I’ve followed Chris’s work for many years, and come to admire his capacity for seeing around corners with unusual prescience. He was warning of a housing bust, and explained precisely how it would play itself out, fully two years before the reality dawned on everyone else.
Here is why I think his new book is important. In the last decade, something astonishing has happened that has escaped the attention of nearly every American citizen. In the past, and with good reason, we were inclined to imagine that if we were living here, we were living everywhere. We were used to being ahead. The trends of the world would follow us, so there wasn’t really much point in paying that close attention. This national myopia has long been an affliction, but one without much cost. Until very recently.
One symptom of the change is that it used to be that the dollars in your local savings account or stock fund paid you money. The smart person saved and got rewarded. It seemed like the American thing to do. It is slowly dawning on people that this isn’t working anymore. Saving alone no longer pays, thanks largely to a Federal Reserve policy of zero-percent interest.
But that’s not the only reason. There’s something more fundamental going on, something that Mayer, author of the absolutely essential and eye-opening book World Right Side Up, believes is going to continue for the rest of our lifetimes and beyond. The implications of his thesis are profound for investors. It actually affects the lives of everyone in the digital age.
Mayer points out that sometime in the last 10 years, the world economy doubled in size at the same time the balance of the world’s emerging wealth shifted away from the United States and toward all various parts of the world. The gap between us and them began to narrow. The world’s emerging markets began to make up half the global economy.
When you look at a graph of the US’s slice of global productivity, it is a sizable slice, taking up 21 percent, but it is nothing particularly amazing. Meanwhile, emerging markets make up 10 of the 20 largest economies in the world. India is gigantic, larger than Germany. Russia, which was a basket case in my living memory, has passed the UK. Turkey (who even talks about this country?) is larger than Australia. China might already be bigger than the United States.
Check these growth rates I pulled from the latest data, and compare to the US’s pathetic numbers: Malaysia and Malawi: 7.1%; Nicaragua: 7.6%; Dominican Republic 7.8%; Sri Lanka: 8.0%; Uruguay, Uzbekistan, Brazil, and Peru: 8.5%; India: 8.8%; Turkey and Turkmenistan: 9%; China: 10%; Singapore and Paraguay: 14.9%.
Then there’s the measure of the credit-default swap rating, which is a kind of insurance against default. The French rate is higher than Brazilian, Peruvian and Colombian debt. In the last 10 years, the stock markets of those Latin American countries far outperformed European stock markets. Also, many emerging economies are just better managed than the heavily bureaucratized, debt-laden economic landscape of the US and Europe. As for consumption, emerging markets have already surpassed the United States.
“These trends,” writes Mayer, “will become more pronounced over time. The creation of new markets, the influx of hundreds of millions of people who will want cellphones and air conditioners and water filters, who will want to eat a more varied diet of meats and fruits and vegetables, among many other things, will have a tremendous impact on world markets.”
Why does he see the trends as creating a “world right side up”? Because, he argues, this represents a kind of normalization of the globe in a post-US empire world. The Cold War was a grave distortion. In fact, the whole of the 20th century was a distortion too. Going back further, back to 1,000 years ago, we find a China that was far advanced over Western Europe.
I read Mayer’s prognostications with an attentive ear, for several reasons. His book is not the result of thousands of hours of Internet surfing or cribbing from the CIA World Factbook. He is an on-the-ground reporter who will go anywhere and do anything for a story about emerging wealth. The result is the kind of credibility that can’t be gained any other way.
But there is another reason. Mayer is often cited as one of a handful of people who saw what was happening in the housing market in the mid-2000s and issued several lengthy and detailed warnings. Not only did he foresee the bust, but he explained why the boom was taking place. He saw a perfect storm brewing with a combination of subsidized loans, too-big-to-fail mortgage agencies and a Federal Reserve policy that was designed to distort capital flows. He called it like few others.
This is not because he is a magic man. It is because he is schooled in solid economic theory — this becomes obvious in page after page — and also because he is intensely curious to discover the workings of that theory in the real world. In his way of thinking, if we can’t understand or expect change, we can’t understand markets, much less anticipate their direction.
Another thing: Mayer is less interested in big aggregates like GDP (and other such “economic monstrosities”) and more interested in taking a “boots-on-the ground view, a firsthand look.” His aim: “stay close to what is happening and what we can understand in more tangible ways.” And he seems close to everything: cement factories, the hotel industry, ranches and farms, coal and cellphone companies, financial houses, glassmakers, water purification companies — all the stuff that makes up life itself.
