— By Luci Morland
If war is a continuation of politics by other means, then it is fair to say that the United States and China are in the intermediate stages of the most serious world conflict since Hitler was toppled.
Forget Afghanistan. Forget Iraq. Forget Libya. Set aside nightmare scenarios of nuclear missiles flying across the ocean or a million troops invading a foreign land. The third world war is not being fought in any of these theatres. It isn’t even being fought with missiles or bullets. It features bonds, not bombs; currencies, not commandos. World War Three is underway, and the entire world has been drafted.
Conspiracy-minded folks and critical theorists have long argued that wars are how the rich battle one another for control of resources — land, water, human capital, and oil are a few commodities that have been mentioned as a source of conflict. Clearly, some American adversaries understand this. Osama Bin Laden, before he was shot by US troops last week, had directly stated that the purpose of 9/11 was not to simply kill thousands of people in a horrific incident, but rather, to draw America out and bleed America financially.
“We are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah,” Bin Laden said in a 2004 video. “We, alongside the mujahedeen, bled Russia for 10 years until it went bankrupt and was forced to withdraw in defeat.”
China is doing essentially the same thing, except instead of suicide bombers and terrorism, it is using its currency as a weapon to bash the American economy down and prop itself up. Make no mistake about it — the Chinese know exactly what they are doing. They have long pegged their yuan to the dollar, allowing the Chinese government to directly influence the value of the yuan. This policy keeps the Chinese currency weak, making Chinese exports cheaper and world imports more expensive. The end result? China can manufacture anything it wants, sell it across the globe with little competition, and reap the benefits. Walk through any Walmart and read the labels. You’ll find plenty of “Made in China” stickers.
This is not to suggest that the war is one-sided or that only the Chinese are engaging in political-economic warfare. The United States has been fighting the war, too. The primary, direct means of warfare available to the United States? Quantitative easing policies and low to zero interest rates. Sound familiar?
Quantitative easing policies allow the central bank (in the United States’ case, the Federal Reserve) to increase the money supply by simply creating more money, printing and distributing the funds via open market operations. More money decreases the value of the currency, driving down the cost of doing business. Low to zero interest rates encourage borrowing and spending, keeping the money supply liquid and presumably kick-starting the economy.
QE has the bonus side effect of inflating the currency — bad for the folks at home living under that currency, but fantastic for the government who owe debts to other nations. Other than paying the debt down directly, inflation is the best means to reducing the essential value of a debt. When done purposefully, as it appears to be happening in the US/China currency war, it amounts to borrowing in bad faith.
The unspoken word in all of this economic mumbo jumbo is “war,” as in “the United States and China are engaged in fiscal war”. But a simple review of the facts shows that the two nations are indeed locked in a struggle to keep their own currency lower than the other currency. Neither side has shown a desire to blink, which brings about the question: what next?
If history is any guide, the answer is “doom, gloom, and misery.” The world has seen a currency war before, in the late 1920s and early 1930s, when France, Britain and the United States skirmished over the value of their currencies. Nations across the globe sought to remedy their unemployment problems by devaluing their currencies, pushing the problem on to other nations. Each nation responded in-kind, until the international exchange market, which was still in its infancy, collapsed under the volatility and uncertainty. The global recession morphed into a global depression, as international trade dropped to negligible levels. It took 10 years for the world to recover.
When U.S. Treasury Secretary Timothy Geithner meets this week with Chinese Vice Premier Wang Qishan, note the body language and the tone of the statements produced. It will look, feel, and sound like two hostile parties engaged in warfare and diplomacy. Without a body count to pay a political price for back home, will either side blink? Or will the world see another great recession slip into another great depression?