Changing Future Trends Arising from History

We are all wondering what the post-Covid-19 world will be like. Perhaps new habits will have been built. Perhaps people will decide that they can work at home, and employers may decide they don’t really need to rent as much space as they have been. Perhaps people will like not having to fill their cars more than once every several weeks. I don’t know the probability of such outcomes.

I do have a stronger opinion about macro-economic consequences. One thing the pandemic has done is to help Americans realize more than ever that they prefer short supply lines. Why manufacture in Asia?  Which is cheaper --- having 3000 laborers weaving textiles in a shop in India, or building a robotic based factory in Indiana run by 3 people and weaving more cloth more consistently? After the capital cost is incurred, it is much cheaper manufacturing in America, and there are lower distribution costs and more secure distribution channels.

Franklin Roosevelt, shortly before he died, invited representatives from 44 Allied nations to a conference at a resort in New Hampshire called Bretton Woods. There a trade deal was sold. America would now use its mighty navy to keep the seas safe for shipping, removing much of the risk. In the not so distant past, the lay of the land was that empires coalesced around major powers who just took what they wanted. A country needed to be in an empire to have a market and military support. Bretton Woods changed that. 

Shortly thereafter, a strange thing happened. Roosevelt, who along with his wife was a friend to the Soviets, seeing them as allies and realizing that is was mainly the Soviets who were beating back Germany, was replaced by Harry Truman. Right from the start, Truman seemed hostile to the Soviets. It was like he expected them to be enemies, and soon they were. The Bretton Woods arrangement now was for countries that were not allied with the USSR, and the world prospered. America gave free military protection to ensure safe trade, except for the price that the recipient was not to side with the USSR.

Close to 50 years later, the USSR disintegrated. The reason behind Bretton Woods was no longer relevant. America began to lose interest in international networking. Clinton was a domestic president with almost zero interest in foreign affairs. He would cram from notes before a meeting with a representative from another country, pass the meeting with flying colors, and then forget about it. Bush II, Obama and Trump have not been much better. There has been no reason to be. America is a self-contained economy whose exports are well under 10% of its GDP. She is resource rich and doesn’t need to import much. So the USA is paying the cost of keeping sea lanes safe for what? It had been to encourage beneficiary nations to stay out of the Soviet camp, but the USSR folded up. So what has the reason been these last three decades? I don’t think Americans know. Donald Trump is wondering the same thing. His America First policy is euphemism for withdrawing America into a continental economy that is not dependant on the rest of the world.

Unlike China. China has a population pyramid that is fat near the top. A huge portion of its population is moving into their senior years when consumption is typically rather low. So China does not have sufficient domestic demand to consume its production. China has depended on the USA to do that. The USA is getting tired of the sub-standard junk China produces and is pulling back from Sino-American trade.

But there’s a larger issue here. Throughout history, there have been many instances of an aspiring super-power expanding and flexing its wings to the point where the existing super-power feels uncomfortable. I could probably cite about two dozen such cases from the last 3,000 years. These situations have usually resulted in a war between the two. We can start with the alliance of Babylonia and the Media demolishing Assyria, continue to the Medes and Persians conquering Babylon, and so on through many centuries to the first real-world war, the Seven Years War, waged in Europe, North America, and Asia. Then the super-power was France, and Britain and Prussia each aspired to the status and took on France, with whom the empires of Russia, Austria-Hungary, and Sweden allied. We see Prussia challenging France again in the Franco-Prussian War of the 1870s. Japan grew to attack the more predominant Russia in the very early 1900s and America in 1941. Now we see China rising and America getting in the way. The probability, it seems to me, is war between the two. I mean a shooting war.

Such a war would help China hold together. We forget that unity is not the natural way of China. The Mongols forced it on them. So did Mao. But these are historical aberrations. See https://www.youtube.com/watch?v=UWqVzZnwnOk for an interesting several minutes. Add to that the fact that 1.1 billion people in China are in the bottom economic class and require financial help. As the Chinese economy falters and stumbles for lack of markets and from the stress of a relatively small proportion of the population producing most of the goods and services and having to support the majority, there will be a tendency to blame the government. If the Chinese Communist Party learned from the Arab Spring, the leaders will want to avoid a Chinese equivalent. Something will be needed to divert attention. War usually does a good job of that.

Now, maybe the parties will be cool and realize that China would have no hope of defeating the USA. One Nimitz class carrier has more firepower than all the other navies of the world put together, and the USA has 11 of them. China’s navy is mainly short and intermediate-range. And in the air, a typical American fighter pilot would have to be incredibly inept and unlucky and a Chinese pilot just as incredibly lucky for there to be a Chinese win in a confrontation between the two.