And what he discovers again and again are localized institutions that are cooperating globally (trade!) to build capital, wealth and new sources of progress that no one planned and hardly anyone anticipated. Here is the story of the building of civilization as it has always happened in history, but tracked carefully and precisely in our times.
In this book, he uses this combination of smarts plus fanatical curiosity to examine all the main contenders for the future: Colombia, Brazil, Nicaragua, China, India, the UAE, Syria, South Africa, Australia, New Zealand, Thailand, Cambodia, Vietnam, Mongolia, Argentina, Russia, Turkey, central Asia, Mexico and Canada. Here he finds innovation, capital, entrepreneurship, creativity, a willingness to try ideas and a passion for improving the lot of mankind.
His reporting defies conventional wisdom at every turn. Page after page, the reader will find himself thinking, That’s amazing. Nicaragua is not socialist. Medellín, Colombia (the “city of eternal spring”), is not violent. Brazil is no longer a land of rich and poor, but rather home to the world’s largest middle class. China is the world’s largest market for cars and cellphones; even in the rural areas you can buy Coke and a Snickers bar. India is the world’s leader in minting new millionaires. Cambodia (Cambodia!) ranks among the world’s most powerful magnets for investment capital. Mongolia has one of the world’s best-performing stock markets.
He also discovers many large American companies that have seen the writing on the wall and opened up factories, manufacturing plants, financial services and retail shops all over emerging markets. These companies are attracted by the intelligence of the workers, the relatively unregulated and low-tax legal environment and the cultures that have a new love for enterprise. And the returns are there too. The bottom line is sending a signal for them to expand.
It’s particularly intriguing to read about how all these emerging- market entrepreneurs overcome terrible and destructive bureaucracies — they exist everywhere! — that try to gum up the works, as well as bureaucrats who know nothing of business yet have the power to kill it off. Yet their very inefficiency is the saving grace. They can’t control the future. The brilliance of the market somehow finds the workaround.
Mayer’s main interest is in finding investment opportunities, and he lays them out in great detail here. If you think about it, this is just about the best vantage point from which to examine a new and unfamiliar world. Commerce is the driving force of history, the road map of where we’ve been and where we are going. To track down the profitable trade is likely to provide more valuable insight than all the academic speculations.
This is a very exciting book. It weaves history, geography, economics and firsthand reporting into a marvelous tapestry, one that is as beautiful as art and as complex and varied as the world itself has become in our times. A fine stylist, Mayer offers some fantastic one-liners in every section (“Change is like a pin to the balloons of conventional wisdom”) and his detailed stories give you the sense that you are traveling alongside him, like walking with Virgil in Purgatorio and Paradiso in one trip.
Mayer quotes Marco Polo: “I have not told half of what I saw.” In the same way, I’ve not told even 5 percent of what’s in this extraordinary tour of the world most people don’t know has come to exist only in the new millennium. There is no way a short review can do this book justice. There is so much wisdom packed in its pages. It is a meaty and enormously credible look at a world most people have never seen. In ten or twenty years, people will point to this book and say: this guy chronicled and understood what few others did.
Executive Editor Laissez Faire Books for The Daily Reckoning....
It’s a policy fierce enough to cause great suffering among Iranians—and possibly in the long run among Americans, too. It might, in the end, even deeply harm the global economy and yet, history tells us, it will fail on its own. Economic war led by Washington (and encouraged by Israel) will not take down the Iranian government or bring it to the bargaining table on its knees ready to surrender its nuclear program. It might, however, lead to actual armed conflict with incalculable consequences.
The United States is already effectively embroiled in an economic war against Iran. The Obama administration has subjected the Islamic Republic to the most crippling economic sanctions applied to any country since Iraq was reduced to fourth-world status in the 1990s. And worse is on the horizon. A financial blockade is being imposed that seeks to prevent Tehran from selling petroleum, its most valuable commodity, as a way of dissuading the regime from pursuing its nuclear enrichment program.
Historical memory has never been an American strong point and so few today remember that a global embargo on Iranian petroleum is hardly a new tactic in Western geopolitics; nor do many recall that the last time it was applied with such stringency, in the 1950s, it led to the overthrow of the government with disastrous long-term blowback on the United States. The tactic is just as dangerous today.
