Violence Is Back As A Tool Of National Policy

By Benjamin Picton, senior market strategist at Rabobank

Flying Blind

News broke yesterday that a jet carrying European Commission president Ursula von der Leyen had to land using paper charts after its GPS navigation systems were apparently jammed by Russia. Traveling to Plovdiv in Bulgaria, VDL’s jet apparently circled for an hour before the pilot took the decision to do things the old-fashioned way and consult the map.

Such an incident targeting a head of not-quite-a-state is shocking to say the least, but serves as a neat metaphor for relations between Russia and Europe in recent years (decades?): European liberal internationalists assume old norms apply -> Russia disagrees and demonstrates that it views violence as a legitimate tool of national policy -> Europeans left stunned.

Some will remember the images of German diplomats guffawing at the United Nations in 2018 as Donald Trump admonished Germany for placing itself at the mercy of Russia for its energy supplies. Fast-forward to 2022 and suddenly Trump’s speech wasn’t so funny, and anyone who cares to bring up a chart of German industrial production can see the fruits of the lack of imagination of Germany’s leaders. Germany’s factories are now struggling to replace lost production for civilian applications with new production for military applications. But how to do this without cheap energy?

So, yes, violence is back as a tool of national policy. Russia is unapologetic about this. So is Israel. So is the United States if you consider the decisiveness of using B-21 bombers to drop bunker busters on Iranian nuclear facilities. Hamas and the Houthis are certainly unapologetic and China has also been stepping up the frequency and scale of ‘rehearsals’ for the invasion of Taiwan while the Chinese navy and coast guard have had semi-regular clashes with the Philippines over territories that China claims as its own through the ten-dash line. Those Chinese territorial claims are not supported by the United Nations Convention on the Law of the Sea, but that is really part of the point.

Despite being permanent members of the UN Security Council, China and Russia have never really fully subscribed to the legitimacy of the post-war global architecture. Many Western leaders continue genuflect to the ‘rules-based international order’ as if it was chiselled in stone and handed down from Mount Sinai. In reality, that rules-based order has always been a US-led order, upheld by US force of arms, and has always been viewed by China and Russia as such. Russia has demonstrated that the it is quite willing to flout the ‘rules’ when its national interest demands it. This does not mean that war is inevitable, but it does mean that it is a policy option that other countries need to dissuade revisionist powers from using. As Bismarck reputedly said “do I want war? Of course not! I want victory.”

Both the United States and China are now interested in re-writing the rules of the road to suit their own interests. The US now sees the liberal economic order as a threat to its position as global hegemon while China seeks to push the US out and establish itself as an Asian hegemon. In the view of the United States, a persistently overvalued dollar and unequal trade terms has offshored production from the US into China (and elsewhere) while the US got hooked on the drug of artificially high living standards courtesy of the strong dollar and the subsidized production of consumer goods in China.

As Scott Bessent China unveils plan for new world order’. However, while team BRICS appears united in grievance against the US order, it is not yet clear that they are offering a coherent alternative. Xi Jinping made his pitch to the global south by encouraging them to embrace “free trade” and announcing that the Shanghai Cooperation Organisation would establish a new development bank to build influence in Eurasia by providing infrastructure loans for green industry. Establishing development banks extending loans in (presumably) Renminbi has the added benefit of de-risking the emerging bloc of the extraterritorial power of the US Dollar. Xi also said he would open up China’s BeiDou satellite system to SCO members as an alternative to the US GPS system (perhaps Ursula von der Leyen will be tempted?).

While the BRICS bloc coalesces towards a new conception of world order and seeks an economic and financial architecture to support it, Western powers seem unsure about the direction of their own political economy. Europe wants to be green but it also wants to re-arm, and the two are not compatible. Far right parties now hold polling leads in Germany, France and the UK as popular discontent at ‘the way things are going’ continues to rise.

European style anti-immigration protests recently broke out in Australia where a Canada style net inward migration rate of ~1.7% at a time where the country can’t house its own young is testing the social fabric. Recent Khemlani loans affair if it turned out to be true.

Whether fact or fiction, the plan does highlight an important point: for economies like Australia that have labor markets at ‘full-employment’, there is simply no surplus labour to do important stuff that needs doing. Labor is a factor of production subject to scarcity, and when scarcity strikes governments take on responsibility for directing the factors of production into their most useful employment. The United States is now doing this through ‘state capitalism’ and cherry-picking high value-add industries for its own economy.

This dynamic poses a question. Is Australia best served by having 55% of school leavers attend university to add to the oversupply of law graduates carrying unserviceable student loan debts? Or would it make more sense to direct the youth into trades training to address the undersupply of builders, tilers, plasterers, welders, farm workers etc etc? These are the trade-offs of economic policymaking under real constraints, but the Australian trade minister recently implied that a more active approach to organising production would not be taken when he said that Australia could be an example to the world by abolishing 500 “nuisance” tariffs.

So, the US is taking a more active role in directing economic activity, the BRICS are seeking to reshape the world order in their own image and Europe is searching for a new model of political economy that simultaneously delivers growth, security and social cohesion. Australia, meanwhile, wants to be an example to the rest of the world by evangelising an economic model that others are rejecting as failed. In this fractious new global environment leaving decisions of what gets produced, where, and by who completely in the hands of Mr Market really would be flying blind.