 2% for essentially the same product.

Greece can't escape without devaluing their currency which is currently way too high for them to be able to compete. They can only devalue by leaving the Euro.

It would definitely easier for them if they left the Euro, but it is not impossible to go on with the Euro.

ETA: here is a question for you: in case of Greece dropping the Euro, how would you think private debt, car loans, mortgages etc. which are denominated in Euro, should be handled?

 

[rhubroma]

...

iow, israel hinted to the chinese it had a ‘better information about iran than america’ and it came to beijing to tell that 'naked truth' to their chinese friends (supposedly w/o washington’s knowledge).

how many more arrogant example are there of taking the wise and ancient nation of china for idiots ?

Little satan, big satan… ?

But you gotta safegaurd Israel, otherwise The End of Days won't come.

All kidding aside, it would be interesting to know just how much power of pursuasion Israel has over China.

One thing is for sure: the history of the ancient nation of Israel, the Old Testament, the anguished history of the jews in Europe in post-classical times all means absolutely nothing to the Chinese, zero. So too doesn't the modern conflict between Israel-Arab relations, the US-Israeli strategic pact to control the Middle East or the crisis with Iran from a purely Western perspective.

However, since, for the timebeing, it seems as if China relies upon the US consumer market as an economic motor for its own further development and since it is well known that a major portion US finance is in the hands of Jewish owned banks and that the Jewish financial lobby is allmighty in America: the threat that a crippling new Mideast oil crisis would have on the US economy, or another devastating regional war with potentially far more grave consequences than what we've already witnessed recently, may be eventualities that China must consider as vital to its own national interests.

Interesting to ponder, then whether or not they are more urgent than having unfettered access to Iranian oil. The outcome of this strategic chess game, thus, may be decisive in terms of what happens over this coming year.

Or maybe not.

 

[python]

All kidding aside, it would be interesting to know just how much power of pursuasion Israel has over China.

not much imo...read on.

One thing is for sure: the history of the ancient nation of Israel, the Old Testament, the anguished history of the jews in Europe in post-classical times all means absolutely nothing to the Chinese, zero.

once again, this is a cultured westerner in you speaking but frankly i don't see why the chinese POLITICIANSshould care about jewish history ...they have their own tortured ancient history and grievances.

Interesting to ponder, then whether or not they are more urgent than having unfettered access to Iranian oil. The outcome of this strategic chess game, thus, may be decisive in terms of what happens over this coming year.

a very important observation you made...let's try to look at it.

sino-us relations are very complex. Iran is but one element.

the dominant element in the relation, as you mentioned, is the complicated, uneasy yet mutually beneficial economic interconnection when china’s growth and development is largely supported by american markets in return for china becoming a key holder of american debt. both sides know they need each other no matter how many other disagreements are there. america knows it can’t push china too hard and china knows it’s not ready to confront the us. this situation is probably a good thing as it exerts a stabilizing effect globally on both the financial-economic matters and political-military competition.

this does not mean that china and america are not involved in fierce rivalry over a host of issues.

putting aside for now china’s obsession with taiwan, the absolutely key element in chinese foreign policy is energy security. oil, natural gas, atomic commercial power etc are the lifeline of their economic growth. china is very active, if not aggressive, all over the globe investing, buying, expanding anything that has to do with safeguarding/promoting their short and long term energy security.

that’s where iran and israel comparative importance to china come into play.

one can build a number of neat theories about israel’s value to china (technology, defense etc) but it does not take much common sense to figure that it can’t even start comparing with iran’s long-term value to china. not only they are natural energy partners since iran is abandoned in mineral resources lacked by china, they share the neighborhood and perceive themselves the victims of the same oppressor exploiting them for centuries. thus, to answer your question, israel’s influence on china is short term, tactical at best, whereas iran fits into their strategic long view. also, i believe china (and russia) view american obsession with iran’s nuclear as cover to a grander design - having been displaced from iraq largely due to iran’s efforts the us is trying to maintain it’s middle east dominance by undermining iran. nuclear weapons or not. Once again, it means that china’s energy security would be at the mercy of the us and it‘s allies.