Iran’s supreme theocrat, Ayatollah Ali Khamenei, has repeatedly condemned the atom bomb and nuclear weapons of all sorts as tools of the devil, weaponry that cannot be used without killing massive numbers of civilian noncombatants. In the most emphatic terms, he has, in fact, pronounced them forbidden according to Islamic law. Based on the latest US intelligence, Secretary of Defense Leon Panetta has affirmed that Iran has not made a decision to pursue a nuclear warhead. In contrast, hawks in Israel and the United States insist that Tehran’s civilian nuclear enrichment program is aimed ultimately at making a bomb, that the Iranians are pursuing such a path in a determined fashion and that they must be stopped now—by military means if necessary.
Putting the Squeeze on Iran
At the moment, the Obama administration and the Congress seem intent on making it impossible for Iran to sell its petroleum at all on the world market. As 2011 ended, Congress passed an amendment to the National Defense Authorization Act that mandates sanctions on firms and countries that deal with Iran’s Central Bank or buy Iranian petroleum (though hardship cases can apply to the Treasury Department for exemptions). This escalation from sanctions to something like a full-scale financial blockade holds extreme dangers of spiraling into military confrontation. The Islamic Republic tried to make this point, indicating that it would not allow itself to be strangled without response, by conducting naval exercises at the mouth of the Persian Gulf this winter. The threat involved was clear enough: about one-fifth of the world’s petroleum flows through the Gulf, and even a temporary and partial cut-off might prove catastrophic for the world economy.
In part, President Obama is clearly attempting by his sanctions-cum-blockade policy to dissuade the government of Israeli Prime Minister Binyamin Netanyahu from launching a military strike on Iran’s nuclear facilities. He argues that severe economic measures will be enough to bring Iran to the negotiating table ready to bargain or even simply give in.
In part, Obama is attempting to please America’s other Middle East ally, Saudi Arabia, which also wants Iran’s nuclear program mothballed. In the process, the US Department of the Treasury has even had Iran’s banks kicked off international exchange networks, making it difficult for that country’s major energy customers like South Korea and India to pay for the Iranian petroleum they import. And don’t forget the administration’s most powerful weapon: most governments and corporations do not want to be cut off from the US economy with a GDP of more than $15 trillion—still the largest and most dynamic in the world.
Typically, the European Union, fearing Congressional sanctions, has agreed to cease taking new contracts on Iranian oil by July 1, a decision that has placed special burdens on struggling countries in its southern tier like Greece and Italy. With European buyers boycotting, Iran will depend for customers on Asian countries, which jointly purchase some 64 percent of its petroleum, and those of the global South. Of these, China and India have declined to join the boycott. South Korea, which buys $14 billion worth of Iranian petroleum a year, accounting for some 10 percent of its oil imports, has pleaded with Washington for an exemption, as has Japan which got 8.8 percent of its petroleum imports from Iran last year, more than 300,000 barrels a day—and more in absolute terms than South Korea. Japan, which is planning to cut its Iranian imports by 12 percent this year, has already won an exemption.
Faced with the economic damage a sudden interruption of oil imports from Iran would inflict on East Asian economies, the Obama administration has instead attempted to extract pledges of future 10-20 percent reductions in return for those Treasury Department exemptions. Since it’s easier to make promises than institute a boycott, allies are lining up with pledges. (Even Turkey has gone this route.)
Such vows are almost certain to prove relatively empty. After all, there are few options for such countries other than continuing to buy Iranian oil unless they can find new sources—unlikely at present, despite Saudi promises to ramp up production—or drastically cut back on energy use, ensuring economic contraction and domestic wrath.
What this means in reality is that the US and Israeli quest to cut off Iran’s exports will probably be a quixotic one. For the plan to work, oil demand would have to remain steady and other exporters would have to replace Iran’s roughly 2.5 million barrels a day on the global market. For instance, Saudi Arabia has increased the amount of petroleum it pumps and is promising a further rise in output this summer in an attempt to flood the market and allow countries to replace Iranian purchases with Saudi ones.
But experts doubt the Saudi ability to do this long term and—most important of all—global demand is not steady. It’s crucially on the rise in both China and India. For Washington’s energy blockade to work, Saudi Arabia and other suppliers would have to reliably replace Iran’s oil production and cover increased demand, as well as expected smaller shortfalls caused by crises in places like Syria and South Sudan and by declining production in older fields elsewhere.
Otherwise a successful boycott of Iranian petroleum will only put drastic upward pressure on oil prices, as Japan has politely but firmly pointed out to the Obama administration. The most likely outcome: America’s closest allies and those eager to do more business with the United States will indeed reduce imports from Iran, leaving countries like China, India and others in Asia, Africa and Latin America to dip into the pool of Iranian crude (possibly at lower prices than the Iranians would normally charge).
