Circling closer to the center

Syria Comes of Age

An extraordinary population boom fuels the revolt against Bashar al-Assad's regime.

BY DAVID KENNER

Each day, for 268 days, there have been the same videos: Syrians coming come out of the woodwork, filling alleys in previously quiescent neighborhoods. They have become experts in the art of protest, employing ornate signs and candles to call for the end of Bashar al-Assad's regime and, increasingly, the president's execution. They are killed in steadily increasing numbers -- more than 4,000 by last count, according to the United Nations.

Who represents these protesters is a matter of dispute -- a Syrian opposition delegation was memorably pelted with eggs in Cairo last month by fellow anti-regime activists who objected to the group's apparent willingness to negotiate with the Assad regime. But who the protesters are is no mystery: They are the product of an extraordinary demographic boom in Syria that has left huge swathes of the country disenfranchised and poor. And they are very angry.

From the 1960s to the early 1990s, Syria boasted one of the most rapidly expanding populations in the world. The country's population doubled from 5.3 million in 1963 to 10.6 million in 1986, and then more than doubled again during the past quarter-century, to approximately 23 million. Before birth rates began falling in the mid-1980s, only two countries -- Yemen and Rwanda -- had higher fertility rates, according to Youssef Courbage, a researcher at the National Institute for Demographic Studies in Paris, in a paper titled "Fertility Transition in Syria."

At the peak of Syria's demographic boom, 44 Syrians were born for every 1,000 people, far exceeding the population growth in neighboring Lebanon (30 births per 1,000 people), and dwarfing that in the United States (16 births per 1,000), according to World Bank data. Population growth was also disproportionately focused in the countryside, creating a swelling class of have-nots in the new Syria.

Syria's birth rates have declined in recent years, but still remain equal to other revolutionary states in the Arab world. Twenty-four Syrians were born for every 1,000 people in 2008 -- the same as Egypt, and exceeding Tunisia's rate of 18 births per 1,000 people.

If the areas where these trends have been felt the strongest were superimposed on a map, they would largely line up with the regions of greatest unrest in Syria. From the south in Deraa, where the protests first gained momentum, to the east in Deir al-Zour, this is a revolt of the neglected countryside. It is also a revolt of long-persecuted cities such as Hama and down-and-out suburbs in Damascus and Homs -- neighborhoods that many of the migrants from the countryside call home.

The Syrian government is at least partially to blame for the country's runaway birth rates. As far back as 1956, Youssef Helbaoui, the head of economic analysis in Syria's Planning Department, argued that "A birth-control policy has no reason for being in this country. [Thomas] Malthus could not find any followers among us."

President Hafez al-Assad, who presided over the population spike of the 1980s, followed the same policies as his predecessors. As Courbage notes, he kept contraceptives scarce and argued that high growth rates "have stimulated proper socio-economic improvements." Until 1987, his government even encouraged births by awarding medals and small material gifts to families with over 10 children.

The result is that, in this era of youth revolt, Syria has one of the youngest populations in the Arab world. From the mid-1960s through the 1990s, the proportion of Syria's population below age 15 held constant at roughly half, while the percentage of Syrians older than 70 declined to a meager 3 percent. Even today, after fertility rates have declined, nearly 60 percent of Syrians are believed to be under the age of 20.

This long-running demographic boom has fundamentally transformed the country that the Assad family has ruled for over 60 years. At the end of World War II in 1945, when Hafez al-Assad was still a schoolboy, Damascus was a sleepy town of 300,000 inhabitants. By the time he seized control of the state in 1970, it had surpassed 800,000 -- and by the late 1980s, it had exploded to over 3 million, according to Patrick Seale's Asad: The Struggle for the Middle East.

This demographic transformation was accompanied by what Syrian intellectual Sadiq al-Azm called the rise of the "merchant-military complex." When the Baath Party seized power in a coup in 1963, Seale writes, there were only 55 "millionaires," in Syrian lire, in the entire country. That figure expanded to 1,000 millionaires in 1973, and rose to 3,500 by 1976 -- of whom 10 percent were worth 100 million Syrian lire (roughly $25 million). Under Syria's centralized economy at the time, the path to enrichment was through Hafez and his Baath party. This trend only accelerated under Bashar, whose billionaire cousin Rami Makhlouf has been estimated to control 60 percent of the Syrian economy.

