Peter L. Berger's Blog, page 618

China’s Devaluation: Much More Trouble to Come?

The People’s Bank of China appears to have caught itself in a conundrum of its own making: yesterday it announced a 1.9 percent devaluation of the yuan, and pledged to allow market forces to have more influence on the currency’s value going forward (a move warmly welcomed by the IMF). At the same time, Beijing pledged to keep the yuan stable, and at a “reasonable” level. Today, hewing to its new market-based policy, the PBOC set the midpoint for the currency near yesterday’s low market close. During the day, renewed speculation had the yuan trading another 2 percent down, despite PBOC claims to investors that there was “no economic basis” for further depreciation. Finally, in the last 15 minutes of trading, the central bank instructed state-owned banks to sell dollars in order to prop up the yuan, which ended up down less than one percent on the day—a total of 2.8 percent down since the close of trading on Monday.

But just because China wants to modulate the yuan’s descent does not mean it is unhappy with it overall. As we explained yesterday, China is using a moment when market forces are pushing the currency down to do something it wanted to do anyway in order to stimulate exports. And with that we are looking at a major shift in world markets—one with both economic and geopolitical implications.The fact that leaders in Beijing determined that devaluation is necessary is more evidence that the economic troubles we’ve been seeing in China are more than a blip on the screen. Something serious is happening. Depreciating the currency is a way to re-energize an export-oriented economy that has been running low on growth. China wouldn’t do this if it could avoid it; in the past it took great pride in holding its currency steady as other Asian currencies melted down around it. Avoiding the competitive currency devaluation wars was one of the pillars of China’s claim to being more than just another emerging economy. Yet here China is, diving into the Asian currency wars it has so assiduously avoided.So now China is exporting deflation. Overproduction of key materials and goods in China—the Great Bubble of excess manufacturing capacity that powered much of China’s massive growth but is now a greater and greater burden—is forcing Beijing to reduce the price of its exports so that companies can sell more of their excess production at lower prices abroad.This is going to hit two important economic sectors and the countries who depend on them: there will be additional deflationary pressure on commodities worldwide, and there will also be deflation in the cost of manufactured goods. When China’s currency loses value against the dollar, everything at Walmart gets a little cheaper. That’s good for consumer standards of living, but bad for the firms competing to sell stuff that China makes. The world’s metal producers, Bloomberg reports, are already taking a hit.This increases the pressure on many countries to devalue their own currencies to stay competitive with China. That’s going to be trouble. Many companies in those countries have borrowed in foreign currencies and if their own currencies depreciate that’s going to make those loans harder to repay.There will also be an exodus of capital from China and from countries likely to follow it down the path of devaluation. If your home currency is going to lose value in the next six months, you would be smart to move your money into foreign currency assets—stocks, bonds, and real estate in countries like the U.S. where the currency is expected to rise. Back in July, we noted that a quarter of a trillion dollars of private capital had already fled China. And that’s a feedback loop which can turn into a vicious cycle at the macroeconomic level; capital outflow can increase the pressure on currencies, forcing them to depreciate further, accelerating the capital flight, leading to more depreciation, etc. This in turn can depress stock markets as both foreign and local investors shun local stocks in depreciating currencies. And more trouble on stock exchanges is the last thing China or its neighbors want.If the Great Bubble is really starting to deflate, we are going to see a lot more turmoil in world markets—and, as some observers have noted, it’s going to be that much harder for the Fed to tighten interest rates in the fall.

That’s Close Enough, Thanks

The EU’s “ever closer union” goal isn’t very popular these days. A new Opinium poll asked Europeans from various countries to choose a statement that best described their view of the EU. Here’s a summary of a key finding, via Open Europe:

Only 14% of Brits, 17% of Dutch and 24% of French believe that EU countries “should continue to progress towards ever closer union” and transfer more powers to Brussels – compared to 56% of Spaniards, 54% of Portuguese and 47% of Italians. The poll also shows that 35% of overall respondents think the EU has been handling the UK’s EU referendum “badly”, with only 15% saying the issue has been handled well.

These results underline a dynamic that has been slowly emerging as Brussels has fudged its way through successive crises: The leading powers increasingly seem to regret their tight coupling with Mediterranean countries they see as profligate and irresponsible, while citizens of the southern countries appear to have a weak appetite for breaking away. For a closer look at these dynamics and the resultant political quagmire, see Michael Mandelbaum’s article in our current issue, aptly titled “Euromess.”

U.S. Warming to Russian/Iranian Proposals on Syria?

Syria’s Bashar al-Assad is losing on the battlefield but making gains at the conference table. That appears to be the story behind the story in this morning’s New York Times. That is, the U.S. seems to have moved some way toward the long time Russia/Iranian position that to insist that “Assad must go” is a mistake—even as losses on the battlefield undermine the dynasty’s power on the ground. Key passage:

Of all the recent diplomatic exchanges and openings, none is more important than the apparent new spirit of cooperation between Russia and the United States. Fyodor Lukyanov, chairman of a council that advises the Kremlin on foreign policy, said that conversations were returning to the topic of Syria after a year of exclusive focus on the Iran deal, with each side a bit “less firm” in its position.

“Saudi still believes that Assad should go, but now they are a little less sure that the alternative will be better,” he said in a recent interview with The New York Times. “Russia still believes he should stay, but cannot ignore that the general situation is changing, that the strategic position for Syria is much worse now than before.”

