Seeds of War, Part II

Only the dead have seen the end of war. ~ Plato

Although history is not totally devoid of examples to the contrary, it is a rare case indeed when a free and prosperous nation sees fit to take up arms against its neighbors. We must be especially cautious, therefore, during a time when freedom is under constant attack and the fragile prosperity of once powerful nations hinges on the finite faith of the many in the moribund currency of the few.

We began our little Seeds of War mini-saga a couple of weeks back with an analogy borrowed from our friend and colleague, Chris Mayer. In a recent article, Chris astutely observed how the period of the roaring 1920s closely resembled the story told by F. Scott Fitzgerald in his classic novel The Great Gatsby. Call it art imitating life…imitating art. (Or, is it the other way around?)

To quickly recap: An exuberant time of easy money and speculative excess, the ’20s witnessed a rise in living standards approximately commensurate to the rise in women’s hemlines. Toward the end of the decade, when the party was in full swing, you might even have been lucky enough to see a lady’s knee as she danced the Charleston. (See George Taylor’s wacky Hemline Theory for more.) More important than even the length of women’s skirts, the period also saw the proliferation of, among other things, low cost automobiles – the makers of which are now mostly defunct or government owned – and the emergence of the United States as a political force on the world stage.

But the decade that began with a post-war, can-do attitude eventually devolved into a post-bash, can’t-do hangover. By 1929, the last of Gatsby’s champagne was emptied and the world set in for the long and painful road of depression. This next decade, Chris noted, was more akin to John Steinbeck’s Grapes of Wrath.

The modern chronological overlay, in case it isn’t already apparent, can be found in the Gatsby-like excesses of the late ’90s-early ’00s…through to the age of the stricken Joads, on which we have recently, regrettably, embarked. What then, we wondered aloud in Part I, comes next? In the fertile plains of social and economic discontent, the seeds of war begin to take root…

We first mused on the growing turbulence on the European continent, a politically fractured landmass seldom far from the precipice of military conflict. News this week tells us that some 60,000 Greek malcontents took to the streets there to torch German cars and generally make a nuisance of themselves. They are revolting against the “austerity” program implemented by the cash-strapped Greek government…and against Germany’s refusal to undermine the flimsy common currency by bailing them out. The problem with Greece’s national cash flow is that it hasn’t got one…or, more correctly, that it is flowing in the wrong direction, and quickly. Simply put, the state is broke. It couldn’t pay its workers more even if it wanted to. The case there is a classic example of too many living off the work of too few; too many public expenses leeching on too few private incomes.

Unfortunately, with a deficit hovering at some 13% of GDP, Greece’s public balance sheet is not the only highly combustible euro-trash to be found in the region. Ireland too is facing strikes at schools and hospitals after it announced a round of pay cuts for public workers. The government there is trying to rein in spending and curb a deficit that reached 11.7% of GDP last year. (Remember, these EU members were supposed to keep their deficits to within 3% of GDP. Not even Germany, the best of a bad bunch, managed that.) Similar social sores afflict Portugal, where civil servants walked off the job on Thursday, hoping to close schools, courts and hospitals as they protested against their own “austerity” measures. One could reasonably hit “find and replace” on the proper nouns in the past couple of paragraphs and drop in France, Spain, Iceland, the UK and half a dozen more drowning nations from around the world.

Closer to home – your Taipei-based editor’s home, that is – tensions are again heating up over the sovereignty of this tiny, though hotly contested, subtropical island.

Following the recent decision by the United States to sell arms to Taiwan, three senior People’s Liberation Army (PLA) officers – including two majors and a senior colonel – told Xinhua News Agency that China should begin selling off US debt to punish the Americans, and that it was in the Middle Kingdom’s best interests to increase defense spending and expand its deployments of military forces.

And the rhetoric doesn’t cease there. In his new book PLA Air Force Colonel Dai Xu, a widely quoted Chinese military analyst, leaves little room for interpretation when describing his thoughts on the possibility of a looming international conflict. “China cannot escape the calamity of war,” he writes, “and this calamity may come in the not-too-distant future, at most in 10 to 20 years… If the US can light a fire in China’s backyard, we can also light a fire in their backyard.”

This kind of political jousting from outspoken members of the PLA is nothing new. Fifteen years ago, General Xiong Guangkai made headlines when, after a meeting with former US ambassador Chas Freeman, he warned:

“And finally, you do not have the strategic leverage that you had in the 1950s when you threatened nuclear strikes on us. You were able to do that because we could not hit back. But if you hit us now, we can hit back. So you will not make those threats.”

With some $2.4 trillion of foreign reserves, Xiong Guangkai’s message is a whole lot more potent today than it was a decade and a half ago…or, perhaps, ever. The last time an international trade balance so tipped in the favor of the Chinese exporters, back in the mid-1800s, the western empire of the day, Britain, flooded the Middle Kingdom with opium. Today, the Chinese are drowning in a sea of steadily depreciating greenbacks. This brings us to the next question: When will the world’s greatest savers de-peg their currency from that belonging to the world’s greatest debtors?

“The answer has always been simple,” writes Dan Denning, the Melbourne-based editor of The Australian Daily Reckoning, “When it is in China’s interests to do. To us, that means China will de-peg when the benefits of increased purchasing power in the currency are more important that dwindling export profits.

“In other words,” continues Dan, “we think China is close to a new phase of growth that’s driven by consumer demand, domestic consumption, and more mature Chinese capital markets open to foreign investment. A de-pegging of the currency would see a much stronger yuan. This would give Chinese savers a lot of spending power on global markets. They would also be able to buy more Chinese goods, which might lead to higher wages in China too (and more stoking of consumer demand).”

It also means less tolerance for provocative acts (whether perceived or actual) from foreign governments. In all of this, it is important to remember that the China of today is not the China of the mid-1800s…or even the China of a decade and a half ago, when Xiong Guangkai first stirred up the press. Similarly, neither are her political adversaries, like those in Washington who think it prudent to sell $6 billion worth of arms to Taiwan, in the same position to bargain.

“In the end,” General Xiong Guangkai waged after that meeting with Freeman, “you care more about Los Angeles than you do about Taipei.”

Nobody doubts that is true. We only hope the world doesn’t have to find out the hard way. After all, as Bertrand Russell one remarked, “War does not determine who is right – only who is left.”

Joel Bowman
for The Daily Reckoning