As Bashar strengthened his ties with the nouveaux riches in Damascus and Aleppo, the children of the countryside found themselves left out in the cold. The International Statistical Institute's World Fertility Survey's report on Syria shows that rural women birthed roughly three more children, on average, than their urban counterparts during the peak of the country's demographic boom. Many of these youths looked to make it good in Syria's rapidly swelling urban centers, straining the capacity of these cities to the limit.

But whether these Syrians stayed in the country or made their way to the cities, they found it nearly impossible to pull themselves up from the bootstraps. "At the national level, growth was not pro-poor," a 2004 report produced jointly by the Syrian government and the UNDP assessed politely, as it highlighted the country's rising income inequality.

Syria's education system has contributed to this problem by utterly failing to pave the way to meaningful employment. A 2009 Syrian government survey found that more than half of Syrians leave school before finishing their secondary education, and that an overwhelming majority of this group assessed that their schooling was of little or no use in their first job. The report went on to find that students found the most success in finding work through family and friend ties, but noted that "the efficiency of job allocation patters based on informal networks is questionable."

There is no small amount of irony in the current crisis, though Bashar may not care to recognize it. Just as his Alawite community came down from the mountains in generations past to seize control of the state, the citizens filling Syria's streets for the past eight months are also seeking to reverse decades of marginalization. And as they move through Syria's squares and alleyways, they are slowly circling closer to the center.

The middle way

War Collectivism in World War I

by Murray N. Rothbard

More than any other single period, World War I was the critical watershed for the American business system. It was a "war collectivism," a totally planned economy run largely by big-business interests through the instrumentality of the central government, which served as the model, the precedent, and the inspiration for state-corporate capitalism for the remainder of the 20th century.

That inspiration and precedent emerged not only in the United States but also in the war economies of the major combatants of World War I. War collectivism showed the big-business interests of the Western world that it was possible to shift radically from the previous, largely free-market, capitalism to a new order marked by strong government, and extensive and pervasive government intervention and planning, for the purpose of providing a network of subsidies and monopolistic privileges to business, and especially to large business, interests. In particular, the economy could be cartelized under the aegis of government, with prices raised and production fixed and restricted, in the classic pattern of monopoly; and military and other government contracts could be channeled into the hands of favored corporate producers. Labor, which had been becoming increasingly rambunctious, could be tamed and bridled into the service of this new, state-monopoly-capitalist order, through the device of promoting a suitably cooperative trade unionism, and by bringing the willing union leaders into the planning system as junior partners.

In many ways, the new order was a striking reversion to old-fashioned mercantilism, with its aggressive imperialism and nationalism, its pervasive militarism, and its giant network of subsidies and monopolistic privileges to large business interests. In its 20th-century form, of course, the new mercantilism was industrial rather than mercantile, since the industrial revolution had intervened to make manufacturing and industry the dominant economic form. But there was a more significant difference in the new mercantilism. The original mercantilism had been brutally frank in its class rule, and in its scorn for the average worker and consumer.[2]Instead, the new dispensation cloaked the new form of rule in the guise of promotion of the overall national interest, of the welfare of the workers through the new representation for labor, and of the common good of all citizens. Hence the importance, for providing a much-needed popular legitimacy and support, of the new ideology of 20th-century liberalism, which sanctioned and glorified the new order. In contrast to the older laissez-faire liberalism of the previous century, the new liberalism gained popular sanction for the new system by proclaiming that it differed radically from the old, exploitative mercantilism in its advancement of the welfare of the whole society. And in return for this ideological buttressing by the new "corporate" liberals, the new system furnished the liberals the prestige, the income, and the power that came with posts for the concrete, detailed planning of the system as well as for ideological propaganda on its behalf.

For their part, the liberal intellectuals acquired not only prestige and a modicum of power in the new order, they also achieved the satisfaction of believing that this new system of government intervention was able to transcend the weaknesses and the social conflicts that they saw in the two major alternatives: laissez-faire capitalism or proletarian, Marxian socialism. The intellectuals saw the new order as bringing harmony and cooperation to all classes on behalf of the general welfare, under the aegis of big government. In the liberal view, the new order provided a middle way, a "vital center" for the nation, as contrasted to the divisive "extremes" of left and right.

I.