What appears to be happening is that the Obama administration wants to use the Iran nuclear agreement as the beginning of a drive to make Iran something of a “responsible stakeholder” in the Middle East and that, given the disarray of the Sunni coalition and the proliferation of Sunni radical groups, it sees no other way forward.

It also appears that the administration is bringing Russia into its Middle Eastern diplomacy. Not since the Cold War has Russia been this much of a factor in a Middle East dispute. For Putin, this is a big win. Not only does it add considerably to Russia’s prestige; Russia has long believed that Iran and Syria can help it in its battle to keep Sunni radicals out of the Caucasus and southern Russia. Russia also has significant investments in Syria and in the Assad government.In terms of administration politics, this appears to represent the victory of the Jeffersonians over the Wilsonian human rights crowd. Dealing with Assad is not the way people like Samantha Power would normally want to go. But the Obama administration hasn’t had very much luck when it lets the liberal human rights Wilsonian faction in the administration get its hands on the steering wheel: witness the shambolic U.S. attempts to promote the illusory ‘transition to democracy’ in post-Mubarak Egypt, the horror of the Libyan invasion, the pitiful results of American efforts in Syria so far.The direction of Syria diplomacy will not bring much comfort to Saudi Arabia or to Israel. Both countries don’t want to see a deal emerge that leaves an Iran-aligned and Iran-dependent government in Damascus, allied to Hezbollah. But Sunni powers roughly aligned with the Saudis haven’t managed to put together a coherent approach of their own. Unwilling to work openly with Israel, unable to develop fighting forces that can match either the Alawi or the radicals in Syria, the Sunni powers haven’t yet come up with some kind of credible alternative to the current government in Syria, blood-soaked and hated as it is.Iran and its allies have the upper hand in the region, even if Assad isn’t doing that well on the battlefields of Syria at the moment. And with the United States under Obama more willing to reduce its liabilities in the Middle East than to take on any new responsibilities, the Americans are de facto aligning with the stronger regional force. Rather than acting as an offshore balancer that would be trying at this point to help the weaker parties in the region from being overwhelmed, the United States is looking towards a policy of deputizing Iran.We’ll see how that works. Feeding the egos of the ayatollahs and of Putin may or may not be a smart way to conduct American foreign policy. But when the Sunnis can’t do anything constructive on the ground in Syria that would break both ISIS and Assad, and with the United States unwilling to put any real effort into the country, this is where you end up.President Obama’s determination to reduce America’s exposure in the Middle East is stronger now than at any time since his election. Gone is the hope of a fresh start with the Islamic world, gone is the hope that ‘moderate Islamists’ could create, with American backing, a democratic alternative; gone is the hope for the Arab spring. What’s left is the hope that Iran can fill the vacuum left by Sunni failure and American retreat.

The Case for Deterrence by Denial

There are two basic ways to deter an enemy.1 One is to threaten to hurt him if he attacks you or your allies (deterrence by punishment). This form of deterrence depends on fear that the defender will inflict a level of pain that exceeds whatever gains the attacker hoped to achieve through aggression. For deterrence by punishment to work, the defender’s threat has to be credible. He has to possess sufficient lethal capabilities to carry through the threat. His weapons have to be known to be capable of reaching the attacker, evading or overcoming his defenses, and either defeating his forces, devastating his population or both. It also has to be clear that the defender is deeply attached to the object he is defending and what forms of behavior will prompt retaliation. The fuzzier the trigger mechanism, the more room there is for ambiguity, and the weaker the deterrent becomes.