Iran’s transaction costs are certainly increasing, its people are beginning to suffer economically, and it may have to reduce its exports somewhat, but the tensions in the Gulf have also caused the price of petroleum futures to rise in a way that has probably offset the new costs the regime has borne. (Experts also estimate that the Iran crisis has already added 25 cents to every gallon of gas an American consumer buys at the pump.)
Like China, India has declined to bow to pressure from Washington. The government of Prime Minister Manmohan Singh, which depends on India’s substantial Muslim vote, is not eager to be seen as acquiescent to US strong-arm tactics. Moreover, lacking substantial hydrocarbon resources, and given Singh’s ambitious plans for an annual growth rate of 9 percent—focused on expanding India’s underdeveloped transportation sector (70 percent of all petroleum used in the world is dedicated to fuelling vehicles)—Iran is crucial to the country’s future.
To sidestep Washington, India has worked out an agreement to pay for half of its allotment of Iranian oil in rupees, a soft currency. Iran would then have to use those rupees on food and goods from India, a windfall for its exporters. Defying the American president yet again, the Indians are even offering a tax break to Indian firms that trade with Iran. That country is, in turn, offering to pay for some Indian goods with gold. Since India runs a trade deficit with the United States, Washington would only hurt itself if it aggressively sanctioned India.
A History Lesson Ignored
As yet, Iran has shown no signs of yielding to the pressure. For its leaders, future nuclear power stations promise independence and signify national glory, just as they do for France, which gets nearly 80 percent of its electricity from nuclear reactors. The fear in Tehran is that, without nuclear power, a developing Iran could consume all its petroleum domestically, as has happened in Indonesia, leaving the government with no surplus income with which to maintain its freedom from international pressures.
Iran is particularly jealous of its independence because in modern history it has so often been dominated by a great power or powers. In 1941, with World War II underway, Russia and Britain, which already controlled Iranian oil, launched an invasion to ensure that the country remained an asset of the Allies against the Axis. They put the young and inexperienced Mohammed Reza Pahlevi on the throne and sent his father, Reza Shah, into exile. The Iranian corridor—what British Prime Minister Winston Churchill called “the bridge of victory”—then allowed the allies to effectively channel crucial supplies to the Soviet Union in the war against Nazi Germany. The occupation years were, however, devastating for Iranians who experienced soaring inflation and famine.
Discontent broke out after the war—and the Allied occupation—ended. It was focused on a 1933 agreement Iran had signed with the Anglo-Iranian Oil Company (AIOC) regarding the exploitation of its petroleum. By the early 1950s, the AIOC (which later became British Petroleum and is now BP) was paying more in taxes to the British government than in royalties to Iran for its oil. In 1950, when it became known that the American ARAMCO oil consortium had offered the king of Saudi Arabia a 50-50 split of oil profits, the Iranians demanded the same terms.
The AIOC was initially adamant that it would not renegotiate the agreement. By the time it softened its position somewhat and began being less supercilious, Iran’s parliamentarians were so angry that they did not want anything more to do with the British firm or the government that supported it.
On March 15, 1951, a democratically elected Iranian parliament summarily nationalized the country’s oil fields and kicked the AIOC out of the country. Facing a wave of public anger, Mohammed Reza Shah acquiesced, appointing Mohammed Mosaddegh, an oil-nationalization hawk, as prime minister. A conservative nationalist from an old aristocratic family, Mosaddegh soon visited the United States seeking aid, but because his nationalist coalition included the Tudeh Party (the Communist Party of Iran), he was increasingly smeared in the US press as a Soviet sympathizer.
The British government, outraged by the oil nationalization and fearful that the Iranian example might impel other producers to follow suit, froze that country’s assets and attempted to institute a global embargo of its petroleum. London placed harsh restrictions on Tehran’s ability to trade and made it difficult for Iran to convert the pounds sterling it held in British banks. Initially, President Harry Truman’s administration in Washington was supportive of Iran. After Republican Dwight Eisenhower was swept into the Oval Office, however, the United States enthusiastically joined the oil embargo and campaign against Iran.
Iran became ever more desperate to sell its oil, and countries like Italy and Japan were tempted by “wildcat” sales at lower than market prices. As historian Nikki Keddie has showed, however, Big Oil and the US State Department deployed strong-arm tactics to stop such countries from doing so.
