(2014-12-29) Hunt The Clash Of Civilizations

Ben Hunt: The Clash of Civilizations. Lots of quotes this week, particularly from my two favorite war criminals – Samuel Huntington and Henry Kissinger. Everyone has heard of Kissinger, fewer of Huntington, who may have been even more of a hawk and law-and-order fetishist than Kissinger but never sufficiently escaped the ivory towers of Harvard to make a difference in Washington.

But Huntington’s “Clash of Civilizations” argument is not just provocative, curmudgeonly, and hawkish. It is, I think, demonstrably more useful in making sense of the world than any competing theory, which is the highest praise any academic work can receive. Supplement Huntington’s work with a healthy dose of Kissinger’s writings on “the character of nations” and you’ve got a cogent and predictive intellectual framework for understanding the Big Picture of international politics. It’s a lens for seeing the world differently – a lens constructed from history and, yes, game theory – and that’s what makes this a foundational topic for Epsilon Theory. (foreign policy)

Huntington and Kissinger were both realists (in the Thucydides and Bismarck sense of the word), as opposed to liberals (in the John Stuart Mill and Woodrow Wilson sense of the word), which basically just means that they saw human political history as essentially cyclical and the human experience as essentially constant. Life is fundamentally “nasty, brutish, and short”, to quote Thomas Hobbes, and people band together in tribes, societies, and nation-states to do something about that.

The central point of “Clash of Civilizations” is that it’s far more useful to think of the human world as divided into 9 great cultures (Huntington calls them civilizations, but I’ll use the words interchangeably here) rather than as 200 or so sovereign nations. Those cultures – Western, Orthodox (Russian), Islamic, African, Latin American, Sinic (Chinese), Hindu, Buddhist, and Japonic – are persistent and profoundly influential in ways that national borders and national institutions aren’t.

The West may very well want to impose the practices and institutions of free markets and free elections for its own self-interest, and China may want to adopt the practices and institutions of free markets (but not free elections) for its own self-interest, but the logic of self-interest is a VERY different thing than the triumphalist claim that the liberal ideas of Western free markets and free elections are “naturally” spreading throughout the world.

What a realist recognizes is that our personal vision of how we would like the world to be is not an accurate representation of The World As It Is, and – as Huntington wrote – it’s false, immoral, and dangerous to pretend otherwise. The World As It Is today includes the birth of an Islamic Caliphate, effectively erasing Western colonialist borders from Iraq to Syria to Libya as it spews anti-modern carnage. The World As It Is today includes the violent sundering of Ukraine along Orthodox/Western cultural lines. The World As It Is today includes an insane Sinic theocracy in North Korea with nuclear weapons. The World As It Is today includes a Japonic culture that is, in a very real sense, dying. Is a realist happy about any of this? Is a realist satisfied to shrug his shoulders and retreat into some isolationist shell? No, of course not. But a realist does not assume that there are solutions to these problems.

Kissinger wasn’t kidding when he said that there were two and exactly two solutions to international problems: 1) hegemony (i.e., empire) over the opposing Civilization, or 2) balance of power with the opposing Civilization.

The problem, of course, is that Door #1 is awfully expensive

Are there aspects of The World As It Is where you ARE prepared to pay the high price of empire to prevent a balance of power equilibrium? It’s a short list for me, but yes, there is a list, headed by the preservation of Israel and South Korea as (largely) Western outposts in the middle of non-Western cultures. Is nation-building in Afghanistan on the list? Don’t make me laugh.

I think the crucial issue here (as it is with so many things in life) is to call things by their proper name. We’ve mistaken the self-interested imposition and adoption of so many Western artifices – the borders between Syria and Iraq are a perfect example, but you can substitute “democracy in Afghanistan” if you like, or “capital markets in China” if you want something a bit more contentious – for the inevitable and righteous spread of Western ideals on their own merits.

here’s the kicker: change is coming. The Clash of Civilizations is not going to get better in 2015. It’s going to get worse. Why? Because for the past five years we have had a US government that was willing to pay the high price of empire to extend its monetary policy hegemony over the entire world to save the infrastructure of modern Western civilization: the US banking system and its collateral assets. (monetary policy)

What happens in the rest of the world now that the peace-keeping and price-raising and prosperity-bringing delivered by five trillion dollars in asset purchases … stops?

I don’t think it’s an accident that Ukraine starts ripping itself apart as the largest monetary experiment in the history of man starts to wind down. Or that ISIS starts to remap the entire Middle East. Or that North Korea attacks Sony. Or that the price of oil drops by half as OPEC faces its greatest existential threat. Did the Fed cause these events? Of course not. But they’re not unrelated. They’re all part of the fabric of global deleveraging. This is what happens when you have a global debt crisis and politicians respond to maintain the status quo by any means necessary

The market flash points for 2015 are not limited to the obvious suspects, like Ukraine and ISIS.

The non-obvious suspects I’m looking at are countries that, like Ukraine, find themselves with one foot in one civilization and one foot in another but, unlike Ukraine, are much more central to global markets. Those countries are Greece, Turkey, Iran, Egypt, and South Korea.

judging from how little it is discussed in the Western press it sometimes seems like no one cares about South Korea, and that’s a mistake. No country on earth is split between more civilizations, and no country is as sensitive AND vulnerable to the clashes that are coming down the pike.

What scares me about the Clash of Civilizations is that the three leaders of the three biggest civilizations – the US (Western), China (Sinic), and Russia (Orthodox) – will misplay their hands and take on another civilization directly or, worse, take on each other, and that will vaporize the Narrative of Central Bank Omnipotence in a nanosecond. The existential risk here for markets is not that China/Russia/Europe/America might “collapse”, whatever that means. No, the existential risk is that the great civilizations of the world will be “hollowed out” (2014-03-30-HuntHollowMenHollowMarketsHollowWorld) internally, so that the process of managing the ten thousand year old competition between civilizations devolves into an unstable game of pandering to domestic crowds rather than a stable equilibrium of balance of power.

I’ll just introduce two key game theoretic concepts at the core of Kissinger’s warning.

First, the proliferation of the most dangerous game of all – Chicken. When Kissinger writes about how “the search for equilibrium risks giving way to a testing of limits”

Second, the dumbing-down of all political games into their most unstable form – the single-play game.

there’s a secret to solving the Prisoner’s Dilemma – play it lots of times with the same players.