A second way to deter an enemy is to make it physically difficult for him to achieve his objective (deterrence by denial). This form of deterrence also depends on fear, but of costs that will be inflicted during the act of aggression, in the place that it occurs. It seeks to make aggression unprofitable by rendering the target harder to take, harder to keep, or both. To work, the defender has to have sufficient lethal capabilities in or near the likely site of aggression to demonstrate that victory will be either be impossible or difficult to attain. The defender’s capabilities have to be known to be able to inflict substantial pain, not in counter-attack but in defense. This differentiates deterrence by denial from the concept of “tripwires,” which are small forces placed in harm’s way to activate retaliation rather than to inflict pain. There is little room for misinterpretation about the trigger mechanisms in deterrence by denial, since by definition it is activated by physical contact with an invading enemy. Deterrence by denial has been favored by small states, but it can also be used in extended form by a Great Power to protect key pieces of terrain or weaker allies, either as a standalone strategy or in tandem with punishment.For most of the modern era, America’s extended deterrence has been based on deterrence by punishment. This form of deterrence was well matched, both to the tools at America’s disposal and to the nature of the objects it needed to defend. Where Britain in its heyday possessed deterrence mechanisms (the Royal Navy and, later, strategic bombers) that were limited in their ability to reach rivals deep within the Eurasian heartland, the United States has faced no such geographic restrictions in threatening punishment. With the advent of nuclear weapons, it possessed the means to reach and devastate any state threatening its homeland or allies. Indeed, so vast was America’s military edge that it hardly needed to invoke nuclear force to achieve an effective extended deterrent; its “overmatch” in conventional arms was sufficiently wide to deter most challengers. This allowed the United States to secure far-flung alliances across the rimlands of Eurasia while retaining the flexibility to shift attention back and forth from crisis points without undermining its overall strategic position.Why It’s Getting Harder to PunishIt was generally assumed that the underlying logic of security through fear of retaliation, which worked well enough during the Cold War, would be equally valid against whatever assortment of competitors eventually emerged after the Cold War to challenge U.S. primacy. But this is not proving to be the case. America’s international threat environment is evolving in unexpected ways that pose significant challenges to traditional extended deterrence based on punishment. Three changes in particular are likely to erode its effectiveness in the coming years. First, there is the sheer number of competitors that the United States must deter. Rather than managing a contest with one, large ideological opponent, the United States must cope with several powerful rivals simultaneously, two of which possess large nuclear arsenals, all of which have significant conventional militaries, and at least one of which is growing rapidly in relative economic and political power. This reduces America’s overall military edge and muddies the underlying power relationships upon which much of the superstructure of U.S. extended deterrence has rested.Second, America’s rivals are becoming better armed. In the words of one senior Pentagon official, Russia and China are “fielding very advanced capabilities at an extremely rapid pace.” They are investing in many of the types of technology—long-range missiles, stealth, next-generation fighter aircraft, and electronic jamming—in which the United States has long maintained a commanding lead. Both China’s build-up of Anti-Access Area Denial (A2AD) weapons and Russia’s “escalate-to-deescalate” tactical nuclear doctrine are examples of efforts to deprive the United States of escalation dominance in future contests. While they have virtually no effect on U.S. nuclear deterrence, these changes erode the effectiveness of deterrence by punishment by reducing the certainty that America could manage escalation and successfully impose high costs for acts of aggression.2 They increase the presumed reliance of the United States on nuclear deterrence for managing even small confrontations—a recourse that America’s competitors rightly assume it will be loath to use in an era of public aversion to casualties (both inflicting and suffering them).Third and most importantly, America’s rivals are developing tactics for evading retaliatory deterrence. Russia and China have introduced limited-war techniques designed to avoid trigger mechanisms of extended deterrence—for Russia, “jab and grab” land incursions; for China, the creeping militarization of maritime zones. Both techniques operate below the threshold of deterrence by punishment and seek to create territorial faits accomplis that lower the costs of revisionism. Such methods pose serious problems for deterrence by punishment, which is predicated on aggression being identifiable and therefore punishable. In a limited war setting, punishment quickly morphs into compellance—not just dissuading an enemy but dislodging him and forcing a withdrawal from his limited, stealthy conquest. As Thomas Schelling has argued, compellance (“a threat intended to make an adversary do something”) is inherently harder than deterrence (“a threat to keep him from starting something). Limited war shifts the psychological burden of conflict—fear of retaliation—away from the aggressor and places it on the shoulders of the defender—fear of escalation. It puts the defender in the position of perpetually under-responding to ambiguous provocations (and thereby losing control of strategically vital spaces by default) or over-responding (and risking war).Diversifying Deterrence OptionsSo far, America’s response to erosions in its military position has been mainly technological: to bolster its competitive advantages against rivals and thereby shore up the credibility of existing deterrence methods. Attempts at reassuring frontline allies through the deployment of tripwires (most recently, in Eastern Europe); the push to refocus U.S. strategic nuclear doctrine on deterring major war; and some (though not all) of the components of the Pentagon’s third offset are all examples of how the United States is “doubling down” on punishment. These efforts are likely to yield positive results in bolstering key components of retaliation and ensuring that deterrence by punishment remains the backbone of America’s extended deterrent for the foreseeable future. However, as America’s lead in advanced weaponry narrows amid prolonged cuts in defense spending, the United States may face limits to how far it can go in using technology to deter its rivals. Unlike its past responses to the problem of competitor “catch-up” (for example, Eisenhower’s “New Look” and the Offset Strategy of the 1970s), the United States will need to look for other sources of comparative advantage with which to maintain its primacy.One such advantage is geography. America’s possession of extensive security relationships with states along the rimlands of Eurasia offers natural strategic advantages that have not been systematically exploited in post-Cold War strategy. It was hard to employ such states effectively in past U.S. extended deterrence systems, since the very act of threatening punishment to rivals with America’s vast arsenal dis-incentivized self-help among its allies (the famous “free-rider” problem). More often than not, allies were viewed as liabilities, either because they required acts of assurance to maintain or because, if over-assured, they might themselves become sources of provocation (the “entrapment” problem). But as the global geopolitical environment turns predatory, frontline states now have a powerful incentive to do more for themselves in defense: self-preservation. Thus motivated, many are arming and aligning with similarly placed neighbors in an effort to contain large powers.These dynamics create an opportunity for the United States. America’s extensive frontline alliances offer a natural means of pursuing a strategy of deterrence by denial, both as an end in itself for containing growing rivals, and as a compliment to deterrence by punishment. Historically, Great Powers have often employed alliances with states located near rivals in this way. Prior to the nuclear era, denial was a more common way to achieve extended deterrence, since the tools for projecting decisive military force were less reliable. When facing rivals that were numerous or far away, it was often more effective to make it physically harder for them to expand rather than by threatening to punish them. Such denial strategies were especially common among maritime or status quo powers attempting to raise the costs of revisionism in key strategic zones. Since they worked with the momentum of the small states’ desire to remain independent, deterrence by denial had the added benefit of being cost-effective, particularly at moments of power transition.Three Ways to DenyGenerally speaking, there are three ways that a Great Power can achieve extended deterrence by denial. One is to make an ally or piece of territory harder to take. This usually involves placing defensive attributes