Notes & Queries IV

Contrasting Economic Outcomes, Military Keynesianism and Panic Over Pokrovsk

Geopolitics ultimately depends on geoeconomics even if there is often a long gap between a crisis in the latter and its most devastating effects in the arena represented by the former. There is no space here to go into any depth on our global economic situation but one of the more fascinating aspects of the case is the continued surge in Wall Street equity valuations centred on just six companies all central to the expected and incoming digital industrial revolution. There are two schools of thought emerging about where this is leading. You may choose which to believe according to temperament. No one actually knows!

1. Pessimism - We are riding for a major market crash on fundamentals. Professional investors are having to ride the wave on their industry tram-lines and each hopes that it will be the one to jump off the tram before it careers over a cliff edge. This crash scenario is based on historical precedent with a form of mega-tsunami expected, much more significant compared to, say, the internet stock crash and dump in the late-1990s and perhaps potentially worse in its effects than 2008. This would not derail the digital industrial revolution in the long run but it would slow it down and focus it. The underlying risk is that a separate market problem, equivalent to sub prime mortgages in 2008, might tip the whole system into a major down turn, even depression, that would be worldwide. The concern here (expressed by some central bankers and market leaders) is about failures in the non-retail B2B private lending system which is almost certainly inadequately regulated.

2. Optimism - There is no cause for concern. The market and global economic system has been secured by previous reforms. The current surge in AI stocks (the big six) is an accurate reflection of the scale and value of the incoming digital revolution while the ‘reforms’ of Trump to American capitalism have not only not proved disastrously destabilising but are demonstrating that the US is becoming strengthened through tough negotiation of trade imbalances. Even if the Supreme Court kills off the Trump tariff, the US Administration is building a new global economy on crypto and blockchain which will create a mass popular capitalism that will bring major benefits just as previous industrial revolutions have done. The only concern might be that ‘yesterday companies’ (those unable to benefit from the AI revolution or to adapt to the new economic order) are being over-valued in the current market surge and that no revolution is without its social costs so that the risk is political more than it is economic (of which more below).

We take no view on this but what does appear to be an emerging problem is the growing disconnect between private sector economies over which key states are rapidly losing control but which seem to be creating a sustainable if probably inadequate growth in the ‘old economies’ and the fiscal situation of states whose only options would seem to be massive spending cuts or significant tax rises that might threaten the very growth of underlying economies yet which are necessary in order to preserve the state machine. This looks as if it might be the central problem for the British economy where an incoming budget on November 26th has few options left to the Government because of ‘fiscal rules’ required by a global market with which incompetent political administrators have managed to place themselves in hock.

Military Keynesianism - A Desperate Recourse

One option, not only in the UK but across Europe, perhaps last man standing as an option, is something we have mentioned before - military Keynesianism. This is looking like an increasingly desperate attempt to drive productivity growth through a ‘potlach’ economy of producing military hardware and trying to drive digital innovation through war technologies. It involves taking taxes out of the civilian economic system, eventually unravelling the welfare system and sustaining dying industrial sectors through investment in an infrastructure that creates complex things that will probably never be used and we should hope never are. Instead of ‘wasting’ current funds on unproductive people (welfare), the shift is to wasting future funds on useless things (warfare). As we have previously suggested, fiscal fear in Europe is driving a growth strategy that is driven by the manipulation of popular fears - initially of climate change and now, as that collapses on Chinese competition, on manufactured threats from the East (which will collapse on an eventual peace agreement).

Military Keynesianism is certainly taking hold in North-Central Europe. In Germany, much of it is concentrated on North Rhine-Westphalia which is maintaining its economic growth on the back of it. It, purely coincidentally of course, just happens to be the region where the AfD is expected to make its first major break out of Eastern Germany and ‘go national’. The British Government is also betting the house on a combination of heavy Net Zero and military-industrial expenditure that is geared to holding up its faltering vote in the Northern cities and in military-industrial zones that are most likely to shift to Reform. This general shift of resources to militarisation is also creating a potential ‘gold rush’ for anyone who can provide product - the Serbians have announced that their surplus ammunition production can be supplied to Europe and they do not give a damn whether it ends up in Ukraine or not.

