Should the US worry about China rising? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 9 January 2014
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Baltimore, Maryland

Somehow, like it or not, the world turns. Today's hegemon becomes tomorrow's also-ran. Today's reserve currency becomes tomorrows wallpaper. Today's cock-o-the-walk becomes tomorrows dinner.

Hey, we didn't create this system. We don't even especially like it. But that's just the way it is.

We'll come back to this in a minute. First let's just note that yesterday's markets were losers for just about everyone. The Dow lost 68 points. Gold was down $4. Now, back to our thoughts...

Governments were set up to take control. Ruling elites - by force of arms - established laws, protocols and armies to try to prevent anyone from taking their place. Their wealth, power and status were to be preserved - at all cost. In the 18th and 19th centuries, however, firearms became ubiquitous. It was harder for elites to maintain their authority. Every farmer on the American frontier had a rifle. A rag-tag band of insurgents, in the American colonies, could defeat the best army in the world (with the help of the French navy). An out-of-work actor could buy a handgun and pop off a president.

Unable to stay in control by force alone, governments had to resort to fraud. Ordinary citizens were allowed to "vote" on who would rule over them. And they were also promised the fruits of others' labors...if they voted the right way.

For a while, it looked as though this new model - social democracies run by flaming politicians and professional functionaries - had defeated all rivals. The Soviet Union, which had relied on more old-fashioned, blunt force to run its slave-driven economy, capitulated in 1989. China had thrown in the towel, more or less, 10 years earlier, when Chairman Dung Tsaoping had announced that 'to get rich is glorious.' And Francis Fukayama, hallucinating, had wondered if the 'end of history' was at hand.

If the end of history were at hand, the dollar, the Fed, and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we'd put our money on history. Most likely, history will trundle forward and the renminbi will replace the dollar as the world's leading currency sometime before the 21st century comes to a close.

But how, exactly, will that happen? Of course, no one knows...but few imperial elites give up the number one position without a fight. As they see their power, their status and their wealth challenged, they typically find a causus belli, hoping to stomp the newcomer before it is too late.

The phenomenon is known to historians as the "Thucydides trap." Graham Allison explains:

    When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, "it was the rise of Athens and the fear that this inspired in Sparta that made war inevitable."

    Note that Thucydides identified two factors: rise and fear.
China is rising. The US power elite fears its rise. And for good reason. Having the world's reserve currency is an 'exorbitant privilege," as Charles DeGaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as 'reserves.' And/or is it lent back to us.

From an economic point of view the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer...based on promises to settle up sometime in the future.

In practice, nobody wants the day of reckoning to come. Because they all know that there are vastly more claims on tomorrow's output than tomorrow can satisfy. Between '71 and today, approximately $10 trillion more has been received by Americans, in goods from overseas, than has been shipped to foreigners. That money is an outstanding claim on US existing wealth and future output. There is also (with some overlap) some $17 trillion worth of US government debt...also a claim on future American output. And, this is just part of the total credit market debt of $55 trillion. (Not to mention the feds' unfunded liabilities.)

In order to pay off these claims, the US would have to run a surplus. When? How? Instead of running a surplus, we run deficits. The federal government's deficit, for example, is expected to be $744 billion this year. And the trade deficit is running at about $500 billion. Neither is near a surplus.

Instead of edging towards a reckoning, all major governments seem to want to make the situation worse. The US stimulates its people to buy more Chinese-made goods. And China stimulates its manufacturers to make more stuff for people who can't really afford it. Both are heading for trouble.

Americans are hooked on spending. They consume their wealth...and more. China is hooked on producing. As it adds productive no-how and capacity, it becomes more and more competitive. Not only can it produce more consumer output at lower prices, it can also produce the latest in military hardware.

It's only a matter of time before that fighting gear comes out. At least, that's what history suggests.

So, if there is a military conflict, how will it turn out? The US spends three times more than China on 'defense.' Advantage: Pentagon. But as the Persians discovered in their wars with the Greeks, having the biggest, best-funded army does not necessarily give you an edge. Instead, it invites sluggishness, complacency and over-reaching.

The US military is arguably the fattest, most zombie-infested bureaucracy in the whole world. It suffers from an overabundance of resources. It supports troops (at a cost of $1 million per soldier per year) all over the globe. It builds weapons systems that are probably obsolete before they are put into service. It coddles armies of lobbyists, contractors, consultants, retirees, hangers-on and malingerers. Like all bureaucracies, it looks out first and foremost for itself. Looking out for the security of the nation is a distant second.

Its 11 huge aircraft carriers, for example, may be marvelous ways to generate contracts, fees and expenses. They may also be great ways to throw US military muscle into two-bit conflicts around the world. But put them up against a modern, electronically sophisticated enemy; then what? We will probably find out...

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Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Should the US worry about China rising?"

Dimitri

Jan 9, 2014

Hey Bill, your refference to historical examples is valid (you can always rely on Greek history when you are looking for todays answers, except on the economy...). But isn't the example of the Iraq war a lesson that nothing is to be gained anymore by wars, but just financial loss?

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