of some kind in the place that is likely to be the object of the revisionist power’s desire—either using the forces of the patron or, far better, those of the targeted ally. The crucial difference between this approach and the “trip-wires” used for deterrence by punishment is that forces deployed for denial are intended not to die and trigger punishment but to live and inflict pain on the attacker. The most common way to ensure this is to help the frontline ally beef up its defensive properties. The classic example is 18th-century Britain’s policy of providing subsidies and arms to Europe’s smaller states to deter the expansion of continental rivals. Another, bolder method is to help the ally acquire offensive capabilities.3 This requires the ally to be large enough in size and capabilities to attempt a conventional deterrent of its own. France’s alliances de revers of the 17th and 18th centuries, for example, created an extended deterrence based on denial by building a bulwark of aggressive mid-sized frontier states (Sweden, Poland, and Turkey). Through subsidies, advisers, and shared technology, France encouraged these states to adopt eastward-facing offensive postures (Charles XII’s famous exploits were largely funded by France) to keep Russia on the defensive and impede its expansion into Europe proper.A second form of deterrence by denial is to make the revisionist’s coveted object harder to keep. This is usually the best option when the ally in question is too weak to mount a credible defense but possesses sufficient willpower to make it indigestible for an attacker. Since the ultimate goal of revisionist powers is to achieve quick, easy grabs, this strategy seeks to make them prolonged and costly—what could be called the “bitter pill” strategy. Sixteenth-century Switzerland is one such example; another is 20th-century Finland. Both used scrappy defensive techniques and small but well-trained forces to advertise indigestibility to predators. In extended form, this approach can involve a Great Power providing weapons of a type or number that enable an otherwise indefensible state to be capable of waging guerilla war against an attacker and outlasting occupation. Britain used such an approach with the Netherlands in the early 18th century by funding mercenary armies and encouraging the flooding of Holland’s fields; in the early 19th-century, it supplied weapons and fortifications to Portugal to resist French encroachments.The third form of deterrence by denial is to make the ally or territory in question stronger industrially than the attacker. Unlike the methods above, which focus on militarily penalizing an attack, this form of deterrence is long-term and mainly economic. Since a major goal of revisionist aggression is to break alliances, denying them their objective can be aided by strengthening the ties between the target country and its patron. Abundant evidence shows that extended deterrence is most effective when the military relationship between two states is undergirded by economic ties, particularly in strategic industries. A study of 54 cases of deterrence between 1900 and 1980 found that defensive alliances characterized by close political ties and even small amounts of trade succeeded in deterring aggression seven times out of eight, compared to much lower success rates in alliances based purely on military relations. France famously sought to build up the resiliency of its CEE alliances not just by aiding and advising their militaries but by providing investment to build up strategic industries and railways, and to fuel economic growth.Whether by short- or long-term methods, the goal of these strategies is to deter a revision of the overall system by deterring the conquest of specific places. Where deterrence by punishment leaves certain frontline terrain unguarded and thereby involves an assumed sacrifice—both of tripwire troops and the soil of the target state—deterrence by denial seeks to make the conquest of the target an altogether unattractive prospect. The two forms of deterrence are not mutually exclusive; indeed, combining them can strengthen the credibility of both. Having the ability to punish while cultivating the local means to resist creates a virtuous cycle, communicating to the ally that self-defense is not hopeless and to the revisionist that he may have to pay twofold for whatever gains his aggression may yield.Alliances as Denial ToolsAmerica has abundant opportunities to inter-weave denial methods into its wider punishment-based system. Rimland alliances offer natural tools for managing multiple, large Eurasian competitors. In both Europe and Asia, the United States possesses alliances with small states with the motivation to oppose local hegemons. A U.S. strategy to “activate” these alliances as instruments for discouraging attempts at control of important real estate could include all three of the forms of denial mentioned above. It would use the military geography of frontline allies to make them and nearby real estate harder to take. America’s archipelagic Asian allies can employ naval mines, submarines, and an increasingly advanced array of missiles to turn the region’s narrow waterways into clogging mechanisms for impeding Chinese naval expansion. Similarly, in Eastern Europe, allies in the Baltic-Black Sea corridor can be turned into “bitter pills” bristling with anti-tank and anti-ship missiles. Mid-sized states (like Poland, Finland and Romania) can be armed with offensive weapons like the AGM-158 JASSM and Tomahawk missiles to keep revisionists off balance and diverting budgets to defensive capabilities. Tiny but determined allies like the Baltic States can be made harder to hold in an invasion by, for example, offering pre-set U.S. packages of nasty weapons like landmines that are automatically released on the first sign of aggressive behavior. In both regions, a strategy to instigate and organize dense networks of intra- and inter-regional cooperation in strategic industries and R&D would thicken the “hide” of allied frontiers on a longer-term basis.Incorporating denial into the U.S. extended deterrence system would offer important advantages for the United States. Strategically, it would focus scarce resources to the places where conflict is most likely to occur. Technologically, it would play to many of America’s emerging areas of competitive strength, including in defensive weapons like surface, air, and naval missiles favored in the third offset, while prompting greater clarity in Pentagon thinking on the as-yet underexamined role for alliances in the offset strategy. In defensive terms, it would provide tools that, should deterrence fail, are more easily employed to fight and win a conflict than those used for punishment. Geographically, denial would play to America’s latent, underdeveloped advantage: its wide range of frontline allies with the predisposition and location to disrupt rivals’ offensive moves. Organizing these states for stronger self-defense would raise the visible costs of revision without necessarily adding commensurate defense burdens for the United States. By systematically bolstering the denial capabilities of frontline allies, the United States could concentrate its own resources on higher-tier punishment weapons. Strengthening frontline resistance would also reinforce and clarify the trigger mechanisms for deterrence by punishment and help to make extended deterrence as a whole more solvent against hybrid-war threats.Injecting greater emphasis on denial into U.S. strategy could also have a political benefit for America’s alliances. Traditionally, frontline states have had an aversion to patron relationships that are overly reliant on punishment, especially when the patron in question is a maritime power. Unlike retaliation, which can seem remote and beyond control to the state being defended, denial is immediate and in the obvious self-preservation interests of the ally, which therefore has strong incentives to deny the enemy the immediate and narrow objective of conquest. Whereas relying primarily on deterrence by punishment from the patron may weaken the alliance, leading to fears of abandonment and being merely a great-power bargaining chip, joint investment by the patron and ally in denial strengthens the political bonds of the alliance.Most importantly, a greater focus on denial could help to shift the psychological burden of 21st-century conflict back where it belongs: on the shoulders of states that wish to rearrange the international order. Whereas limited-war techniques enable revisionists to believe they can avoid triggering retaliation and thereby get away with an easy victory, denial signals that they will pay a steep price for aggression at the place it occurs, ranging from a sharp rebuff to a war of attrition. From Eastern Europe to the Western Pacific, the goal should be the same: to limit options for easy revisions and to increase the immediate cost and difficulty of grabbing and holding territory. Building up such mechanisms will help the United States avoid the predicament of holding together through compellance what it could not through deterrence. The goal should be to restore a healthy sense of fear in would-be predators. Doing this now, while the century is still young and revisionists are still mulling over their options, will be a far cheaper policy in the long run than waiting for deterrence by punishment to fail and then trying to regain lost ground through coercion.