There are other examples crossing our desk, none of which will help Ukraine (the ostensible reason for all this expenditure) much in the near to medium term. Indeed, Ukraine is clearly trying to get into the act itself by seeking to produce weapons surpluses for export. Competition between arms suppliers looks as if it will become frenetic, ending up in its own ‘bust’ with over-production of material in due course. And it all depends on the debt markets and confidence in the European economy. The logic is either that growth through military ‘potlach’ economics will enable the generation of resources to pay off debt and persuade markets that productivity is improving (though this did not work out well in the end for Hitler and we may add Mussolini and Tojo) but, we note, without adequate access to natural resources that cannot be rectified by using the armament as the fascist powers tried to do.

What is grimly amusing is that European Greens, who set off much of the war hysteria in an effort to destroy European dependance on Eurasian energy, are now having to watch a massive and destructive exploitation of the planet and increased demand for fossil fuels in order to pull together the war material required to deal with the manufactured consequences of the conflict that these utopians had triggered. This militarisation strategy may, in fact, work if managed carefully and if populations accept higher taxes (the UK will be a test case in this on November 26th) and/or spending cuts (where the French are proving recalcitrant). The key point in this ferocious gamble is that most of the political decisions (electoral tests) take place as far away as 2027. Post-modern atomised Western populations do not take to the streets with sufficient organisation to effect regime change. There are many useless peaceful protests but no more Lenins able to seize the commanding heights of a collapsing system.

The Politics of Militarism

This system has to drive this strategy (given that the Green Agenda model has failedin this respect and is just a cost in the near to medium term) in order to achieve material results for the discontented working class and small business communities within about a year to eighteen months (two to three years in some cases). Everything is thus on a knife edge especially as there is now significant depletion of domestic military stocks in some key countries (notably the UK) because of the need to fuel Ukraine and its war. This depletion of stock will need replacement with more advanced and probably more expensive product. Chancellor Rachel Reeves in the UK was dangerously unapologetic in implying that tax rises would come but that defence spending had to rise without giving any really cogent reason beyond the equally implicit threat from Russia (which is probably not there) and the demands of President Trump (who is really dictating all this nonsense). Exactly how sustainable this system is must be currently unknown. Things could go either way - it could ‘save’ centrism by restoring an apparent prosperity to sufficient voters to hold back and reverse the populist tide (a key political war aim) or it could crumble on external factors (market behaviour related to debt) or internal resistance to tax and cuts from different constituencies. Keeping that war trundling along looks both a problem (in terms of cost) and a necessity (in terms of justification of the last solution to the incoming political problems of an increasingly troubled European centrism).

There are two great theoretical sumps of money for this surge of trying to buy growth and votes to hold and push back the Far Right - the European taxpayer (moderated by welfare cuts and increased debt holding) and the currently frozen intent to plunder Russian frozen assets. There is, of course, thd debt market but debt has to be serviced. Supporting Ukraine now represents a bastardised form of the Keynesian war economy, holding the line against de-industrialisation at home and seeking to maintain ‘prosperity’. Yet the risks are obvious - peace would be problematic in cutting the rug under the narrative of threat that keeps legislators on message in the face of incoming difficult spending cuts and probable tax rises. Few electors are so passionately engaged in the defence of the Ukrainian oligarchical regime that they would be willing to sacrifice household income, let alone die for it. Electoral cycles alone help to dictate acceptance and toleration for the strategy yet any increased debt will be very expensive to service if expropriation is not in order and expropriation has its own market risks. Wheezes like seizing frozen assets or ‘euro-loans’ are only pushing the fiscal crisis forward in the hope (of which Mr. Micawber would approve) that somehow ‘growth’ would eventually pull current elites’ irons out of the fire.

