Money – the making of a super power
There is an old saying that in peace time generals prepare to win the last war, and the next war is never the same. But this is often truer of the victor than the vanquished. An example of this is at the end of the first world war, the victors claimed that it was a triumph of good over evil, spoke of it as the war to end all wars, and prepared for an enduring peace behind a heavily fortified wall. The defeated Germans saw it as a victory of mechanical warfare (masterminded by Australian John Monash) over traditional warfare and prepared to master mechanical warfare to conquer Europe in the second world war.
The world then endured the cold war through the second half of 20th Century as two military super powers sized each other up by backing different sides in a multitude of conflicts. The USA declared itself the victor of the cold war with the fall of the Berlin wall. A victory that was seen by many as an economic victory more than a military triumph. Once again, the victor has prepared for an enduring peace, this time behind its financial powerbase. But others appear to be plotting their downfall.
This time around it appears to be China that has learnt the most from the previous war and is challenging America’s preeminent position. This time around finance is the strategic weapon of choice.
Having amassed perennial trade surpluses, China is using its financial muscle to penetrate deep into foreign territory and establish positions of dominance. At the same time, the American people are pressuring their government to pull back from world affairs and focus on the country’s domestic issues. To some extent this makes sense, America’s foreign debt and trade deficit are the biggest in the world and both are getting worse. But these numbers are also irrelevant so long as the debt and trade continue to be in America’s own currency, (remember money is not real). Surrender this position as the global currency and this un-payable debt will become very painful indeed.
China has already taken a dominant position in numerous countries in Asia, Africa and the Pacific. China has enticed numerous governments by offering investment loans and direct trade agreements to cash-strapped governments. What has become increasingly apparent is that these arrangements are very one sided with the investments provided on condition that the projects are undertaken by Chinese firms (1). Countries are finding they are being left with a larger than expected bill for substandard, (often incomplete), infrastructure. The debt owed on the investment loan is of course in Chinese Yuan. Being indebted to China is also proving to be problematic for these countries as China is a very demanding creditor, insisting things be on their terms. Subsequently, some countries have established trade-free zones and residential enclaves that benefit the local Chinese population while being out of reach for locals.
By using its financial might in this way, China has legally taken control of major ports, trade routes, agricultural, fishing and mining resources that would have been strongly condemned if the same outcomes had been achieved via military pressure. At this point it is worth noting that during the Irish potato famine, (which killed over 1 million people), in the mid 19th century, Ireland was a net exporter of food. The issue was not that it could not grow any food, it was that the farming land was owned by the British, who exported the food for profit, while the local Irish population starved. A rapidly growing Chinese economy has a growing appetite for food and resources, and the same fate that the Irish experienced over 150 years ago could soon be shared by local populations in various countries across the world.
China is not the only player in the money wars. Some say that the European Union created the Euro specifically to establish an alternative to the American dollar for international trade. It has undoubtedly increased international trade within the EU. However, the Euro has also demonstrated the perilous position that countries can find themselves in when they are in debt and do not govern their currency. When these financial tensions are combined with the physical security issues highlighted by the immigration crisis, it forces the EU to focus on getting its own house in order before it takes on the world.
Russia is running its own race. Although it appears to be seeking independence rather than dominance, it is avoiding trading in US Dollars, even if it means returning to an almost barter arrangement of exchanging gold, oil and other commodities for the things it needs. It is also content to niggle its old foe by taking the opposite side in complex conflicts. Each aware that their military might is unable to solve the problem. Each also knowing that military might is essential to protecting ones own rights.
Where China has brazenly dealt its way into strategic positions with over 70 countries, it has more subtly indebted the US. Selling it cheap products and using the proceeds to buy government bonds it has simultaneous undermined its production capacity and its global financial position. The relationship dubbed chimerica has become an important cog in global trade. It is a relationship that President Trump is attempting to unwind by imposing tariffs on Chinese imports. His attempts are making ‘Trade War‘ headlines across the world. He is being condemned in the media for obstructing free trade. What many in the west fail to understand is that many of the goods they purchase as cheap imports from Asia are actually more expensive if purchased in Asia – large flat screen televisions for example. The change is US policy in this regard is policy recognition that the trade imbalance matters and that they are already in a power struggle – economically, politically, internationally, financially, with a country who’s government and military are not constrained by the will of its people.
Make no mistake the USA is under threat. The US dollar has greased the wheels of international trade for over half a century, ably supported by the American military, and morally supported by its allies. While its borders and security may be resistant to military and immigration incursions, they have been porous to financial and economic infiltration. China now has the USA in a pincer movement, the way of life so treasured by the american people is now dependent on China continuing to sell it cheap goods on credit. At any point China could decide to dump the US dollar, and/or change its trading policy with massive ramifications for the american economy and the status of the US dollar as the currency of choice. The question is whether the threat is more powerful for the Chinese than actually pulling the trigger and having all hell break loose.
Keep a close eye on the global posturing. In coming years many countries will be asked to make a choice between a trading partner and a military partner. Not all will choose wisely, and the world could get a little messy before order is restored.
Recap
- Reward for effort – The effort and expense required to be the global currency is very well rewarded.
- Value is relative – The value of being able to trade in your own currency is very powerful relative to trading in someone else’s currency.
- Trade requires difference in value – China values power and influence over selected countries more than the value of the loan to them.
- Money is a catalyst – the US dollar is the catalyst for 80% of world trade.
- Trade creates economic ecosystems – The USA and China will remain a significant participant in the world economy, and as such will continue to be impacted by world events and world trade.
- Economic measurements are incomplete – Any sell-off of government assets is not appropriately reflected in economic measurements – giving a false positive increase