Sanctions Not the Only Obstacle to Iranian Gas in Europe

Soon after it struck a framework nuclear deal with the West, Tehran turned its gaze west by northwest, eyeing Europe as a huge potential market for its oil and gas. Sanctions crippled Iran’s energy sway in Europe, but as the West prepares to lift them as part of the agreement, Iran is eager to make up for lost time. But as the FT reports, there’s still a long way to go before Iranian gas starts powering and heating European homes and businesses. Naturally, one of the biggest obstacles in Iran’s way is one of Europe’s biggest natural gas suppliers—Russia:

The cancellation of the South Stream pipeline seemed to have knocked Russian efforts to send more gas into southern Europe, but it was quickly replaced with the similar Turkish Stream pipeline. This 60 bcm per year subsea pipeline will compete directly with any effort by Iran to market its gas in Europe.

In fact, Iran has been losing market share to Russia in Turkey, the only gateway market into Europe it supplies. In 2010, Iran supplied around 20 per cent of Turkey’s gas imports, but last year it fell to 18 per cent. Over the same period, Russian gas exports to Turkey have almost doubled to 30 per cent.

Russian efforts in Turkey, inspired by Europe’s rejection of the South Stream pipeline, are going to make it more difficult to get Iranian gas to market. Iran could imitate its neighbor across the gulf—Qatar—and start liquifying more gas and sending it on ships, but there too it will be running up against stiff competition. Tiny Qatar accounts for roughly a third of global LNG trade, a veritable giant in a market that seems already well-supplied, especially with American LNG exports in the offing.

Iran’s oil exports are a different story, as they promise to upset other petrostates both within and outside of OPEC. The oil cartel’s members are already flagging under plunging prices—now trading below $50 per barrel—and will be loathe to see new supplies coming online to contribute to an already full-up market. But there’s another petrostate that may be even more worried than Venezuela or Saudi Arabia. Russia exports to Europe a grade of crude similar to that which Iran produces, and as such its market share is under the greatest threat by resurgent Iranian exports.Iran will hope to hit the ground running with its energy exports, but its chances look a lot better with oil than with gas.

Japan Restarts Its First Nuclear Reactor After Fukushima

Japan is re-starting its first nuclear reactor since it decided to shut down all fifty of them in the wake of the 2011 Fukushima disaster. As workers began getting the reactor ready, hundreds of protestors gathered outside to voice disapproval for the Abe administration’s return to the controversial energy source. The WSJ reports:

Kyushu Electric Power Co. began removing control rods from the No. 1 reactor at the Sendai nuclear power plant in southern Japan at 10:30 a.m. local time. The company said the reactor should begin generating electricity by the end of the week and resume commercial operation by early September following inspections. The plant’s second reactor is scheduled to be brought back online later this year. […]

Prime Minister Shinzo Abe and his government have said they want the reactors back online to cut the nation’s dependence on imported energy. In July, the industry ministry approved a new target that calls for nuclear to account for as much as 22% of the nation’s electricity by 2030. Clean-energy sources will account for up to 24%, according to the program. […]Polls, however, have shown that a majority of Japanese oppose the restarts, and the issue has been a factor in driving down Mr. Abe’s approval ratings. Critics cite the environmental risks in a nation prone to earthquakes and other natural disasters. In addition, efforts to clean up the Fukushima plant and other heavily contaminated areas have been mired by repeated radiation leaks and other issues. The cleanup is expected to take decades as tens of thousands of residents remain displaced.