There is also a race against time against either of the two possible market scenarios noted at the beginning of the article: under the first, a major correction in AI stocks in the US could have serious ripple effects in a Europe with no fiscal reserves to deal with the consequences (although this affects mostly France and the UK) and, under the other, the AI revolution drains capital out of the international system driving up interest rates to levels that sovereign states find almost impossible to service and still maintain services as well as the militarisation and net zero programmes. The level of denial within Western political classes has become staggering - of which the latest is that the politically defunct Starmer in the UK can be credibly replaced in the spring by the eco-obsessive Ed Milliband in an act that would be piling Pelion on Ossa.

The Race Against Time - Growth or Populism

The politics of this in Europe is interesting. The Dutch case, presented as a victory for the Centre-Left, has actually showed that the ’Far Right’ has maintained its core strength. What has happened is a major shuffling of votes within the voting territory that opposes the Far Right. This is something we are seeing elsewhere – a strong Far Right holds its position but against which everyone else is ranged in terror at its arrival, with votes moving about to try to create the best means of standing up to populism. One feasible outcome in the UK is that the Labour Party dumps its useless Leader in good time and puts in a strong alternative who can persuade frightened liberals and greens to dump, in turn, the fashionable left-populist parties and sustain it in power as ‘the lesser evil’.

All the interest groups who loathe each other but who loathe Farage more might then start combining just to stop him. This may work to grab another term of office for centrism (whether left or right depending on local circumstances) and it cuts both ways - the lesser evil might be (as could happen in France) a bunch of crazed utopian Leftists (in the eyes of the centre). Whatever happens it turns the right populists into the Government (against perceived left-wing expropriation) or into the Official Opposition (while a frightened ‘bourgeoisie’ tries to manage and merely delays the process by which the Left demands its pound of redistributive flesh). Eventually ‘objective conditions’ may lead to sufficient discontent that the bulk of the working class and lower middle class in particular decide that it is Farage and his European ilk that is, in fact, the ‘lesser evil’. Farage and that European ilk probably needs to purge its own radical Right to get there while the radical Left purges itself from the Centre.

In other words, the total system is now becoming ‘defensive’ against populism and thinks it simply needs to hold on to power and then learn to become competent in the eyes of the public in order not to lose it later. This seems to be a possible pattern in some countries – populations mostly want non-populists to be in charge but to become competent again. It is the failure of competency that opens the door to right populists. The UK has shown what happens when confidence in centrist competence effectively collapses altogether – the populists emerge as a potential government ‘faute de mieux’ and resistance to right populism becomes left populism (in this case, the Greens) so that the centre faces a war on two fronts. Something similar has happened in France where left populists staked all on a wealth tax as defining of their position so forcing centre and right populists into one single issue camp and ensuring that the centre now faced a continuing war on two fronts. The Dutch case is one where left populism has not emerged as a viable challenger: centre-left voters and anti-populist centrists in general can mobilise any broadly liberal country against the ‘Far Right’ but this still depends on the centrists holding themselves together on key economic issues - and that’s where things start to go wrong because a shift to the Left tends to mean no mandate for necessary welfare reform and increased taxes. And the consequent fiscal crisis pushes more and more people to the extremes.

Why Ukraine Continues Regardless

Kiev is becoming more shrill now, shifting from an emphasis on demands for more weaponry to demands for more funds (to be expropriated from Russia at European risk) because, although it had some success since the weekend in halting the Russian advance at some parts of the line, Pokrovsk is almost in Russian hands. Its logistical role in the long Ukrainian defence line makes its fall if it comes significant (which we look at in more detail below). As one analyst pointed out, we are seeing a war in which one side (Ukraine) cannot win but refuses to admit it (in good part because Europeans constantly dangle the possibility of victory) and the other side (Russia) refuses to put in the energy and resources to ensure a military victory (out of fear of alienating both the much more powerful US, bringing it into the war with more force, and its own population with too many body bags). Left to themselves, this war would have been over by now with Russia holding the Donbas and Crimea and with Ukraine busy reconstructing within the European orbit. Now, we will robably have a war that may continue for some time - how convenient for some!