We have no space here to dwell on the extensive role of big business and business interests in getting the United States into World War I. The extensive economic ties of the large business community with England and France, through export orders and through loans to the Allies — especially those underwritten by the politically powerful J.P. Morgan & Co. (which also served as agent to the British and French governments) — allied to the boom brought about by domestic and Allied military orders, all played a leading role in bringing the United States into the war. Furthermore, virtually the entire eastern business community supported the drive toward war.[3]

Apart from the role of big business in pushing America down the road to war, business was equally enthusiastic about the extensive planning and economic mobilization that the war would clearly entail. Thus, an early enthusiast for war mobilization was the United States Chamber of Commerce, which had been a leading champion of industrial cartelization under the aegis of the federal government since its formation in 1912. The chamber's monthly, The Nation's Business,foresaw in mid-1916 that a mobilized economy would bring about a sharing of power and responsibility between government and business. And the chairman of the US chamber's executive committee on national defense wrote to the du Ponts, at the end of 1916, of his expectation that "this munitions question would seem to be the greatest opportunity to foster the new spirit" of cooperation between government and industry.[4]

The first organization to move toward economic mobilization for war was the Committee on Industrial Preparedness, which in 1916 grew out of the Industrial Preparedness Committee of the Naval Consulting Board, a committee of industrial consultants to the navy dedicated to considering the ramifications of an expanding American navy. Characteristically, the new CIP was a closely blended public-private organization, officially an arm of the federal government but financed solely by private contributions. Moreover, the industrialist members of the committee, working patriotically without fee, were thereby able to retain their private positions and incomes. Chairman of the CIP, and a dedicated enthusiast for industrial mobilization, was Howard E. Coffin, vice president of the important Hudson Motor Co. of Detroit. Under Coffin's direction, the CIP organized a national inventory of thousands of industrial facilities for munitions making. To propagandize for this effort, christened "industrial preparedness," Coffin was able to mobilize the American Press Association, the Associated Advertising Clubs of the World, the august New York Times, and the great bulk of American industry.[5]

The CIP was succeeded, in late 1916, by the fully governmental Council of National Defense, whose advisory commission — largely consisting of private industrialists — was to become its actual operating agency. (The council proper consisted of several members of the cabinet.) President Wilson announced the purpose of the CND as organizing "the whole industrial mechanism … in the most effective way." Wilson found the council particularly valuable because it "opens up a new and direct channel of communication and cooperation between business and scientific men and all departments of the Government."[6] He also hailed the personnel of the council's advisory commission as marking "the entrance of the nonpartisan engineer and professional man into American governmental affairs" on an unprecedented scale. These members, declared the president grandiloquently, were to serve without pay, "efficiency being their sole object and Americanism their only motive."[7]

Exulting over the new CND, Howard Coffin wrote to the du Ponts in December 1916 that "it is our hope that we may lay the foundation for that closely knit structure, industrial, civil and military, which every thinking American has come to realize is vital to the future life of this country, in peace and in commerce, no less than in possible war."[8]

Particularly influential in establishing the CND was Secretary of the Treasury William Gibbs McAdoo, son-in-law of the president, and formerly promoter of the Hudson and Manhattan Railroad and associate of the Ryan interests in Wall Street.[9] Head of the advisory commission was Walter S. Gifford, who had been one of the leaders of the Coffin Committee and had come to government from his post as chief statistician of the American Telephone and Telegraph Co., a giant monopoly enterprise in the Morgan ambit. The other "nonpartisan" members were Daniel Willard, president of the Baltimore and Ohio Railroad; Wall Street financier Bernard M. Baruch; Howard E. Coffin; Julius Rosenwald, president of Sears, Roebuck and Co.; Samuel Gompers, president of the AF of L; and one scientist and one leading surgeon.

Months before American entry into the war, the advisory commission of the CND designed what was to become the entire system of purchasing war supplies, the system of food control, and censorship of the press. It was the advisory commission that met with the delighted representatives of the various branches of industry, and told the businessmen to form themselves into committees for sale of their products to the government, and for the fixing of the prices of these products. Daniel Willard was, unsurprisingly, put in charge of dealing with the railroads, Howard Coffin with munitions and manufacturing, Bernard Baruch with raw materials and minerals, Julius Rosenwald with supplies, and Samuel Gompers with labor. The idea of establishing committees of the various industries, "to get their resources together," began with Bernard Baruch. CND commodity committees, in their turn, invariably consisted of the leading industrialists in each field; these committees would then negotiate with the committees appointed by industry.[10]

At the recommendation of the advisory commission, Herbert Clark Hoover was named head of the new Food Administration. By the end of March 1917, the CND appointed the Purchasing Board to coordinate government's purchases from industry. Chairman of this board, the name of which was soon changed to the General Munitions Board, was Frank A. Scott, a well-known Cleveland manufacturer, and president of Warner & Swasey Co.