In May 1953, for example, sometime Standard Oil of California executive and “petroleum adviser” to the State Department Max Thornburg wrote US ambassador to Italy Claire Booth Luce about an Italian request to buy Iranian oil: “For Italy to clear this oil and take additional cargoes would definitely indicate that it had taken the side of the oil ‘nationalizers,’ despite the hazard this represents to American foreign investments and vital oil supply sources. This of course is Italy’s right. It is only the prudence of the course that is in question.” He then threatened Rome with an end to oil company purchases of Italian supplies worth millions of dollars.
In the end, the Anglo-American blockade devastated Iran’s economy and provoked social unrest. Prime Minister Mosaddegh, initially popular, soon found himself facing a rising wave of labor strikes and protest rallies. Shopkeepers and small businessmen, among his most important constituents, pressured the prime minister to restore order. When he finally did crack down on the protests (some of them staged by the Central Intelligence Agency), the far left Tudeh Party began withdrawing its support. Right-wing generals, dismayed by the flight of the shah to Italy, the breakdown of Iran’s relations with the West and the deterioration of the economy, were open to the blandishments of the CIA, which, with the help of British intelligence, decided to organize a coup to install its own man in power.
A Danger of Blowback
The story of the 1953 CIA coup in Iran is well known, but that its success depended on the preceding two years of fierce sanctions on Iran’s oil is seldom considered. A global economic blockade of a major oil country is difficult to sustain. Were it to have broken down, the United States and Britain would have suffered a huge loss of prestige. Other Third World countries might have taken heart and begun to claim their own natural resources. The blockade, then, arguably made the coup necessary. That coup, in turn, led to the rise to power of Ayatollah Khomeini a quarter-century later and, in the end, the present US/Israeli/Iranian face-off. It seems the sort of sobering history lesson that every politician in Washington should consider (and none, of course, does).
As then, so now, an oil blockade in its own right is unlikely to achieve Washington’s goals. At present, the American desire to force Iran to abolish its nuclear enrichment program seems as far from success as ever. In this context, there’s another historical lesson worth considering: the failure of the crippling sanctions imposed on Saddam Hussein’s Iraq in the 1990s to bring down that dictator and his regime.
What that demonstrated was simple enough: ruling cliques with ownership of a valuable industry like petroleum can cushion themselves from the worst effects of an international boycott, even if they pass the costs on to a helpless public. In fact, crippling the economy tends to send the middle class into a spiral of downward mobility, leaving its members with ever fewer resources to resist an authoritarian government. The decline of Iran’s once-vigorous Green protest movement of 2009 is probably connected to this, as is a growing sense that Iran is now under foreign siege and Iranians should rally around in support of the nation.
Strikingly, there was a strong voter turnout for the recent parliamentary elections where candidates close to Supreme Leader Ali Khamenei dominated the results. Iran’s politics, never very free, have nevertheless sometimes produced surprises and feisty movements, but these days are moving in a decidedly conservative and nationalistic direction. Only a few years ago, a majority of Iranians disapproved of the idea of having an atomic bomb. Now, according to a recent Gallup poll, more support the militarization of the nuclear program than oppose it.
The great oil blockade of 2012 may still be largely financially focused, but it carries with it the same dangers of escalation and intervention—as well as future bitterness and blowback—as did the campaign of the early 1950s. US and European financial sanctions are already beginning to interfere with the import of staples like wheat, since Iran can no longer use the international banking system to pay for them. If children suffer or even experience increased mortality because of the sanctions, that development could provoke future attacks on the United States or American troops in the Greater Middle East. (Don’t forget that the Iraqi sanctions, considered responsible for the deaths of some 500,000 children, were cited by al-Qaeda in its “declaration of war” on the United States)
The attempt to flood the market and use financial sanctions to enforce an embargo on Iranian petroleum holds many dangers. If it fails, soaring oil prices could set back fragile economies in the West still recovering from the mortgage and banking scandals of 2008. If it overshoots, there could be turmoil in the oil-producing states from a sudden fall in revenues.
Even if the embargo is a relative success in keeping Iranian oil in the ground, the long-term damage to that country’s fields and pipelines (which might be ruined if they lie fallow long enough) could harm the world economy in the future. The likelihood that an oil embargo can change Iranian government policy or induce regime change is low, given our experience with economic sanctions in Iraq, Cuba and elsewhere. Moreover, there is no reason to think that the Islamic Republic will take its downward mobility lying down.
As the sanctions morph into a virtual blockade, they raise the specter that all blockades do—of provoking a violent response. Just as dangerous is the specter that the sanctions will drag on without producing tangible results, impelling covert or overt American action against Tehran to save face. And that, friends, is where we came in.