Nuclear energy made up 30 percent of Japan’s energy mix pre-Fukushima. The country incurred enormous costs trying to make up the energy deficit it incurred by shutting down all of its reactors. It leaned heavily on imports of natural gas, which replaced 44 percent of nuclear’s former contributions but only at great cost, as a lack of pipeline capacity forced Japan to import the more expensive LNG. The region’s LNG spot prices spiked, and the Japanese economy reeled. It is in this context, and with the knowledge that Japan lacks sizable fossil fuel reserves of its own, that Shinzo Abe made the choice to champion the reopening of Japan’s shuttered reactors. But the vociferous anti-nuclear demonstrations and polling data suggest it was not an easy decision politically.

Every energy source entails risks (even those favored by environmentalists). The best we can do is minimize the chance of something going wrong. With nuclear power, the chance of catastrophe is extraordinarily small, but the potential ramifications of the worst-case scenario are enormous—much larger than, say, a fire at a coal plant.For this reason it’s extremely important to site these facilities intelligently. Unfortunately for the Japanese, there aren’t many places that post greater risks to these plants than the Land of the Rising Sun. Situated on the Pacific’s Ring of Fire, Japan is subject to large-magnitude earthquakes, resultant tsunamis, and volcanic activity to boot. It’s not hard to see why the Japanese public is approaching the issue of a nuclear restart with an abundance of caution.Meanwhile, halfway across the world supposedly green-minded Germany also chose to close its nuclear plants after Fukushima. Berlin’s decision, however, illustrates the other side to this debate. Germany, which doesn’t straddle a dangerous tectonic boundary, has little to fear by way of tsunamis and earthquakes—and yet a nuclear disaster caused by them shuttered an entire industry. Prudence and sober risk analysis gave way to misguided fear-mongering.Japan has a difficult road ahead, and world-class safeguards will have to accompany any kind of sustained nuclear restart. There, the nuclear industry is making a lot of progress, especially in its next generation of thorium and molten salt reactors, which incorporate fail-safe designs. For the rest of the world—well, let’s hope it doesn’t draw the wrong lessons from the Japanese experience.

China’s Sly Devaluation

For the past few decades, China’s economic miracle has been a wonder of the world. We’ve seen double digit GDP growth (even accounting for exaggeration in the CCP’s official figures) and the rise of Beijing as a major player in global trade and military power. But after a whirlwind year that saw the value of Chinese stocks more than double, the market is taking some big hits, and the prospects for future growth are dimming.

As we’ve followed closely, President Xi Jinping seems to have been battening down the hatches, looking ahead to a period of major financial instability, pretty much since he took office. Now that the storm appears to have arrived, his government is taking radical steps to stop the damage. After the first few days of the collapse, for example, Beijing froze trading on the vast majority of listed companies; in effect, true to authoritarian nature, the Party simply ordered the market not to decline.And then yesterday, Beijing devalued the renminbi by the largest amount since it switched to its current currency regime in 1994. Calling it a “convenient reform,” Bloomberg offers some solid analysis:

By allowing markets a bigger role in valuing the yuan exchange rate, the People’s Bank of China is ticking off a box in its campaign to internationalize its currency. Central to this plan is a bid to have the yuan accepted by the International Monetary Fund into its basket of reserve currencies, known as the Special Drawing Rights or SDR. That would place the yuan on par with the dollar, euro, yen and British pound, and boost China’s global stature.

China’s central bank has typically kept a tight rein on movements in its currency, setting a daily rate for the yuan and the dollar, sometimes in defiance of market forces.

Market-makers who submit prices for the PBOC’s reference rate will now have to consider the previous day’s closing rate, demand and supply, and changes in major currencies. Previous guidelines had no mention of these criteria.

[…]The yuan’s real effective exchange rate — a measure that’s adjusted for inflation and trade with other nations — climbed 14 percent over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.“The central bank would never admit they are weakening the currency to help exporters, but clearly they’re complaining about the real effective exchange rate’s strength,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “It is a way to kill two birds with one stone.”

China already wanted to devalue the renminbi, which its standing policy had more or less pegged to the dollar, in order to make its exports more desirable for Europe and the developing world: more favorable exchange rates with trading partners equals more exports, and like it or not, Beijing hasn’t been able to overcome the market forces keeping it from moving past the export-driven growth model. So by timing it to coincide with the market’s troubles, Beijing gets to save face. Savvy move.

But even if this sleight of hand works, that doesn’t solve the basic, structural problem underlying the Chinese market’s recent travails, and it raises questions about how Beijing will react when everybody is eventually forced to admit that most of its self-inflicted bubbles have popped. As Einstein is said to have remarked in a very different context “the great miracle of the universe is that there are no miracles.”

