World War III

Sunam Son from Chicago wrote to me through the contact form to ask what I meant by my occasional references to a possible World War III. I wrote this in reply.

1. The economic crisis has provoked historical comparisons with the 1930s, but I consider another analogy might be when three decades of financial imperialism went bust in 1913, leading to the catastrophe of 1914-45 of which the 1930s was an expression, not the cause.

2. The crisis has accelerated the shift of economic power to Asia and the Bric countries. The question is whether the West and the US in particular will allow this process to continue peacefully. I once had a conversation with a Pentagon official who said: “You Europeans have taken the moral high ground from us. The Chinese have taken our manufactures. That leaves us with just the weapons. I guess it’s double or quits”. I have no idea how serious he was. Maybe he was winding me up. Nixon’s mad dog strategy was to make people believe he could push the button and that would make them more compliant.

3. The place of World War III has already been chosen. Afpak has the advantage of being the most volatile area of the Muslim world, with Russia, China and India on its borders and substantial Western military commitments there already without being too close to home. If India and China can be drawn into a shooting war, maybe this will slow down their inexorable economic growth. What would happen if Muslim fanatics (put up to it by…) let off a nuclear bomb stolen from Pakistan in India or China? Now that would be another “shot heard around the world”.

4. Who would be “the allies” in such a war? The US, Europe, India and Japan (aka “democracy”) vs Russia, China (“the evil empires”) and the Muslims (already built up by Bush as the target of a new crusade). At least it makes better sense than the idea that we are in Afpak to bring democracy to the region. The Chinese want a port on the Bay of Bengal through Burma. India is building up its navy and the Japanese have already complained about Chinese naval aggression. Who do you think started the Cold War? Stalin?

5. There is the question of where we are in the global economic crisis and what will happen next. The massive injection of money by central banks to save the banking system has delayed the recession and injected a lot of cheap cash into equity markets, but it has done nothing to restore demand and it is highly unequal. This could lead to a sovereign debt crisis, wth Britain, Japan and the Eurozone being particularly vulnerable. Basically, the people who got us into this mess are still in power and they could push us all over the brink by continuing with their bankrupt recipes.

6. The US is not out of the wood by any means, but I believe that America would benefit from an escalation of the crisis at all levels since, apart from its share of the world market (which would grow in a depression) and its military monopoly and global reach, the fundamentals of its economy are stronger than those of its rivals. The future of the world economy is information services traded on the internet and the US still leads in production of its hardware, software and content. The global imbalance between US debt and China’s export surplus could lead to a bond crisis (hyperinflation or monetization of the debt) with ramifying political consequences, not to mention the mother of all exchange rate crises.

7. In any case, the world economy has lost and is losing aggregate demand fast. Everyone is hoping to grow through increased export demand, but where is that when home demand is contracting everywhere and governments are cutting back in order to continue to borrow? A combination of deflation and hyperinflation in different places could make 2010 a year to remember for the world economy.

8. I explored these questions in a fictional conversation betwen myself and Abdul Aziz from the Lehman collapse to December 2008. This was written in real time against the backdrop of the unfolding news. None of what I have laid out here is a prediction. It is just a very gloomy scenario that I believe ought to be given more of an airing than it has, so that a general political discussion might influence the course of events. But people really don’t want to think about these possibilities, since it makes it hard to sleep at night.

9. The unspoken truth of our moment in history is that the game is up for the West and that makes our “interesting” times very dangerous. We have lived off unearned income for 500 years and the rest aren’t going to pay any more, if they can help it. No wonder that Britain and France are the two most pessimistic countries in Europe or that fear and loathing of strangers is now rampant there. The Americans have options and they are prepared to use them. The game may be up for them too, but I don’t think they will take it lying down, as the Europeans are.

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Category: World