As to peace, this observer has no doubts that the White House is sincere in wanting it but it is clear that dialogue between Washington and Moscow has collapsed on mutual incomprehension. It is worth thinking about the nature of this incomprehension because it cuts both ways - both sides live in different mental universes. Washington has been failing to listen to what Moscow has actually been saying fairly consistently over a long period of time but Moscow is also locked into its own world view. This is why things have descended backwards into warfare, not helped by the Europeans. The American side is culturally unable to comprehend Russian thought processes. Similarly Moscow is unable to comprehend the compromising ‘business-like’ approach of American negotiators. Moscow has set out its existential requirement on a ’do or die’ basis. It may compromise non-existential issues in seeking a final and complete settlement but it will not compromise on strategy related to existential survival. The issue here is what ‘existential survival’ actually means. Rubio, otherwise very capable, does not have the background to comprehend what a Russian means by this. It may be harking over old ground but the losses sustained by four nations (Russia, China, Germany and Poland) in the Second World War were substantial enough to dictate an existential position for each on current affairs that quite simply does not apply to, say, the Anglo-Saxons.

American cultural preferences, on the other hand, are generally for solving one problem (the war in this case) before going on to the next (the full and final settlement). For example, in the 1940s, it was defeat Germany and Japan and then worry about what to do with the victory. The bad guys are eliminated and then everything will be just fine. Why the bad guys were bad guys is irrelevant and the leaching of some of the bad guys into the new world (as ex-Nazis reappeared in the Bundesbank and Wehrmacht) was not such a big deal if the total system is working again and the really bad guys have been eliminated. The Communists could then become the really bad guys. For the Russians, the bad guys would be everyone involved in the regime so that the total system and the ideology needed to be thoroughly rooted out. To the Soviets, the return of Nazis in West Germany in order to maintain stability was adding insult to injury and it indicated a ‘bad faith’ whose effects on trust Anglo-Saxons underestimated.

The Russians thus know that the war is their bargaining chip. They feel they have been let down and ‘lied to’ too many times in the past to trust to American promises and goodwill. And they have a point – not because Americans are malicious or indeed are consciously lying (they are not) but because the volatility of American politics and administrative forgetfulness and wheeling and dealing to manage multiple actors means that American policy can shift and change and fill any vaccuum that may appear without recalling past commitments. Russian wariness goes back to the Churchill-Truman flip into confrontation after FDR died but also to the actual behaviours of American Presidents as the promises made to Gorbachev were thrown to the winds on Russian weakness – a lesson that is particularly important to the current Russian generation in power.

Pessimism About Peace This Year

This account of the discussion should make us a little pessimistic about further progress this year. The American side cannot actually make reliable long term promises in the event of a ceasefire (again not from malice but because of its political culture). It cannot deliver a full and final settlement precisely because it has to square a ‘hawkish’ Congress on the one hand and European allies on the other, both of which include or may even be ‘wreckers’ who can kill the deal through inaction or indeed ‘malice’. The only way forward for the Russians becomes, because of this, to do so much damage to the Zelensky regime that it crumbles in a cold winter with no funds in the Spring to sustain its war effort and to make the war as politically and fiscally painful for increasingly unpopular European leaders as possible.

Russian frustration is thus as understandable as American. American frustration lies in it believing itself to be trustworthy because it always means what it says when it says … and then forgets that it said it when conditions change.It is puzzled that Russia cannot trust the new President because he is not any previous President while Russian frustration lies in the functional ‘irrationality’ (in terms of ensuring full and final settlement of issues) of Western political decision-making – and so the war continues. Even something simple like Rubio’s puzzlement at Lavrov’s insistence that Ukraine is run by Nazis is a cultural translation problem centred on the definition of Nazi and mutual understanding of twentieth century history. To Rubio, Nazis are a defeated German phenomenon, it all happened a long time ago and the Rada is democratically elected as much as the Duma so how can there be Nazis involved?

