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The permeance of global debt

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Lanka will subsist on a diet of perpetual debt

by Kumar David

The thesis of this essay, conveyed within my 1,700 word-mandate, is that the world economy has entered a phase of near universal debt. Lanka’s inexorable overload of domestic and foreign debt is part our own making part footnote of the global story. Everywhere, mighty USA and European Union included, the state is mired in debt that will not vanish so long as Finance Capital (FC) rules the world. The surpluses created by economic activity are amassed by a few institutions and individuals. Thomas Piketty drew attention to inequity of wealth and income. The market capitalisation of the world’s largest 2,000 companies is $100 trillion, but the value of all the property (land, houses, other fixed assets) of the poorer 50% of the world’s population is just $10 trillion. The heft of bank balance sheets, private-equity, mutual and hedge funds, pension & social welfare coffers, sovereign wealth funds and holdings of personal wealth, leave one dumb struck by their magnitude. FC rules the world.

Recently, post the 2009 recession, Central Banks including especially the Fed in the US expanded money supply not by billions but by trillions. Governments issued bonds, that is borrowed from FC’s (money-market) gigantic holdings to splurge on fiscal deficits or “sold” Treasury Bonds to Central Banks, which printed money (electronically) to “buy” on never-never terms. Debts to Central Banks will never be repaid, simply rolled over in perpetuity. Central Banks also ‘Quantitative-Eased’ hundreds of billions to banks and private funds to lubricate asset purchases (equities and property) which merely ballooned an asset price bubble and exacerbated wealth inequality. I don’t want to stud this piece with statistics which readers will find easily enough on the Internet and will limit myself to three numbers. The US national (government) debt of $26.5 trillion exceeded US GDP during 2020 and will not decline in the foreseeable future – in Japan it’s 230%. Second, global government debt is $60 trillion but global GDP in nominal (not PPP) terms is $75 trillion. The third point is that the total debt of non-financial corporations, globally, is about 95% of global GDP according to the IMF.

 

A nominal currency (not PPP) comparison

This essay is intended for my non-specialist readers and the data gives a broad idea of magnitudes and distributions. It is not easy to gauge indebtedness of financial institutions as reliable data is hard to come by. And it is meaningless to tot up household debt globally because $1,000 has a different meaning for say the denizens of the USA as against an Indian or an Indonesian. The idea I would like you to take away is not only that States and Corporations are deeply mired in debt, but more important things will get worse not better in the 2020s decade. This is commonplace in countries where productivity is low and which will never export enough to cover imports plus investment for capital projects plus surpluses to accommodate graft for the political classes. But I put basket cases to a side to deal with chronic diseases of the mighty. I cannot within the confines of this essay deal with the US, the EU and China, the big three whose capital shapes the world, and I have to limit this essay mainly to the US

Classical Keynesianism held that when demand and employment were low and economic activity in decline, the state should intervene and prime the pump with monetary and fiscal injections. ‘Monetary’ means to hold interest rates down and lend (print) to would-be investors; fiscal stimulus is big spending by governments to build infrastructure and create employment. Roosevelt’s New Deal helped but it was really WW2 (capitalism loves wars, armaments production and sales) that did the trick. In theory, economic revival should allow the government to recoup its outlay via higher taxes and duties. The “Keynesian multiplier” was said to be greater than one. It worked in the glorious boom from 1945-1970 when capitalism shone and socialist ideas were put away in a dog-box. But Keynes-Thought lost its shine after the oil-shocks of the 1970s and welfare capitalism slumped into Stagflation – economic growth was stuck in the mud; high inflation could not be reduced and high unemployment persisted. The world did not learn a lesson and turn against capitalism. On the contrary, there came neo-liberalism; Regan, Thatcher, Pinochet and JR slashing welfare, smashing trade unions, privatising and swinging political philosophy to the far right. Except Pinochet, mostly within the bounds of democracy unlike ultra-right populism today.