Yet centralized mobilization was proceeding but slowly through the tangle of bureaucracy, and the United States Chamber of Commerce urged Congress that the director of the CND "should be given power and authority in the economic field analogous to that of the chief of state in the military field."[11] Finally, in early July, the raw materials, munitions, and supplies departments were brought together under the new War Industries Board, with Scott as chairman, the board that was to become the central agency for collectivism in World War I. The functions of the WIB soon became the coordinating of purchases, the allocation of commodities, and the fixing of prices and priorities in production.

Administrative problems beset the WIB, however, and a satisfactory "autocrat" was sought to rule the entire economy as chairman of the new organization. The willing autocrat was finally discovered in the person of Bernard Baruch in early March 1918. With the selection of Baruch, urged strongly on President Wilson by Secretary McAdoo, war collectivism had achieved its final form.[12] Baruch's credentials for the task were unimpeachable; an early supporter of the drive toward war, Baruch had presented a scheme for industrial war mobilization to President Wilson as early as 1915.

The WIB developed a vast apparatus that connected to the specific industries through commodity divisions largely staffed by the industries themselves. The historian of the WIB, himself one of its leaders, exulted that the WIB had established

a system of concentration of commerce, industry, and all the powers of government that was without compare among all the other nations.… It was so interwoven with the supply departments of the army and navy, of the Allies, and with other departments of the Government that, while it was an entity of its own … its decisions and its acts … were always based on a conspectus of the whole situation. At the same time, through the commodity divisions and sections in contact with responsible committees of the commodities dealt with, the War Industries Board extended its antennae into the innermost recesses of industry. Never before was there such a focusing of knowledge of the vast field of American industry, commerce, and transportation. Never was there such an approach to omniscience in the business affairs of a continent.[13]

Big-business leaders permeated the WIB structure from the board itself down to the commodity sections. Thus, Vice Chairman Alexander Legge came from International Harvester Co.; businessman Robert S. Brookings was the major force in insisting on price fixing; George N. Peek, in charge of finished products, had been vice president of Deere & Co., a leading farm-equipment manufacturer. Robert S. Lovett, in charge of priorities, was chairman of the board of Union Pacific Railroad, and J. Leonard Replogle, Steel Administrator, had been president of the American Vanadium Co. Outside of the direct WIB structure, Daniel Willard of the Baltimore & Ohio was in charge of the nation's railroads, and big businessman Herbert C. Hoover was the "food czar."

In the granting of war contracts, there was no nonsense about competitive bidding. Competition in efficiency and cost was brushed aside, and the industry-dominated WIB handed out contracts as it saw fit.

It's officially over

The Era of Apathy

After a decade of being treated like children, Russia's electorate is finally finding its voice.

BY TANYA LOKSHINA

The scope of the protests that have followed Russia's Dec. 4 parliamentary elections, which protesters claim were rigged, have not only shocked Prime Minister Vladimir Putin and his cohort -- it has shocked the opposition as well. And Kremlin officials have no one to blame but themselves for this swelling protest movement.

The first protests kicked off that Sunday night, following the ballot, with a demonstration of approximately 5,000 to 10,000 people in the central Moscow area of Chistye Prudy. The protest turned ugly when riot police attacked protesters marching toward the Central Electoral Commission building, dispersing demonstrators, sometimes roughly, and detaining people at random. More than 200 of the detained -- including some opposition leaders, journalists, and well-known activists -- were held overnight in crowded cells with no food and no access to lawyers. Administrative trials started the next day, sentencing protesters to 15 days of incarceration, officially for resisting police orders but in fact for merely expressing their discontent with the authorities.

The following days saw more protests against Putin and the ruling United Russia party in Moscow and other large Russian cities. They culminated in a massive rally of over 50,000 people in Moscow's Bolotnaya Square on Dec. 10 (and this is a very conservative assessment, as the opposition is claiming approximately 100,000). The protesters were met with a massive police and military presence -- armored personnel carriers on the ground, roaring helicopters in the sky -- which spoke of potential trouble, but the day passed without a single provocative act by the demonstrators nor a single use of force by the police.

The demonstrators wore white ribbons on their coats, and many carried multicolored balloons and flowers, emphasizing the nonviolent and nonpartisan spirit of the protest. Smiling young women pressed white carnations and chrysanthemums on young uniformed servicemen, and some shyly accepted those gifts of peace, giggling like school kids. Democrats, communists, anarchists, radical lefties, and people with no political convictions chanted: "I'm a citizen of my state!" "We want fair elections!" "Our opinion matters!" That evening, state-owned television channels featured short reports about the massive demonstration. They simply had to.