Administration Abandons Failed Syria Program

The Obama Administration may quietly be dropping its commitment to the failed, U.S.-run fighter scheme in Syria, which was the cause of much derision recently when 23 of the only 60 men the program trained were captured. The Daily Beast reports:

The Obama administration is still publicly counting on a $500 million rebel army to beat ISIS in Syria. But privately, the Pentagon brass long ago moved past its own proxy force, The Daily Beast has learned. They’ve found another group to fight the self-proclaimed Islamic State instead.

In the eyes of the administration, a better force had emerged—already trained, competent, organized—that posed little risk of abandoning the fight or worse yet, switching sides. They are the Syrian Kurdish militia—the Popular Protection Units or YPG, by their Kurdish initials. And they have successfully wrestled Syrian territory out of ISIS’s hands.

Seeing officials finally move to distance themselves from the training program, even if only in an off-the-record manner, is heartening. The first step to solving a problem, as the saying goes, is to admit you have one, and America’s policy with regard to Syrian forces has had a serious problem lately. As a “senior defense advisor” told The Daily Beast, “I don’t understand why we are still training, other than to inoculate criticism. … [The administration] cannot admit it is a complete disaster.”

But a pivot to the YPG would be far more complicated than it is presented here as being, largely because of our new alliance with the Turks. They have no intention (to put it mildly) of allowing the anti-ISIS fight to create a new Kurdish power in the region. In fact, as Dov Friedman has argued in our pages, Ankara seems to see the campaign against ISIS as an opportunity to crush Kurdish regional aspirations. So the Administration’s trial balloon in this case proposes something completely at odds with its recent move to cooperate with Turkey in Syria.Among the groups that can field real fighters in Syria, Kurdish forces are in many ways the most aligned with America’s interests. It’s good that they’re on the Administration’s radar—and that we’ve (potentially) moved past the farce of the “New Syrian Force.” But this still isn’t a coherent strategy.

Labour’s Suicide by Socialism?

“I do not know if the people would vote for superior men if they ran for office,” Tocqueville once noted, “but there can be no doubt that such men do not run.” How easily those words spring to mind this summer in Britain. Here the opposition Labour party is voting for a new leader to replace Ed Miliband following its worst general election result since 1983. From a dire field, Jeremy Corbyn, the hard left candidate, is the runner with momentum. By common consent, his victory would condemn Labour to another general election defeat in 2020, with the potential for oblivion thereafter.