The gurus of neo-liberalism like Heinrich Hayek, Robert Barro and Robert Lucas, theorised that the Keynesian-multiplier was less than one. Barro father of the now discredited ‘rational expectations theory’ said that if the state spent more, people will realise that higher taxes were on the way and would spend less, erasing the hoped for increase in demand. Nothing of the sort is happening today; reality has stood ‘rational expectations’ on its head. The US housing market is rising because of low interest rates (interest rates are negative in Japan). Consumer spending remains undamped without engendering inflation because the US consumer is tapping into a global, mainly Asian, dirt cheap by US prices, one-billion worker labour-market churning out goodies for pampered North American and European consumers. Inflation in the Eurozone is negative; Japan is in perpetual deflation. Fifteen dollars per hour! An Asian or south of the US-border worker will be lucky to take home $15 (LKR 2800) a day. What Barro and his ilk failed to take into account was much-integrated global goods, services and labour markets. US inflation stays stubbornly low because producers for the US market de facto pay minimal wages to their producers (workers). In any case governments and Central Banks can’t stimulate the economy in perpetuity, you can’t defy gravity forever.

Demand is slack in advanced countries because the one percent rich can only splurge that much on consumer goods and prefer to invest in assets, and secondly production companies are risk-averse in the face of Asian competition hence domestic investment in manufacturing remains weak. The pre-COVID picture was bleak since state revenue was slack in the rich world due to slow growth, and it was falling in the US thanks to Trump’s tax handouts to the rich. Post-COVID expenditure has risen even further due to large expenses on medical and subsistence grants and unemployment payments. Hence pressure for trillion-dollar stimulus packages. The end point is that substantial fiscal deficits have become a permanent feature. In the US for example the fiscal deficit for 2020 and 2021 taken together will be three to five trillion dollars. There is no way out except to borrow-print-hold interest rates low or negative, and live with debt for eternity. Eurozone stimulus will be hundreds of billions per years for many more years. This nexus of extra-loose monetary policy and unescapable fiscal deficit blurs the divide between monetary and fiscal policy; they merge. Government borrowing without constraint has got a new name, Modern Monetary Theory (MMT). Adherents of MMT dismiss concerns that excess borrowing will induce inflation or will bring countries to the brink of an abyss. They have no fear that if interest rates go up governments will have to default or that the financial system will die in convulsions.

I need to repeat the thesis that underpins my essay before moving on: The world economy has entered a period of universal debt – government, corporate and household. I now need to say a few words about high-finance in China; I am avoiding the term finance-capital (FC) when dealing with China because how financial interactions will unfold in the context of a state-led economy cannot be foreseen yet.

High-finance is moving into China on a not insignificant scale. I am on tenuous ground, but I make a ball-park guess that about 10% of global high-finance is networked with China – add 5% to 10% if Hong Kong is included. True, New York, London, Tokyo and Frankfurt dominate bank, investment-fund and equity-market capital. High-finance however is on the move; asset managers (BlackRock and Vanguard), giant investment banks (JP Morgan Chase) and others are setting up shop in China (HSBC is already there), and Ant Group’s Hong Kong stock market launch later this year will be the largest ever IPO, eclipsing Saudi oil giant Aramco’s recent listing. Let us imagine that global high-finance has a quarter of its roots in the PRC by 2030. Remember that China took over as manufacturing workshop of the world in 20 years from 1980 to 2000; finance is a great deal more fluid than industry.

High-finance will be affected if the reach of China’s financial sector becomes even half as big as its global manufacturing. Some of the influences that will underpin change in the decade of the 2020s are easy to discern. The stranglehold of the US dollar as world reserve currency and mechanism of payment will need to be broken. Within five years an alternative global payments system and a currency based on two or three of the following, gold, yuan, yen, Euro and US$, will need to be initiated. (The US is the only country that can run eternal deficits, print mountains of money and export its economic problems because the world remains hungry for dollars till the value of the dollar declines). Second, the world needs other payments mechanism to overcome the US stranglehold known as sanctions – Cuba, Iran, Hong Kong, China, Venezuela, Turkey and Russia are among affected countries. Third, Belt & Road expenditure will be facilitated by an alternative global currency and banking and payments mechanisms.

A few words about Lanka before I sign off. The merging of monetary and fiscal policy is already advanced. Prof Lakshman’s task is to stay on the phone borrowing from whoever will lend and burning the midnight oil ensuring that the printing presses keep rolling. We are familiar with Lanka’s Central Bank borrowing billions again and again from China, India, the IMF or money-markets to repay China, India, the IMF or money-markets, again and again! Debt keeps growing as interest compounds while capital indebtedness persists. The balance of payments will remain in the red if not forever, for the foreseeable future. I don’t know it can be reversed both because governments need to survive politically and there is no big-enough feasible economic strategy. I am certain China, India, Japan and the US will not let us sink on the balance of payments issue since none of them wants a chaotic and anarchic country in this geographic location. For this reason I do not see sudden collapse but slow irreversible decline.