What caused this extraordinary awakening of Russian citizens, who have previously appeared sullenly acquiescent to the erosion of democracy during the Putin era? Russia's Interior Ministry was quick to blame social networks for "threatening the foundations of the society" and "contributing to the rise in extremist views." Putin, predictably, is blaming everything on Western interference, bashing U.S. Secretary of State Hillary Clinton for supposedly sending a "signal" to the opposition to destabilize Russia. In fact, however, two signature blunders by Putin's own regime served as the trigger for this current round of protests.

First, it all started with President Dmitry Medvedev's revelation on Sept. 24 that Putin would run for the Russian presidency next year, while he would lead United Russia in the parliamentary vote. Putin himself said, "I want to say directly: An agreement over what to do in the future was reached between us several years ago."

Western media and policymakers often explain the lack of pluralism in Russia by pointing to how Russians love Putin's strong rule, his populist machismo. That may be so, but Russians, as the elections this month have shown, have also become increasingly unhappy with more than a decade of so-called "soft" authoritarianism. When Russians heard that what they long suspected was coming true, many felt they had no option but to take to the streets. This frustration alone, though, was probably not enough to convince tens of thousands to gather in Bolotnaya Square for the first time since the stormy 1990s. It was the brazen acknowledgment by the head of government that the decision had actually been made long ago and that the public -- children that they are -- simply hadn't needed to know about it. It was this gross, infantilizing condescension that became the tipping point. The realization that the authorities are not even trying to pretend that public opinion matters, that individual choice matters, that voters have decision-making power, was just too bitter a pill to swallow.

After the parliamentary election results began coming in, the Kremlin made its second painfully obvious mistake. Exit polls for Moscow that showed United Russia's share of the vote at a meager 27 percent miraculously disappeared from the website of the Public Opinion Foundation, a leading polling agency known for its loyalty to the government. While people around the world were watching the protest movement unfold in Moscow, all that Russians could see on federal television were wildlife programs and "nothing's happening" news.

Independent journalists and the public were overwhelmed with disgust. A correspondent of Kommersant FM radio, Stanislav Kucher, addressed Russia's infamously kowtowed broadcast journalists with a stinging rebuke: "Thousands of people are pouring into the streets of both capitals of what's for now our common homeland for the first time in 10 years, to say what they think about the elections. And yet the same television stations that show the president say not a word about the protests -- that's just unprofessional." Kucher added that television people hid "information from millions of people"-- at minimum manipulating their attitude and at maximum disgracing themselves and their profession.

The official information blockade only contributed to the protest mood. More than 35,000 people signed up for the Dec. 10 rally via Facebook, and after the initial hard-line reaction and threats of using brutal force against the protesters, the authorities had to relent. The opposition not only received an official sanction for the demonstration, but the authorities also agreed to provide a "corridor" for those choosing to gather closer to Red Square, so that those protesters could march across the bridge to the other bank of the Moscow River and join the bigger crowd.

So what comes next?

Moscow is no Tahrir, and what's happening in Russia at the moment is not yet a revolution. But Dec. 10 was indeed a historic moment: Thousands of Russians made it clear that they would no longer be ignored. The authorities also realized that hard-line measures and broadcast blockades would only worsen their position and that they must take their critics into account.

The period until the March 4 presidential election is now of paramount importance. Even if Putin does return to the presidency at that time, the powerful voice of discontent played out in the streets and through social media will prove impossible for him to ignore. The era of apathy is officially over.

A bridge too far

The man who predicted the European debt crisis

By Charles Lane

Europe’s financial crisis is rapidly metastasizing into a political one, and the coherence of the European Union is more doubtful than at any previous time in recent memory.

That’s the meaning of last week’s European summit, in which 26 leaders either accepted a German-French plan for tight fiscal discipline or agreed to consider it — while British Prime Minister David Cameron said no, amid nationalistic finger-pointing across the continent.

Europe’s politicians are making a hash out of the once-proud project of United Europe, and, in the process, making a prophet out of Martin Feldstein.

In 1997, before the first euro note had rolled off the presses, the Harvard economist surveyed Europe’s plans for a single currency and, in a lengthy essay in Foreign Affairs, predicted that they would come to grief.

Like many of his colleagues, Feldstein doubted the single currency’s economic viability absent political and fiscal union.

What Feldstein saw with special clarity, though, was the disaster that would ensue even — or perhaps especially — if Europe tried to increase political and fiscal union for the sake of monetary union.