But to Lavrov Ukrainian nationalism depended on national socialism as ultra-nationalism for its brutal development (it was truly murderous under German occupation), sustained a partisan war supported secretly by the West until the mid-1960s, was central to the Maidan ‘coup’ and is to be found at the heart of the Zelensky regime – the functional role of radical Ukrainian nationalism within the regime shows (to Lavrov) continuity with the German assault on Russia and occupation of Ukraine. It is (in his world) simply a transformation of anti-Russian national socialism to new ends. Again, it is a matter of trust and historical interpretation – Rubio (like all Westerners) thinks ‘but that was then and this is now so let’s move on’ and Lavrov (like all Russians) says that ‘the then is the now: there is continuity of ideology and intent and intent includes national socialist destruction of Russia’. It is not an entirely stupid analysis if you have studied the history but it could be unravelled if Western negotiators began to see that the general attitude is anxious and defensive and not aggressive. Putin has now stated quite simply that the order to his men is to get hold of Donetsk (he has Luhansk) by the end of February next year and that seems feasible at the current rate of expansion. Once that is achieved, peace talks will start again but they may need another national leader in place in Kiev.

Where Pokrovsk Fits Into All This

As to Ukraine, the impending Pokrovsk loss is clearly unnerving a lot of people but you have to search (critically) through Telegram Channels covering German and Russian commentary to get a good feel for this. The Western Press seems to be living in la-la land at the moment with or without D-Notices in play. It is interesting to see what appears to be an incipient campaign in Germany to demand some sort of change within Ukraine with an emphasis on the discontent of the military. This may reflect wider dissatisfaction with the lack of realism about the situation present in the Presidential Office and perhaps the seeding of eventual acceptance of a temporary military ‘takeover’ by some competing interests in the regime. The recognition of the loss of Pokrovsk by realists is to be compared with the maintenance of fantasies about counter-offensives. These latter do take place but never seem to hold or achieve much. They are probably directed at creating the illusion of the possibility of victory and so positive media coverage but they often involve a waste of assets and men (which will be frustrating to the Germans supplying the assets). This has been a problem throughout the war - the West has played the war as a PR war as much as a military war, spinning fantasies to maintain morale. This has driven Zelensky towards actions designed to maintain illusions rather than solve problems. It is understood that the loss of Pokrovsk as morale problem is rated equally in Kiev to its loss as logistical centre which may not be an entirely healthy attitude.

Whatever may be said in Kiev, the facts on the ground seem to indicate that Pokrovsk is now all but lost. Pokrovsk is important [the Russians now hold 90% of the city but the battle is really for the ‘heights’] and we quote a Russian source we found on Telegram: “On the Pokrovsk (Krasnoarmeysk) direction, even the Western press, unlike the Kiev leadership, publicly acknowledges the dire situation of the AFU in Pokrovsk and Mirnograd. The enemy [Ukraine] constantly counterattacks; intense fighting is ongoing. Enemy channels claim that “a military-political decision has been made [by Kiev] to hold the Pokrovsk-Mirnograd conglomerate as long as possible. All possible reserves will be used for this. They explain this by the fact that west of Pokrovsk is flat terrain without heights, which creates a threat of Russian Armed Forces gaining operational space, and this, given the release of our [Russian] significant forces after the assault on Pokrovsk, threatens the enemy with a cascading collapse of defense in a specific sector.” ¹

Other sources have suggested that elements in the military and NATO are unhappy at the significant wastage of men and assets involved in this strategy of ‘defence at all costs’ (which may have led to the discontent expressed anonymously in the German media) but defence has its logic even if it is only buying time to prepare for the defence of the line further back. We also note that the Russians are steadily if slowly extending their control of sections of the Ukrainian side of the international border. Some Ukrainian activity might be interpreted as attempts to draw Russian troops away from the Pokrovsk battle but there is little sign of this working. On the contrary, the apparently successful counteroffensive against a particular salient north of Pokrovsk simply looks like the Ukrainians taking the bait of the Russians setting up something that they have to waste troops on recovering. The escape route from the pocket created by the Russians by their advances into and to the immediate north of Pokrovsk seemed to be rapidly closing yesterday.