Maybe there will just be a cold war. Makes sense. America with a handful of trading partners --- Canada, Mexico, the UK, Australia, New Zealand, Japan, South Korea and select countries in South America --- versus China and a much bigger trading community. We may even see Central American countries cozy with China. China is investing there, as in many other regions. For example, they are planning a super-highway across Costa Rica, from Limon up through Guapiles and on to the Pacific coast. The idea is to ship freight overland rather than paying $500,000 for one freighter to make one pass through the Panama Canal. The oligarchy that are members of Panama’s Union Club will likely want to keep ties with the USA, and America may be motivated by the strategic location of Panama, so Panama may be America’s beacon in Central America.

Another country that stands to be hurt in a major way by shifting trade relationships is Germany. Whereas China is a major exporter of crap with about 20% of its GDP being exported, Germany is a major exporter of high quality, highly functional manufactured goods. Half of Germany’s GDP is exported, so she needs a continued market. The USA, turning inwards now even more so as a result of the current pandemic, is more interested in revitalizing domestic industry and supply chains than in keeping Germany in business. The rest of Europe is not enough of a market. When 50% of your GDP is exports, even a 1/5 decline in exports is a 10% drop in GDP. That’s huge.

With a new order shaping up, plus more and more businesses failing the longer the world is locked down, the chances of a major depression continue to grow. I know there is all this wishful thinking about pent-up demand --- the idea that people will buy with a vengeance once they can again --- but I don’t agree. When this shutdown is done, I am not going out to get three haircuts. 70% of Canada’s GDP is services. Services unrendered are lost revenue.

My apologies for rambling a bit here, but I think we need to be thinking outside the contemporary box, and more in line with the broader background of history. I hope this essay provokes you to think longer and more deeply about the state of the world than you have.

The Sale of Ambassador Hall

I have long thought of Winnipeg as a city with a bigger past than a future, a sentiment with which that peculiar, but intriguing, movie My Winnipeg seems to be aligned. Historically, real estate busts parallel stock market collapses, but with a separation of a few years. So, the 1836 Chicago real estate dive was followed by a generalized huge stock market drop in 1837 as the USA slid into the deepest depression in its history, with unemployment rising to about 50% by 1840. The 1926 Florida real estate bust was followed by the infamous 1929 Wall Street crash. Likewise the Winnipeg real estate market entirely deflated in 1882, two years before the 1884 stock market panic, and in terms of inflation adjusted dollars, Winnipeg’s real estate has yet to recover those losses. Yes, it is not true that if you patiently hold onto real estate long enough, the price will always recover, unless 135 years is not enough patience.

The steel magnate, Andrew Carnegie, whose company morphed into U.S. Steel, built sandstone library buildings around North America. We have one of them here in Victoria, downtown on Blanshard Street, except very few people know that it used to be a library. I’ve seen them elsewhere too. I’m rambling here. Later, one of the largest --- perhaps the largest --- stockholder in U.S. Steel, and a director, was Hulett C. Merritt. He is reputed to have said that any man that knows how much he’s worth mustn’t be worth very much. Around 1900, Orange Grove Boulevard in Pasadena had become the home to several mansions of wealthy and influential families. They generally still stand. There is the Wrigley mansion, later to become the headquarters of the Rose Bowl Parade. There was the Busch mansion (think Anheuser-Busch). These, and other, great estates fronted onto the aristocratic Orange Grove Blvd.

Then came the upstarts. Cyrus McCormick built a mansion on Orange Grove, but he structured his property to back onto that elegant street, and his frontage was Terrace Drive. If I recall correctly, the mansion south of him, with which I knew as Manor del Mar, was owned by his father, but I might be wrong. To McCormack’s north was built a large Tudor mansion that came to be called Mayfair. Next in line, north of Mayfair, was the Italian styled Terrace Villa, owned by Lewis J. Merritt, father of the aforementioned Hulett Merritt. A bit further on was the smaller Olcott mansion, and smack in between these two estates lay what I think was about 3 acres of ground sloping from Orange Grove down to Terrace. This property was purchased by Hulett Merritt, and from 1905 to 1908 he constructed a 17,000+ square foot trophy home, the biggest one in that row of mansions that now backed onto Orange Grove Boulevard like it was their back alley, and which stretched from Del Mar Blvd. to Green Street. Merritt paid 1.1 million dollars to build that home in which he lived for 45 years. Its dining room had the first recessed lighting in America, and in the rear of the home was a beautiful Italian Garden. The two Merritt mansions were also connected by a secret underground tunnel as I recall. Many regularly saw the Hulett C. Merritt mansion in the TV show The Millionaire.