This essay has turned into heavy reading; I feel sorry for myself. No one pays attention to well researched stuff that is not simple to skim and digest. Anything on the Sinhala-Tamil brawl or derogatory of persons, regimes or regime-opponents draws stampeding crowds. Oh well, what to do!



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Sinharaja world heritage

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Conservation Outlook Assessment: Significant Concern

By Professor Emeritus Nimal Gunatilleke

Continued from Yesterday

 

Water diverted from Ampanagala reservoir to Muruthawela will be used to meet the irrigation deficit of Muruthawela and Kirama Oya systems and the balance will be transferred to Chandrika Wewa, through existing LB canal of Muruthawela scheme up to 13.8 km and a new canal of 17.0 km. After that, the water requirement of Hambantota harbour is to be transferred to Ridiyagama tank through the Walawe river and Liyangasthota anicuit. However, due to the extreme length of the diversion through the three-river basins of Nilwala, Kirama Ara and Urubokka Oya, it will lead to a massive conveyance losses of the diverted water while on the way to the Walawe basin. Furthermore, enormous costs associated with its construction, a failure to fully realise the intended outcomes due to a shortage of water budget will simply be a burden that Sri Lanka cannot afford with her current economic condition, according to Eng. Prema Hettiarachchi. It may be worth recording that the water ingress into the grouted tunnel of the Uma Oya near Ella has still not been fully repaired, even though the Uma Oya project is nearing completion. An expensive lesson to be learnt on the nature of the weathered geological structure, lineaments and implementing its unexpected and costly mitigatory measures which will eventually to be paid back by this and future generations of tax payers of this country.

According to the Irrigation Department web site postings, Mahaweli Consultancy Bureau has initiated the Environment Impact Assessment (EIA), but due to the unavailability of concurrence of the Forest Department, revised TOR has not been issued by the CEA. Therefore, due to the unavailability of updated TOR, the EIA study has been delayed.

Environmentally, the most contentious issue highlighted in the news media is the proposed construction of a RCC dam at Madugeta to build a reservoir for which around 79 ha of forested (and some agricultural) lands in Sinharaja and a portion of prisine riverine forest in Dellawa would be inundated. On the Sinharaja side of the proposed Madugeta reservoir (right abutment) at present there are home gardens and small-scale tea plantations in addition to good riverine forests. In contrast however, proportionately a larger area of luxuriant forest of Dellawa, which is a part of the new ‘Sinharaja Rain Forest Complex’ would go under the chain saw for this reservoir construction (left abutment). The Geo-engineering report of May 2019 on GNDP has revised the siting of the dam to a more favourable location with supposedly reduced impacts but they forewarn that the three core-drilling along the proposed dam axis that had to be temporarily abandoned due to protests made by the villagers, need to be completed to confirm the geological suitability for the dam site.

 

Are there any Environment-Friendly Alternative Options?

As an alternative site for a dam on Gin Ganga, Eng. Nandasoma Atukorale (Specialist Engineer [Hydropower]) has proposed a location at the confluence of Mahadola with Gin Ganga at the village of Mederipitiya, way back in 2006. According to him, the riverbed at this site is 261 masl and have a catchment area of 132 km2. He proposes the construction of a 35 m high concrete gravity type dam that would form a reservoir with a storage capacity of 65 million cu.m and a potential discharge of 320 million cu.m of water annually which could divert 293 million cu. m of water to the SE Dry Zone. Most importantly, this region passes through a relatively narrow section of the river which is ideally suited for a dam according to him. However, geological suitability and socio-economic impacts of local communities need to be investigated, beforehand.

Quite interestingly, Eng. Athukorale claims that ‘although it is not economically very attractive, another 200 million cu.m of water could be diverted to the Nilwala basin by constructing a dam across Gin Ganga at the downstream of the confluence with Dellawa Dola at the village of Madugeta, with an 8000 m long tunnel which could be considered at a later stage provided further water shortages are experienced in the area’.

 

Now that the proposed Madugeta reservoir is receiving heavy criticisms from the environmental front, wonder whether Mederipitiya option proposed by Eng. Athukorale could be revisited for the diversion of Gin-Nilwala river water to the SE Dry Zone.

In a research paper titled ‘Comparison of Alternative Proposals for Domestic and Industrial Water Supply for Hambantota Industrial Development Zone’ Eng. Prema Hettiarachchi makes a comparison among three irrigation projects Kukule Ganga, Gin-Nilwala and Wey Ganga to convey water from the SW wet zone to SE dry zone.