my conclusion - china is likely to use all its weight and influence deflecting too much pressure on iran. If that does not help and the expected american arrogance persists, i can even see iran suddenly becoming a full permanent member of the shanghai treaty. that would turn all tables and pave the way to a major confrontation. it would give iran the organization’s blanket protection against a military attack. we know that china has long been in favour of iran’s full membership whereas russia has been cautious concerned with american overreaction.

 

[Bala Verde]

Capitalism in crisis: The code that forms a bar to harmony

The ft rips financial compensation at the start of 2012.

The enrichment of bankers, corporate chiefs, flash traders and their cronies is testing tolerance of inequality, argues John Plender in the first part of an FT series

What is unquestionably novel is the ferocity with which US business sheds labour now that executive pay and incentive schemes are more closely linked to short-term performance targets. In effect, the American worker has gone from being regarded as human capital to a mere cost, or what was known in the 19th century as a “hand”. Yet this pursuit of a narrowly financial conception of shareholder value may destroy value for the ultimate pension beneficiaries – because of the disruption that slashing and burning causes, and the cost and time involved in hiring and retraining when conditions improve.

if Hyman Minsky, the expert on financial market fragility, provided the best route map for understanding events before the crisis, and Keynes offered the best guide to crisis management, Mancur Olson, a theorist on institutional economics, could now be a posthumous beacon on how to manage the aftermath. Olson argued that nations decline because of the lobbying power of distributional coalitions, or special-interest groups, whose growing influence fosters economic inefficiency and inequality.

Also interesting

Tinbergen became known for his 'Tinbergen Norm', which is the principle that, if the difference between the least and greatest income in a company exceeds a rate of 1:5, that will not help the company and may be counterproductive

Oh, and civil war in Nigeria soon? Emergency situation was already declared before new year in response to boko haram terrorist attacks...

http://www.csmonitor.com/World/Glob...-nationwide-fuel-strike-and-ban-on-Christians

 

[ramjambunath]

How much will the new sanctions affect things on the ground in Iran? For me, it just seems like some posturing and diplomatic pressure from the west. The real sanctions- the UNSC sanctions and bilateral trade ties with friendly/non hostile countries- will not take effect because of Russia's political closeness with the Islamic Republic, the Chinese dependence on external oil, as has been pointed out by Python, and I also cannot see India trying to ostracise the Iranian govt, who could be a potential energy supplier for India. Till these countries place sanctions against Iran, there shouldn't be too much of a change in the situation on the ground.

I think that the current regime in the USA is inept in foreign affairs compared to past US govts and one of the clear pointers to that is the way the Obama govt has allowed India to mellow its stance quite a lot on the Iranian nuclear programme. This was something that Manmohan Singh was on the verge of condemning during the framing of and wait for the signing of the Indo-US nuclear pact.

 

[Captain_Cavman]

...
this does not mean that china and america are not involved in fierce rivalry over a host of issues...

http://www.youtube.com/watch?v=iR6oYX1D-0w

"I need one Yuan" in future covers perhaps.


Iran no longer settles oil trades in Dollars.

Iraq does. Libya does. But both attempted to introduce non-dollar settlements just prior to having their Governments toppled. Funny that.

The US can't afford not to be the World's reserve currency, as in, will utterly collapse unless it is.

meanwhile the Chinese have severe economic problems of their own, which would be considerably ameliorated if they could get more countries to buy their currency in order to trade it for commodities.

 

[python]

http://www.youtube.com/watch?v=iR6oYX1D-0w

<snip>Iran no longer settles oil trades in Dollars.