A Last Note - The Smoke and Mirrors of War

But what may be equally interesting is the claim that NATO has itself had an important command and control centre in Pokrovsk and that attempts to evacuate it have proved problematic with the claimed loss of a Blackhawk and its elite extraction team. This is where we are in muddy waters. Kiev spun the story as a heroic rescue and did not mention why it was expending such vital resources. The Russians spun the story as an abysmal failure and indicated a reason. Differing propaganda positions are exposed in this story. We are back in the world of ‘smoke and mirrors’ but Russian sources go further in suggesting that the importance of Pokrovsk lay precisely in it being a central NATO command centre ( (where NATO might ‘deniably’ process intelligence and manage logistical support) as much as a Ukrainian command centre and Ukrainian military logistical centre.

The problem for independent Western observers is that every effort will be made by Kiev and NATO to deny or control the narrative in order to ‘maintain morale’. As to truth and exposure, a lot would depend subsequently on political calculations in the Kremlin about what they would do with anyone captured ‘in situ’ if speculative claims about NATO officers are proven correct. A helicopter crash, if demonstrated, could suggest a problem for NATO that may go beyond the any claimed loss of its elite unit.

Let us hold off making a firm judgement but speculate on what it might mean if the Russian claim is proven true, NATO officers were present in the City and they could not be exfiltrated. It is moot whether this unit can be interpreted as NATO combat engagement in the war but it is quite possible that the ‘desperation’ (a Russian claim) on one side has been to capture NATO officers in the act and possibly ‘parade them on Red Square’, presenting them to Washington as an embarrassment to the White House, or ‘alternatively’, on the NATO side, to spirit them away and maintain the illusion that NATO was not involved in the actual conduct of military operations. The nationalities of any officers captured (until now kept carefully back from the front line) may have political ramifications within the West since it could be construed as a ‘casus belli’. Somehow, if the Russian version is true, this command centre would appear to have been so central to Ukrainian defence that the departure of its team was left to the last possible minute and they may have been overtaken by events (this would explain some of the tactical emphases of Russian movements within the City).

1. For the sake of balance (since I have been taking Russian sources more seriously than some might like), I refer the reader to the BBC’s account of the situation in Pokrovsk at https://www.bbc.co.uk/news/articles/c0jdv0623pno The key point is that there are no embedded independent journalists on either side inside the City so Western and Russian media alike depend on ‘spin’ from their relevant communications officers. In this case, you sense the attempt by the Ukrainians to suggest constantly that they are still in the fight and yet are doing so against overwhelming odds. The first is true, the second probably special pleading for the home crowd. The military analysts are also keen to downplay any excessive belief (rightly) that the capture of Pokrovsk would automatically result in the folding of the Ukrainian defence line but the Russian technique of taking fortress by fortress in a very long game seems to be working and it seems to be admitted that the Russians are deploying effective infiltrationist tactics. The mapping that emphasises ‘limited Russian control’ does appear to be self-serving since it is quite clear that Russia does control this territory and ‘claimed control’ often appears to be verified after the event - one important strategic PR drive on the Western side is to suggest that the Russians are lying about control but the tactics deployed by Russia seem to be less about being in a place themselves as making sure Ukrainians are not in that place and that is all that is required by the Russians Nevertheless, it is important to understand that the imminent fall of Pokrovsk, while a significant defeat for Ukraine, does not change the assessment that the Ukrainian defence line remains a formidable obstacle and that there will be no quick military end to the war unless Ukraine crumbles under the stress from within. It is also important to understand that the presentation of the Ukrainian case is not only a matter of local morale and, more indirectly, spin directed at Western populations but a framing of the story for President Trump (the Russians are obviously doing the same). It is vital for Trump to believe that Ukraine is not a lost cause or that Russia will inevitably acquire what he wants by military means and then stop. Moscow wants to send the opposite message knowing that Trump admires winners and hates unnecessary bloodshed.