She proposes yet another option that is probably still on the drawing boards to be considered which is the Wey Ganga diversion in Ratnapura District. According to her, this could meet the industrial and drinking water requirement (154 MCM + drinking water) of Hambantota metropolitan area at a significantly lower cost and with less damage to the environment. Further, there is a possibility of augmenting this scheme by diverting a part of Kalu Ganga catchment at a later stage.

Eng. Hettiarachchi further states that ‘by comparing the workload, it could be estimated to be nearly one third that of the Gin-Nilwala diversion. The Wey Ganga diversion can be carried out at a significantly lower cost by local agencies. That can also address the water scarcity of Hambantota metropolitan area including the requirements of international harbour and proposed industrial development zone with the relatively less environmental damage which is a major issue with respect to large scale projects. Construction period will also be less since the workload is less and can be carried out by the local agencies’.

What I have strived to show with this detailed irrigation engineering information available on public domain in the form of research publications, is that the Madugeta reservoir option is not the only one available for taking water from the wet zone rivers to the SE Dry Zone which is indeed a legitimate requirement for agricultural and industrial development of that region.

Pre-feasibility studies have been conducted on these options since 1968 and a considerable wealth of technical information is already available with the Irrigation Department. Apparently, according to knowledgeable irrigation engineers, there are more environmentally friendly, and cost-effective options with greater assurance of water conveyance to the SE Dry Zone available for consideration. It is often the case that during pre-feasibility studies of these large engineering projects, environmental concerns are given the least priority. Steady supply of water during extreme drought events which are becoming more frequent depends very much on the nature of the vegetation cover of the watershed area. These environmental aspects need to be critically evaluated before such costly projects are designed. As an example, although, the major engineering work of the Uma Oya project has been almost completed, its cost-effectiveness is yet to be seen with a denuded watershed, a potential of heavy soil erosion on top of the unexpected heavy expenditure on tunnel boring and other engineering works.

Biologically speaking, the Dellawa Forest Reserve is an integral part of Sinharaja Rain Forest Complex representing the pristine climax forest vegetation of SE wet lowlands and provide a vital connectivity link to adjoining Diyadawa forest of equal significance via the remains of Dombagoda forest. Therefore, clearing a riverine strip of this forest for the construction of Madugeta Reservoir would lead to an irreparable and irreplaceable damage to its characteristic riverine/flood plain forest vegetation.

On the other hand, pledging a reforestation initiative of a much larger area with Hevea rubber as a compensatory measure proposed by the political administration is totally unacceptable. Preserving intact forests in protected areas has no substitutes or replacements. Furthermore, the Natural Heritage Wilderness Area act and the binding articles of the UNESCO Convention on Protection of the World Cultural and Natural Heritage to which Sri Lanka is a signatory, clearly state that causing direct or indirect damage to a natural heritage is legally not permissible.

In summary, the Sinharaja World Heritage Site is already in a state whose biological values are threatened and/or are showing signs of deterioration and significant additional conservation measures have been recommended to restore these values over the medium and long term. Adding more threats like the construction of reservoirs inside protected areas at this stage would inevitably downgrade the values further to a ‘critical conservation outlook’ which is not what the citizenry of Sri Lanka and the world at large would acknowledge as ‘sustainable development’.

The author of this article is a member of the National Sustainable Development Council of Sri Lanka and he thanks Dr Jagath Gunathilaka of Peradeniya University for providing the geotechnical information described herein. The author can be contacted at .)

 

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US seeking way out of Afghan killing field

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As the Biden administration makes its initial moves to extricate the US’ remaining security forces personnel from Afghanistan, it would do well to ponder on former US President John F. Kennedy’s insightful comment on foreign policy: ‘Domestic policy can only defeat us; foreign policy can kill us.’ This is a rare nugget on the nature of foreign policy.

Considering the high costs, human and economic, a country could incur as a result of blundering on its foreign policy front, Kennedy could be said to have spoken for all countries. However, there is no denying that the comment is particularly applicable to expansionist powers or ‘hegemonic’ states.

Sensible opinion is likely to be of the view that the US decision on quitting Afghanistan should have come very much earlier; may be a couple of years after its bloody misadventure in the conflict and war-ridden country. Considering the terribly high human costs in particular the US’ 20 long years in Afghanistan have incurred, the US could be said to have committed one of its worst foreign policy blunders, overshadowing in severity the blood-letting incurred by the super power in Vietnam. However, in both theatres, the consequences for the US have been of unbearable magnitude.