Iraq does. Libya does. But both attempted to introduce non-dollar settlements just prior to having their Governments toppled. Funny that.

if you are hinting at iran toppling, i don't see how. at least not yet...

both iraq and lybia were militarily assaulted before their dictators toppled plus they were bursting from the domestic civil unrest. iran, however, despite all the sanctions, isolation and tremendous pressure, is far from this situation. another big difference is that the iraqi and lybian dictators were left practically without any friends and sponsors. iran has both regional sponsors/enablers (china and russia) and influential friends/good-wishers (turkey, india etc) . i touched upon this in detail already.

no i don't see iran toppling, not even if directly invaded. a military air/naval strike on iran, as i analysed earlier, is possible but not likely without some serious miscalculation on either side.

The US can't afford not to be the World's reserve currency, as in, will utterly collapse unless it is.

with the euro in turmoil, i don't see any threat or any alternative to the dollar for many years to come.

this does not mean that the dollar supremacy is going to add any more bite to american economic sanction in access the already incurred damage. as i showed above, china and india already came up with the mechanisms to bypass american efforts to arrest iran oil trade by sanctioning their central bank.

chinese economic dilemma is a choice between 6% gdp growth and 10% growth. american economic dilemma is a choice between zero growth and negative growth with all the concomitant social-political troubles during the election year.

i'll take chinese troubles any time.

 

[rhubroma]

not much imo...read on.

once again, this is a cultured westerner in you speaking but frankly i don't see why the chinese POLITICIANSshould care about jewish history ...they have their own tortured ancient history and grievances.
a very important observation you made...let's try to look at it.

sino-us relations are very complex. Iran is but one element...

And that was precisely my point (look again). As for the rest (especially the problematical symbiotic relations between China and the US) I agree with those conclusions.

But let's take a look at this from several other angles, internally with Iran and let's not forget Syria.


There has existed an internal Iranian crisis since the election of the reformist Mohammad Khatami in 1997, which rendered manifest the rejection of the theocratic regime on the part of the population. Subsequently, however, we saw this transformed into a crisis that culminated with the fraudulent election of Mahumad Ahmadinejad in 2009, which, once and for all, caused a fracture between the "legal" country and the real one. Such was followed by six months of repression against the "Green Revolution" demonstrators, though the theocrats in reality do not have a political consensus among the population.

The Iranian leadership in fact has its back up against the wall, after having ransacked the British Embassy and today threatens to close the Straits of Hormuz, through which passes over a third of the world's oil supply. With an irrational audacity the regime challenges the entire world, China and Russia included, such that Teheran seems to have lost its head. Now this could be good news, though it could also be terrible news if, in shear desperation, the ayatollahs attempt to unleash hell in the region. And they can do it: in the Persian Gulf, in Iraq or, with the help of Hezbollah in Syria, at the northern frontier of Israel.

With the internal political strife, enduring sanctions against Iran and the saber rattling between itself and the West, an eventual protracted Mideast struggle could lead to an all-out Shiite-Sunnite war. Here's where Syria enters the picture.

Ten months of brutal repression by the Assad regime has not been an effective deterrent against an all-out insurrection and, in fact, the tension continues to rise between the minority Shiites in power and the majority Sunnite population. And this is beginning to delineate a fracture throughout the entire region: on one side you have the Syrian leadership, Shiite Iran and Iraq (where the Shiite majority took power after the fall of Saddam); on the other side you have the Sunnite parts in Syria and Iraq and the Sunnite monarchies of the Gulf lead by Saudi Arabia, to which the Americans have just recently sold 84 anti-aircraft missile launchers.

Hence the Iranian and Syrian crisis are increasingly becoming inexorably linked and, in a bit, could even become united, with the Mideast in flames, right at the time when the great powers find themselves in positions of weakness for this year 2012.