As Feldstein wrote: “A political union of European nations is conceived of as a way of reducing the risk of another intra-European war among the individual nation-states. But the attempt to manage a monetary union and the subsequent development of a political union are more likely to have the opposite effect. Instead of increasing intra-European harmony and global peace, the shift to [monetary union] and the political integration that would follow it would be more likely to lead to increased conflicts within Europe and between Europe and the United States.”

Feldstein foresaw that the trigger for political tension would be a sharp economic downturn, imposing different levels of unemployment on different members of the monetary union, because high-unemployment countries could not recover their competitiveness through currency devaluation.

The ensuing “conflicts over economic policies and interference with national sovereignty could reinforce long-standing animosities based on history, nationality, and religion,” Feldstein warned. “Germany’s assertion that it needs to be contained in a larger European political entity is itself a warning. Would such a structure contain Germany, or tempt it to exercise hegemonic leadership?”

Sounds like a summary of Europe’s current predicament.

Britain is divided between euro-skeptics who think Cameron is a national hero and europhiles who think he has severed their ties to the huge continental market. In France, meanwhile, President Nicolas Sarkozy responds to criticism of his alleged subservience to Germany by claiming a compensatory victory over the financiers of perfidious Albion.

German Chancellor Angela Merkel pursues her long-term plan for a European budget-balancing rule, untroubled, it seems, by the fact that this is a recipe for ruinous austerity in the short run.

Merkel, like many of her countrymen, cannot or will not see that southern Europe’s debt crisis is the mirror image of Germany’s immense trade surpluses, and that Germany, too, must adjust if the euro is to be saved.

A recent PricewaterhouseCoopers report lays out four possible endgames. In the most benign, the European Central Bank takes mass quantities of bad debt onto its balance sheet and Europe avoids a depression at the expense of higher inflation and slower long-run growth.

The only difference among the other choices — organized default by the euro zone’s biggest debtors; a Greek exit from the euro; and the rise of a new, smaller euro zone led by France and Germany — is the depth of the recession each would trigger.

In 1997, Feldstein thought that a failed currency union could lead to war. That seems far-fetched, even now.

But today’s blame game among Europe’s politicians may soon seem mild indeed. A full-scale backlash against the EU, and its Franco-German leadership, can hardly be ruled out.

Europe could become a much more troubled and self-absorbed region — less able either to counter the United States in world affairs or to support it. The collateral damage to the U.S. economy from a European slump may exacerbate transatlantic tensions.

Postwar Europe was right to forge a single market and common international stance. But the single currency was a bridge too far. Instead of creating a Europe wealthier and more diplomatically potent than the sum of its parts, the euro is impoverishing much of the continent and reducing it, once again, to a squabbling gaggle of nation-states.

They should have listened to Feldstein.

Last week in Europe

Some thoughts on the ongoing crisis

by DETLEV SCHLICHTER

Last week was supposed to be a major week for Europe. We had the ECB meeting on Thursday and then another EU summit to ‘solve’ the eurozone debt crisis on Thursday and Friday. Of course, nothing has changed, nothing has been solved, and quite frankly, I do not see any reasons whatsoever for changing my analysis of what is going on and how all of this is likely to end – badly, that is. If anything, the events of last week confirm that authorities are adamant to continue travelling further on the road to complete currency destruction – not only in the eurozone but equally in the U.S. and the UK, although the latter two are managing to escape closer scrutiny by markets for the time being. As usual, I felt that most of the commentary in the media was missing the main points.

The problems around the world are essentially the same. After decades of ongoing and generous expansion of the fiat money supply, of artificially low interest rates and cheap credit, banks are hopelessly overextended, asset markets are distorted, and sovereign states are bust. I sometimes get pushback on the last point. Are they really bust? – Yes, most of them are. They have acquired debt loads and spending habits – now very deep-rooted and practically impossible to eradicate – that require constant new borrowing at fairly low interest rates – cheap credit forever. Obviously, that is not going to happen. The end of the forty-year credit boom has arrived. The private sector is no longer playing ball.

What needs to happen? The overextended credit edifice needs to be cut back to a size that is commensurate with the underlying pool of real voluntary savings and with underlying real income streams. Money printing and the constant attempt to manipulate lending rates down have to stop. The market has to finally be allowed to set interest rates that reflect the true cost of available savings, and to liquidate what is not sustainable. Deleveraging, default, and debt deflation are necessary to bring the economic structure back into balance. Is this painful? – You bet. It is also unavoidable. There is no other solution. Yet, the solution is deemed politically unacceptable and it is thus being fought tooth and nail. Not only in the US and the UK, also in Europe.