The US death toll speaks for itself. At the time of writing more than 2,300 US security forces personnel have been killed and over 20,000 injured in Afghanistan. Reports indicate that over 450 Britons have died in the same quagmire along with hundreds of similar personnel from numerous other nationalities. Apparently, it took an exceptionally long period of time for the US to realize that Afghanistan for it was a lost cause.

The lesson that the US and other expansionist powers ought to come to grips with is that it would not be an ‘easy ride’ for them in the complex conflict and war zones of the South. The ground realities in these theatres are of mind-boggling complexity and Afghanistan drives this point home with notable harshness. Power projection in South-west Asia and persistence with its ‘war on terror’ were among the apparent prime objectives of the US in Afghanistan as well as in Iraq but what the US did not evidently take into consideration before these military involvements were the internal political realities of these countries that are not at all amenable to simplistic analyses and policy prescriptions.

The Soviets ought to have come to grips with some features of the treacherous political terrain presented by Afghanistan in the late eighties but their principal preoccupations were related more to the compulsions of the Cold War. Simply put, the Soviets were bent on preserving the ‘satellite’ status of Afghanistan and their war effort was aimed at this in the main. Preparing Afghanistan for democracy was not even least among the Soviet Union’s concerns, of course.

However, the same does not apply to the US. The latter helped the Mujaheddin in the task of getting rid of the Soviet presence in Afghanistan but its aim was also to have a US-friendly regime in Kabul that would be a veritable bridgehead of US power and influence in the region on a continuous basis. In other words, the US expected the regime which replaced the Soviets to be pro-Western and essentially democracy-friendly. The US did not in any way bargain to have in Afghanistan Islamic fundamentalist regimes whose political philosophies were the anti-thesis of democracy as perceived in the US and practised by it.

However, the Islamic fundamentalist Taliban regime which eventually came to power in the mid-nineties in Afghanistan, once the Soviets withdrew, defied all Western expectations. As is known, the Taliban was not only repressive and undemocratic but was staunchly opposed to everything Western. There were no hopes of the Taliban working towards Western interests. Besides, the US did not expect to see in Afghanistan a country dangerously divided on ethnic, tribal and religious lines. The problems of Afghanistan have been compounded over the years by the coming together of the Taliban and the Al-Qaeda and these groups have world wide Islamic fundamentalist links.

It has been the aim of the US to have in Kabul religiously moderate, pro-democratic regimes but as developments have proved over the past few decades these administrations have not been in a position to hold out against the Taliban. In fact, it is the Taliban that is veritably at the helm of power in Afghanistan currently and years of futile attempts at trying to contain the Taliban have brought home to the US and its allies that they have no choice but to talk to the Taliban in order to secure some respite to effect ‘an honourable exit’ from the bloodied land. This is where matters stand at present.

However, as pointed out by commentators, it is the Afghan civilian population that has suffered most in the decades-long blood-letting in the country. Conservative estimates put the number of Afghan security forces personnel killed in Afghanistan at around 60,000 to date and the number of civilians killed at double that figure.

Accordingly, the Afghan people would be left to face an uncertain and highly risk-riddled future when the last of the US security forces personnel and their allies leave Afghanistan in September this year. The country would be left to its own devices and considering that the Taliban will likely be the dominant formation in the country and not its legitimate government, the lot of Afghan civilians is bound to be heart-rending.

There is plenty to ponder on for the US and other democratic countries in the agonies of Afghanistan. One lesson that offers itself is that not all countries of the South are ‘ready for democracy’. This applies to very many countries of the South that already claim to be democracies in the Western sense. Southern ‘democratic’ polities defy easy analysis and categorization in consideration of the multitude of identity markers they present along with the legitimacy that they have achieved in the eyes of their states and populations. What we have are dangerously volatile states riddled with contradictions. Relating to them will prove to be highly problematic for the rest of the world.

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The Soul

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The Soul (also known as Ji hun) is based on the sci-fi novel ‘Soul Transfer’, written by Jiang Bo in 2012. The novel was widely popular and inspired director Cheng Wei-Hao to adapt the tale into a movie. The story is about a married couple who are determined to uncover the truth behind strange activities in their community. According to the official synopsis for the film from Netflix, while investigating the death of a businessman, a prosecutor and his wife uncover occult secrets as they face their own life-and-death dilemma. The film stars Chang Chen, Janine Chang and Christopher Lee among others.

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