Trouble brewing on two fronts

President Barack Obama is walking a delicate balance. He is now attending the G-20 Summit in St Petersburg, Russia. Syria will dominate the summit talks. The matter now rests solely in the hands of the US whether it will launch a military strike against Syria over allegations that the Assad regime used chemical weapons against citizens. The US Senate Foreign Affairs Committee has voted 10 to 7 to approve a draft resolution empowering President Obama to resort to military options against the government of Syria. The draft resolution will then be put to the floor for a vote in the Democrat-controlled Senate. But it remains unclear how the resolution on Syria will play out in the Republican-controlled House of Representatives. Chances are high that the US Congress will pass the resolution so that President Obama can go ahead and order a military strike against Syria on a limited scale and in a limited timeframe.

President Obama has indicated that if the military strike goes ahead, he would not commit US troops on the ground. The strike would be a missile or air force attack. But the US might have to go it alone. Earlier, the British House of Commons voted down a motion to support the US in military action in Syria. France is now also debating whether to support action against Syria.

Personally, President Obama is against the US going to war in Syria. But he has been dragging his feet all along, expressing reservations against sending US troops to Syria while now supporting an air strike. Syria has been engulfed in civil war for two years, yet the Assad government has held firm. The rebels – supported with hardware, money and other resources from neighbouring Saudi Arabia, Qatar and others including western powers – have not been able to topple the Assad regime.

Meanwhile, Russia has made it clear that it will back Syria to the end. If Syria becomes a target of western attacks, Russia and the eastern powers might come to Syria’s rescue. The risk is that the war in Syria will spill over into the wider Middle East and other regions.

In the end, the matter rests with President Obama. He can choose peace by working through diplomatic channels, or he can choose war.

The second big issue is the US Fed’s decision on September 17-18 on its monetary policy. The financial markets have already discounted widespread expectations that the Fed will scale down its QE by reducing its asset purchasing programme from US$85 billion to $75 billion a month. The Fed’s signal to taper off its QE policy has already wrecked havoc in the BRICS and other emerging-market countries including Thailand. Turkey, Brazil, India and Indonesia so far have been hit the hardest by sudden capital outflows. Their currencies are plummeting. Stock prices are taking a beating. Short-term interest rates are on the rise amid global tightening. Economic growth rates are slowing down. 

These countries have been forced to come up with different measures to stem capital outflows and keep their industries from falling apart. Thailand is also suffering from the current debacle. Credit Suisse has revised downward the Thai GDP growth to 2.7 per cent for 2013.

Cheap US dollars began to flow into the BRICS and emerging-market countries after the 2008-2009 financial crisis in the US. This created a boom. Five years on, the US has yet to restructure its banking and financial system. Europe is still in a deep recession due to its overwhelming indebtedness. But since May, the broad macro picture began to change when the Fed started to signal its intention to taper off QE. Economic indicators in the US and Europe have taken a turn for the better, whereas growth rates or financial bubbles in China, India, and Brazil and other emerging-market countries have been highlighted. The message is that capital will continue to flow back to the global financial centres because the BRICS and emerging markets will need at least three to five years to put their houses in order. At the same time, the developed economies of the US and Europe have already seen the worst.

In short, the prospects of war in Syria and the Fed tapering off its QE are casting a dark shadow over the world system. Countries are now erecting barriers to protect their industries and financial systems. If the situation gets worse, we’ll be seeing more protectionism, nationalism, capital controls, social upheavals, currency crises and economic collapse across the world.