The entities that are most under stress in this scenario are the banks and the debt-addicted states. You know my forecast: the central banks will be asked to underwrite the states and the banks directly with the help of the printing press on an ever-larger scale, and this will ultimately lead to higher inflation and finally to paper money collapse: the end of our present fiat money system, the latest experiment in the sad history of unlimited and fully elastic state money systems.

While this is broadly a global story, many people question whether it really applies to Europe. Isn’t the ECB more conservative, more Bundesbank-like, and thus less prone to debt monetization than the other central banks? Is there not some real effort being made in Europe to sort out the fiscal problems? – No. Most of it is simply theatre that has no or little implication for the final outcome. Let me explain.

The EasyB.

Like the other major central banks around the world, the ECB played its role in setting the world up for the credit bust by providing the cheap credit for the preceding credit boom. The ECB’s balance sheet – or rather the consolidated statement of the Eurosystem as it is correctly termed – started out at less than €690 billion in 1999. On the eve of the present credit crunch, in the summer of 2007, the balance sheet had reached a size of €1.2 trillion. In fact, over this period the ECB’s balance sheet had grown faster than that of the Fed. Like all other central banks, the ECB has, since the crisis began, become the lender-of-last resort to ever more banks and also to state institutions. At the end of 2011, the ECB’s balance sheet will be more than €2.4 trillion – its largest size ever, and also more than 20% larger than at the start of the year!

And as Mr. Draghi, the ECB’s top central banker, told us on Thursday, the growth of the central bank’s balance sheet will continue. More than four years after the crisis started and more than three years after Lehman collapsed, none of the problems in the European banking community are fixed. This is evidently the case as the European banking sector is still in desperate need of ongoing and, this is important, growing central bank support. In fact, the ECB announced more ‘liquidity’ measures to prop up the banking system this week. It also stated that it would lend money against an even wider range of collateral than previously. These measures are similar to the ones announced a week earlier by the major central banks around the world, which were also designed to lessen funding pressures among the banks. We can only conclude that the state of the banking sector must be extremely precarious.

Can all these banks ultimately be ‘eased’ back into lasting health and operational independence by the central banks? Of course, not. A reduction in banking capacity via a shrinking of balance sheets and potentially via defaults is ultimately unavoidable. Again, the banking sector overdosed on years of cheap credit. The boom will not be extended forever. Rehab is inevitable. So are the present measures of the central banks aimed at slowing this process, at postponing it, at sabotaging it or even completely avoiding it? I fear that the key decision-makers don’t even know the answer themselves. They simply want to buy some time, I guess.

The ECB had by Thursday night also fully reversed its timid and tentative rate hikes from spring and summer and was thus back to record-low policy rates. Developments last week thus confirmed my outlook: None of these central banks have an exit strategy. If you believe that these so-called unconventional and extreme measures are temporary, and that policy will be normalized at some stage, you are mistaken, in my view. The biggest direct beneficiaries of cheap money from the central banks are now the ‘private’ banks and the sovereigns, and as the shrinkage and/or failure of these entities is deemed politically unacceptable, and as the states in particular cannot cut back their expenditures and thus their deficits meaningfully, the central banks will continue to print money.

It is somewhat astonishing that in financial market debate and in large parts of the media coverage of ECB policy, the idea is conveyed that the ECB was being particularly stringent. This is due to the fact that many now demand that the ECB provides not only ‘unlimited’ direct support to the banks but that it should also manipulate directly the prices of certain financial assets, in particular the prices of governments bonds of weaker eurozone states, to an unlimited degree, because many banks hold huge quantities of them and they struggle with the lower and, I would suggest, more appropriate market prices for these securities. ‘Unlimited’ bond buying, however, is something that the ECB struggles with, at least officially, and that hits some raw nerves in Germany. Draghi’s negative assessment of large-scale bond buying in the press conference made all the headlines last week, and this is what helped to give the impression of conservatism and policy tightness.

The whole affair is complete theatre, of course. The ECB has indeed been engaged in sizable price-fixing operations in the government bond market for quite some time and is still conducting these operations today. Every week, the ECB buys bonds of weaker eurozone states in an attempt to lift their prices above normal market-clearing levels. Such indirect funding of state spending via the printing press is against ECB-rules, as Mr. Draghi confirmed again in his press conference. However, it is being done continuously by the ECB and defended with the ridiculous excuse that these operations are needed to allow a proper transmission of ECB policy. This is a blatant lie, of course, but apparently all this money-printing, market manipulation and rule-breaking still doesn’t go far enough for many in the financial industry who now demand even more money printing and more market manipulation. Please remember that the ECB presently limits its bond buying to €20 billion per week. If it only continues at this pace, which I expect it to do until it will give up its faint resistance and accelerate bond buying, the present procedures will add up to more than another €1trillion by next Christmas, and thus mean that the ECB’s balance sheet has expanded by another 42% in a single year! But, according to financial market economists, that is not enough!