Now, here’s the point. The Merritt estate sold the huge mansion in 1956, obtaining $20,000 for it --- less than the original cost of the front wrought iron fence. Ambassador College bought it and renamed it Ambassador Hall, converting it into a classroom building. Later, when the college closed, the property passed into other hands, and I see that it was once again sold this month for 2.1 million dollars. I don’t know what the 1.1 million cost of 1905-1908 is in today’s dollars, but I think something like $30,000,000.  Winnipeg is not the only place where it would not have paid to hold real estate for 135 years.

Beating Bennett

I wonder, if I was a PM faced with the circumstances confronting R. B. Bennett in the 1930’s, how I would steer the nation. Keeping in mind that I believe in the utility of a free market, and that my political leanings, to the extent I have any, are almost certainly libertarian (see http://gordonfeil.blogspot.ca/2016/11/questions-about-practical-libertarianism.html and

http://gordonfeil.blogspot.ca/2016/11/normal-0-false-false-false-en-ca-x-none.html).

The big problem in the 30s was the shrinking money supply. I am lumping credit into the money supply. At a time when banks were cancelling credit, the Bennett government was focused on balancing the budget. While a balanced budget makes sense, over what time frame? If you spend more than you earn this weekend, should you be bothered by it? If you are going to earn it Monday through Friday, then what does it matter? You may not have a balanced budget for the weekend, but for the week you do. But does it even have to be for the week? So long as your earnings this month exceed your outgo, does it matter on what days each occurs? For that matter, does it matter if some months you run a deficit, so long as for the year as a whole, you have a surplus? Yet, what is so magical about a year as a timeframe? Why not a decade or a quarter century?

Canada may be the country that was hardest hit by the “Hungry Thirties”. Laboring wages were incredibly low. Even as low as 2 cents per hour in some cases. The “relief” camps, set up by the government in remote areas to remove young men from cities where they might voice their dissatisfaction, were essentially slave camps. There were plenty of goods around, but most people did not have the money to buy them. Inventory surpluses were so extensive that in some cases, inventory was destroyed. Food was not scarce; it was simply unaffordable by the masses. Eventually the government solved that by sending some of the masses to the destruction of war. I am being partly facetious here, but not totally.

So how should Bennett have responded? He should have extended credit to the needy. He campaigned against hand-outs on the basis that it would train people to not be industrious. Of course, it is likely he just didn’t want to raise taxes on the rich to fund the dole. Credit would have been more effective methinks. The most engaging politician ever produced in this country, and maybe in the whole Western World, was probably William Aberhart. Too bad he was such a bungler as Alberta Premier. But his idea of extending credit to the poor was a good one. He didn’t know how to execute it. What should have happened in Canada probably includes the following:

1. Stockholders rights should have been protected from rapacious managers who had incredibly high wages during the Great Depression. Perhaps a limit on total remuneration (salary, stock options, etc.) to a reasonable multiple of the wage of the average assembly line worker within the business.

2. Government credit granted should have been extended to the needy on the basis of zero interest and payback as conditions improved. This would have meant a budget that was unbalanced over a short timeframe, but over the long haul it could have been balanced with funds inflows during times of prosperity, or simply by the printing of new money.

3. The borders should have been opened to free trade. All customs duties eliminated. This would have reduced prices on consumer goods. It probably would have allowed American freight companies to compete on Canadian freight. A significant food distribution problem was that producers found it more profitable to let the food spoil than to pay the freight getting it to market. Open borders probably would also have allowed international markets to bid up the price on foodstuffs. Meat packers were selling beef at 19 cents a pound while farmers were being paid 1 cent a pound. This was only feasible because of government intervention in the market allowing for price and profit dislocations.

4. Fully applying the biblical rules regarding the release of debt after 6 years would have restored dignity and economic security to many oppressed families. Of course, such measures should only take place when the creditors have known in the first place that they were lending on that basis.

5. Sales tax should have been eliminated. Government could have been funded by the issuing of new money. This means that Provincial and municipal governments should have been allowed to issue money also. A free market would have destroyed the worthless money and kept the issuance honest over the long run.

I could go on, but I need to haul a bunch of stuff to the thrift shop. In short, the problem was not capitalism. It was the abandonment of practical concern for the poor combined with government bullying in the economy.

Who Won WWII?

When I was young, I saw people in more black and white terms than I do today. This resulted in liking some and disliking others. Long experience has shown me that people are the result of many influences. All have aspects I like and ones that I dislike. Some are more compatible with me, so I still tend to like them better I suppose, but at least I have learned not to be as judgmental as I was.