Standing before a federal deficit without precedent (and two outrageously expensive wars started under Bush), the US is forced to make military spending cuts. Not only is it that today America doesn't have the financial means to contemplate an armed intervention, but it also has to take into consideration a public opinion that's radically hostile to such a notion. Especially since the primaries have recently opened in Iowa and in a moment in which Washington is committed to withdrawing its troops from Afghanistan and after having just gotten out of Iraq. From the military perspective the US isn't in the position to intimidate anyone and Europe even less.

With the exception of Britain and France, the EU military apparatus is not very potent and, like the rest of continental affairs, not coordinated and without a union wide command. Only with the sustainment of US air power was the EU able to oust the Libyan dictator Muhammar Gheddafi from the Libyan skies, though it's not a military power and its financial crisis is still a long way off from being resolved. Europe's biggest concern is saving the euro, thus it too is in no position to contemplate a war in the Middle East.

It certainly won't be in 2012 that Europe becomes a protagonist within the international scene and it's not to be excluded, considering his internal difficulties, that Vladimir Putin gets tempted to make the tensions with the West grow while playing the nationalist card at home.

After a year of contagious democracy, a time of uncertainty beckons over the following twelve months for sure.

 

[Amsterhammer]

After a year of contagious democracy, a time of uncertainty beckons over the following twelve months for sure.

Thanks for all that, Rhub. I'll look forward to the new year with restrained optimism then................

 

[Captain_Cavman]

if you are hinting at iran toppling, i don't see how. at least not yet...

No, my point was more about whether the Dollar's status as reserve currency can be toppled. China needs Iran to stand up to the US and will support it.

So the US is using a combination of displays of military strength and sending the bankers in to bribe/cajole/threaten. But if the Chinese stand their ground, I can't see what the US can really do.

 

[Amsterhammer]

But if the Chinese stand their ground, I can't see what the US can really do.

US = paper tiger?

 

[Cobblestones]

No, my point was more about whether the Dollar's status as reserve currency can be toppled.

That would be much, much more inflationary than any raise of the debt ceiling could ever be. Has the teaparty caught onto that yet?

About Iran. It should be considered that closing the strait of Hormuz might be the only way for the Iranians to reciprocate the newest US sanctions. While the US sanctions essentially mean that no third country in the world can deal with Iranian oil (otherwise it too will be subject to US sanctions), a closing of the strait of Hormuz is the Iranians' means of saying, ok fine, then no third country can deal with Iraqi or Kuwaiti oil either. It will be intended as economic sanctions of similar magnitude and consequence. Of course, such actions will be construed as military escalations (which technically they are) and will be answered likewise. At this point, we don't leave Iran a graceful way out. We expect them to either step down and admit defeat, or to escalate the conflict, or to drive them into the arms of China or Russia to help them circumvent the sanctions. The first option seems highly unlikely, the other two are pretty unfavorable. Moreover, outside pressure will usually strengthen the regime in that it creates an external enemy toward which the regime can channel dissatisfaction.

 

[rhubroma]

That would be much, much more inflationary than any raise of the debt ceiling could ever be. Has the teaparty caught onto that yet?

About Iran. It should be considered that closing the strait of Hormuz might be the only way for the Iranians to reciprocate the newest US sanctions. While the US sanctions essentially mean that no third country in the world can deal with Iranian oil (otherwise it too will be subject to US sanctions), a closing of the strait of Hormuz is the Iranians' means of saying, ok fine, then no third country can deal with Iraqi or Kuwaiti oil either. It will be intended as economic sanctions of similar magnitude and consequence. Of course, such actions will be construed as military escalations (which technically they are) and will be answered likewise. At this point, we don't leave Iran a graceful way out. We expect them to either step down and admit defeat, or to escalate the conflict, or to drive them into the arms of China or Russia to help them circumvent the sanctions. The first option seems highly unlikely, the other two are pretty unfavorable. Moreover, outside pressure will usually strengthen the regime in that it creates an external enemy toward which the regime can channel dissatisfaction.

It's a big game of chess isn't it?

At some point, however, without a move, then, you know, things just start going off.