For Labour, this situation is a self-inflicted wound. Corbyn was supposed to be a joke candidate–the proto-Marxist sacrificial victim put up by the hard left at every Labour leadership election. Unable even to gather the 35 nominations from Labour MPs required to make it onto the ballot, a number of MPs, including former foreign secretary Margaret Beckett, signed his papers in order to give the party a full debate. “They should be ashamed of themselves,” says John McTernan, a former adviser to Tony Blair. “They’re morons.”Those parliamentary “morons” failed to understand that the Labour Party in the country has shifted dramatically to the left. Moreover, given that you only have to pay £3 to register for a vote as a party “supporter,” entryism by extreme left groups such as Militant (not to mention a few mischievous Conservatives) has clearly been going on. Half of those eligible to vote have signed up in the last three months.Even without the fringe element, most party supporters have rejected the center-ground politics of Tony Blair that won three successive elections for Labour between 1997 and 2010. Blairites are now seen as a “virus” in need of eradication. Liz Kendall, the neo-Blairite candidate, is regularly booed at hustings and condemned as a closet Tory. Many look instead to the success of the anti-austerity message of the Scottish National Party (SNP) at home, and Greece’s Syriza and Spain’s Podemos abroad, as a populist way to return Labour to power.That argument might have validity if it didn’t fly in the face of facts. A Labour postmortem into the recent defeat shows that the existing anti-austerity message helped cost the party the general election. “The first hard truth is that the Tories didn’t win despite austerity,” says the report’s author, MP Jon Cruddas, “they won because of it.”Corbyn’s policies, including higher taxes, more public spending, re-nationalization of utilities, scrapping Britain’s nuclear deterrent and a soft line on terrorist organizations, are unlikely to appeal to those middle-ground voters who rejected the party at the last election. Blairite-ultra David Aaronovitch provides a searing summary in The Times of Corbynite policies as a form of “state socialism…a deadening, bureaucratic nightmare, held together only by an antipathy towards America.”And let’s be clear: Jeremy Corbyn loathes the United States and Western “imperialism.” Russia’s incursion into Ukraine? “It is the U.S. drive to expand eastwards which lies at the root of the crisis in the former Soviet republic.” The rise of ISIS? A result of Western military intervention in the region. The UK, he says, would be much better off “not being part of U.S. foreign policy at every step.” Corbyn and his followers profess an admiration for the landmark Labour government of 1945–51, but, as Clement Attlee’s biographer, John Bew, makes clear, their foreign policy is as far removed from Atlanticist tradition of Attlee and Ernest Bevan that constructed the NATO alliance as it is possible to get.If Corbyn is unlikely to be Prime Minister, perhaps his foreign policy stance hardly matters. But with the Conservative government holding such a slender majority in the House of Commons, and every UK military campaign requiring assent from the House, Corbyn, as leader of the opposition, could have a seriously disruptive impact on Britain’s role as a member of the Atlantic alliance.So how has a man who symbolizes the “loony left” and has voted against his own party in Parliament more than 500 times since 1997 now become a genuine contender to be its next leader?Writing in the introduction to the recent Fabian Society report, “Never Again: Lessons from Labour’s Key Seats”, Andrew Adonis, a key figure from the social democratic wing of the party, notes that Labour’s recent general election result was “a defeat in the broad realm of ideas and positioning, not individual policies or leadership and campaign failures.”And here perhaps we get to one reason why Jeremy Corbyn has momentum in the race to be leader. For Corbyn does have ideas, however delusional they may be. Watch the candidates in action at the hustings and you can see his real connection with the faithful.And while Corbyn has a vision for what Britain should look like, his two main rivals, Andy Burnham and Yvette Cooper, hem and haw, offering not much more than bland platitudes. Liz Kendall, meanwhile, who does have ideas and vision, is doomed as the Jon Huntsman of the campaign; everyone admires her except those with a vote.Politics is a war of ideas, and on this occasion a bad idea is on course to trump the “no idea” of the other viable candidates. But the real protagonist in the conflict lies elsewhere. For the rise of Jeremy Corbyn has less to do with the success of the hard left than the intellectual triumph of David Cameron and his strategist-in-chief: Finance Minister George Osborne.Osborne is known throughout Westminster as an ardent student of history, who revels in the high politics of the Victorians. To use the terms deployed by the conservative scholar Maurice Cowling to analyze that era, Osborne has skillfully used both “maneuver” and “rhetoric” to construct the national political debate in the Conservative party’s favor, fighting and winning the last election on the dangerous terrain of austerity, sound finance, and debt reduction. He won the war of words that saw the previous Labour government defined as profligate and incompetent. And by making the UK the best-performing economy among the G7 nations, he has the figures to back up his rhetoric.For Labour that has left two choices: embrace Osborne’s language of austerity as its own, giving it a social democratic twist; or reject it outright. Kendall says do the former; Corbyn the latter. The fact that Kendall looks set to come last tells us where most Labour supporters stand on that debate.All of which is likely to mean that come the next general election, the British people will say “thank you, comrade” and vote for Tocqueville’s “superior men” on the other side. If Corbyn is declared leader on September 12, Labour may be out of power for a generation or more. Worse for Labour supporters, that may even still be the case if either Burnham or Cooper stumbles over the line courtesy of second preferences, so divided does the party look set to become. The winning alliance put together by Tony Blair has self-destructed.Can Labour then pull itself back from the brink? When the movement emerged onto the political stage at the beginning of the 20th century, it did so as the party of the workers in a mass industrial society. Now in our postindustrial age, Labour has been destroyed in Scotland by the SNP, is under attack in its northern heartland from UKIP’s appeal to working class nationalism and the Conservative’s aggressive “northern powerhouse” strategy, and in southern England has apparently given up on those aspirations that Tony Blair understood so well. The party that Labour replaced a century ago, the Liberals, had until that time, in one form or another, been a dominant force since 1688; by 1923 they had been decimated at the polls and were destined thereafter for a minor role in British politics.Political parties, historically speaking, do become irrelevant. Labour members might reflect on that fact when postal voting begins on August 14th.

A Success Turns 50

On Sunday, in a reminder of Singapore’s huge postcolonial success, the country’s citizens gathered to celebrate its 50th anniversary as an independent nation. From Reuters:

The highlight of the day’s celebration, a nearly three-hour long parade in the evening, showcased military vehicles, performances by the island nation’s different ethnic groups, and an aerial show by 50 military aircraft. A 26,000 strong audience gathered at the central stage, along with millions watching on television.

It is the second time this year that Singaporeans have come together to reflect on the national success. The first was after the death of the first prime minister, Lee Kuan Yew, in late March.“At 50 years, as we stand at a high base camp, we look back and marvel how far we have come … ” Prime Minister Lee Hsien Loong, the son of Lee Kuan Yew, said in a televised speech on the eve of the national day.

PM Loong is right to marvel: Singapore is not perfect, but it has come a long way since 1965, when it emerged as an overcrowded, resource-poor nation divided into quarreling ethnic and religious groups and surrounded by larger, hostile states. Thanks to Yew’s leadership, Singapore is now one of the safest, most prosperous, and, from many standpoints, freest societies in the world.

Unfortunately, other nations have not fared so well. Even as Singapore rejoiced this past weekend, the population of North Korea experienced mass hunger. According to the Times of London:

Two thirds of North Koreans now face chronic food shortages amid a government cut in rations and a drought that has destroyed crop yields.

State-sanctioned food supplies have been cut from 410 to 310 grams, with farms struggling to feed the population, the UN says. As well as government mismanagement, El Niño, an abnormal weather pattern caused by warm water in the Pacific, has also played a part. […]“In the poorer rural areas there will be increased malnutrition and even cases of starvation,” as supply slows later this year.

The situation in North Korea is indicative of a larger trend. Wannabe nation builders that fell for the socialist claptrap of the twentieth century have ended up depriving their people of political and social liberty without delivering prosperity—not only in North Korea but in places like Cuba, as well. Had Fidel Castro, for example, been as smart, as forward-looking, and as concerned for the well-being of the poor as Lee Kwan Yew, Cuba would be a near paradise today. And if Yew rather than Stalin or Mao had been the figure who caught the imaginations of post-colonial rulers across Asia, Africa, and Latin America, the world would be a better place today.