None of this is a solution but all that market participants (and politicians) want is apparently some peace and quiet, a little pause in this unfolding disaster. Of course, it is only a question of time and the ECB will accommodate the wishes for even more aggressive money-printing. Again, I consider most of the debate theater.

Inflation will rise

What will all this money-printing mean for the purchasing power of money? – The answer is clear in my view: it will mean rising inflation, then accelerating inflation when confidence in paper money erodes and when central banks will find it impossible to restore such confidence through tighter policy.

It is truly remarkable that four years into a major credit correction, none of the major economies has registered any deflation. Of course, those who have an irrational fear of deflation and declare it an evil to be avoided at all cost will consider this a success. The truth is, a deflationary correction would be the natural response at the end of an extended inflationary boom based on artificially cheap money. Deflation would be part of a necessary, if in many ways painful adjustment process. This process is aborted via aggressive money printing from the central banks. We can clearly see that nothing has been solved and that the channels through which money debasement occurs have simply changed but that it is still ongoing.

Inflation in the eurozone may not be very high at present but it is above target and it will, in my view, continue to rise. The idea that all this money printing is not only harmless but also positive because it avoids deflation is nonsense. In the case of Britain, we are told every month that the Bank of England needs to keep rates low and its balance sheet expanding to avoid deflation and economic contraction when inflation has continuously been above target and in fact rising. Something similar is now unfolding in Europe. Easy money is supposed to help the banks and the states but enough of it is leaking into the wider economy to continually debase the monetary unit, while failing to initiate another artificial boom in the wider economy. I consider what we are seeing in Britain a good blueprint of what will unfold elsewhere in coming quarters: rising inflation (now above 5 percent in the UK), ongoing central bank balance sheet expansion (whether labelled officially ‘quantitative easing’ or something else), an overall weak economy with rising unemployment, failure to reign in budget deficits.

Fiscal consolidation and fiscal integration

It can only be a sign of desperation that grown and otherwise intelligent people believe that the solution to Europe’s debt problem is fiscal integration or policy coordination. This is at a minimum naïve. Debt levels and budget deficits are not where they are today because of a lack of coordination or integration among the member states. They are where they are because NONE of the states can live within their means.

Fact is that all members of the club have been shown to be habitual over-spenders and fiscal-rule breakers for years. The risk that in a fiat-money union some members may run excessive deficits and then expect to get bailed out by the other states or via the printing press, thus being rescued by a process that involves taking from the tax-payers in other countries (via fiscal transfers) or by taking from their own savers and savers in other countries (via higher inflation), was understood and clearly seen from the start of EMU. That is why certain rules were implemented: budget deficits shouldn’t exceed 3 percent, overall debt levels not 60 percent, there was a no-bail-out provision, and the ECB was banned from bailing out states with the printing press. ALL of these rules have now been broken. Germany insisted on the Maastricht criteria which restricted overall state debt to 60 percent of GDP. Germany herself is now at 83 percent – and happily signing up to new commitments in bail-out-funds that should not be possible under EU rules to begin with.

All fiscal rules have by now been broken. Bail-outs have been implemented and the ECB is funding member states to the tune of €20 billion per week!

But now, these politicians tell us, now we can finally trust them. Because all these cheaters and fraudsters will now check on one another very thoroughly as part of ‘fiscal integration’ under a new set of self-imposed restrictions and with a new treaty, and this will turn a club of rogues and rascals into a group of prudent and trustworthy guardians of the public purse.

This whole idea only deserves ridicule. It is completely laughable. Of course, it will not work. Sadly, it is also presented to the public with that specifically distasteful ingredient of bureaucratic micro-management. Obviously, the member states only trust one another to obey the rules if all decision-making is minutely coordinated and policy-setting on everything from corporate tax laws to bank regulation carefully centralized under a new European super-state. We will get more state-interference, more centralization, more meddling in markets, more and higher taxes and more capital misallocation. What we will not get is less government spending. All power to the bureaucracy!

The endgame does not change because of any of this. The only question is this: Will this impress the markets and restore some stability for a while? I doubt it.

In the meantime, the debasement of paper money continues.