Even Josef Stalin, who instigated the deaths of millions of his own people, had an honorable side to him. I am reminded how he refused to save the communists in Greece from the British after the Second World War because he had promised Churchill that Britain could have Greece. It would surely have been in his interests to have a communist Greece, but he kept his word. I know we could argue that he kept his word because if he hadn’t, then Britain would not have allowed the Soviets free reign in the Slavic countries, so it was really in Stalin’s interests to honor his promise, but I don’t see how Britain was in any position to stop Russian predominance in Eastern Europe.

Long ago I started asking Why in regards to people’s behavior, partly out of curiosity, but partly to know how to influence better behavior. I’m a Bible student, and I know that the Bible is not so much into the Why of human behavior so much as the What and How. I mean Bible based therapy is focused on What, not Why. William Glasser’s Reality Therapy is a solid approach to psychological problems that focuses on the What far more than the Why. This is in contrast to psychotherapy, which wants to explore childhood and formative influences to understand what is going on. The problem is that no amount of understanding of how you got to where you are is going to fix the problem. Reality Therapy is about identifying and making choices and then acting on them. It is done with the aid of a therapist who behaves as an interested and loving friend, whereas the psychotherapist practices detachment.

Back to the point that began this post. We are all a mixture of good and bad. Propaganda sometimes tries to persuade us to make enemies. I grew up during the Cold War. The godless Soviets were not to be trusted. They wanted to bury us, so thankless were they for the USA winning the War. Now that I am older, I see that it was really the Soviets that won the war. They cost the Germans 6 million men, whereas the USA and other allies took out only 1 million. The Soviets lost more personnel in the Battle of Stalingrad than did all the Allies during the entire war.

FDR recognized this and he appreciated it. He viewed the Soviets as America’s friends. He died, and the rather inexperienced Truman, who in his 82 days as vice-president had only met FDR twice, began listening to Edward Stettinius and other business moles in government who felt threatened by communism. They urged Truman not to trust the Soviets. Even the dropping of the 2 atomic bombs on Japan seems to have been to threaten the Soviets. Japan was already defeated by that time. The mega “slaughter bombing” had destroyed both military targets and hundreds of thousands of civilians.

Anyway, just musing this morning about the complications of people’s motives and how they are not always evident, so we need to be slow to judge.

What Will This Century's World War Be?

I was reflecting today on the build up to the Second World War. That munitions war was preceded by a money war --- currency battles and trade battles. I don’t know if I can remember anytime during my lifetime when there seemed to be so much tension between the major economies as there seems to be now. 

Trump campaigned on rhetoric about pegging down China for its unfair trade practices. He has done nothing about that since being elected, probably in hopes that China would fulfill their undertaking to pressure North Korea into ceasing its nuclear weapons program. China has not delivered, and now there is no reason for Trump to not tighten the screws on China. The USA will block Chinese banks and companies trading with North Korea from the dollar exchange system. Sixty-two percent of international currency transfers are in dollars. The dollar is how oil is bought. The dollar is how most big trades occur.

Trump has also now imposed trade sanctions on Russia. Companies that assist the Russian arctic oil industry will be blacklisted on the international dollar bank transfer network. Of course, Europe, which is dependent on Russian petroleum, is miffed. Trump’s actions are a threat to European investors in Russia’s oil industry. What a way to drive Germany and Russia into each other’s arms.

Russia will retaliate. It doesn’t have the economic clout to do it with trade embargos, but it can do it with cyber-attacks. Russia has a army of several thousand hackers for such purposes. If you are in the USA and your bank’s ATMs all go down, or the power goes off over a wide area, or the CME loses its computer network, we’ll have to wonder.

Trump has also put Canada, Mexico and South Korea on notice that the USA doesn’t consider itself obligated by its trade deals. I would not be surprised to see various nations co-operate to set up a bank transfer process that does not depend on or even accept dollars. If that happens, the dollar will likely tank.

One has to wonder what the big war of the 21^st century will be. In my opinion, the Seven Years War was the first of the world wars. This eighteenth century war was followed by the nineteenth century Napoleonic Wars. Then came the twentieth century with its major wars. Of course, the centuries prior to the 1700s each had their big wars.  I expect that this century will see some kind of major shooting conflict. Maybe it’s shaping up now. I don’t think Trump will be president when it happens. It would be hard to impeach him now, but after the mid-term elections, if the Democrats make big gains, there may be enough votes to send Trump out on the Richard M. Nixon Memorial Skids. This won’t abate world tensions. It will be too late for that.