World War III: U.S. vs. China?

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Includes: CAF, DIA, FXI, GXC, PGJ, QQQ, SPY
by: James West

It took the onset of World War II to lift the world out of the Great Depression that began in 1929.

Ignore the historical hyperbole that claim Roosevelt’s “New Deal” had anything to do with it. It was war, plain and simple, that galvanized the U.S. manufacturing complex into debt-driven growth, and ended the period of stagnation following the economic contraction from 1929 to 34.

Bernanke’s theory is that the depression would have been averted had the Federal Reserve acted decisively and boosted liquidity - a theory he is now testing. At that time, the Fed was limited to how much liquidity it could inject by the fact that the available money supply had to be connected (at least partially) to the available gold on hand in U.S. reserves.

But scholars (to use the term loosely) agree – the advent of war was the end of the depression. War has since been recognized as good economic policy, and many U.S. administrations have embraced it as fundamental foreign policy.

I recently had a conversation with a senior Chinese government official who assured me that the Chinese observed the regime change machinations of the Bush administration with interest. He suggested that the precedents set by the United States in Iraq, Afghanistan, Panama, Colombia, Saudi Arabia, and myriad other coups overt and covert have thoroughly established the expectation among democratic citizens that forcible regime change of irresponsible governments is an acceptable tool in the democratic arsenal.

That the United States deploys this tool indiscriminately does not pass un-noticed. To the Chinese strategic thinkers, it acts to condone future regime change strategies lurking within the long range plans of expansion-minded countries whose resources may be reaching critical shortages due to excessive population.

Notice that virtually no criticism was leveled by China against Bush’s contrived Weapons of Mass Destruction fallacy, and no interference with the subsequent attack on Saddam Hussein’s fiefdom was seen.

An interesting tidbit in the news over the last 24 hours demonstrates just how easily the pre-text for war can be manufactured.

Five Chinese vessels maneuvered dangerously close to a U. S. Navy ship in the South China Sea on Sunday, closing within eight metres of the unarmed surveillance ship, the Pentagon said.

"This was a reckless, dangerous maneuver that was unprofessional" and violated international law, said Defence Department spokesman Bryan Whitman. The United States protested to Chinese authorities in Beijing and to the defense attaché in Washington over the incident, which occurred in the South China Sea, about 120 kilometers south of Hainan Island.

A Republican lawmaker called the standoff a critical "early test" for President Barack Obama just weeks before he meets Chinese President Hu Jintao in April.

Far from a provocative act of war, the unwillingness of both China and the U.S. to admit any sort of wrong-doing over the incident demonstrates the battle of wills that lurks just under the surface of U.S. – China relations.

According to the Pentagon, the targeting of the Impeccable came at the end of several days in which Chinese naval vessels had been stepping up their harassment in international waters.

The Pentagon insisted the Impeccable was engaged in "routine" and legal operations in international waters.

"The Chinese navy pursues peace and safeguards the security of the country," navy deputy chief of staff Major General Zhang Deshun told China Daily. On most levels, war between two of the planet’s superpowers is unthinkable. Since both are armed to the teeth with the most sophisticated of weaponry, it is difficult to envision a traditional war, where one side sends troops over to physically subdue the other side.

And any idea of a nuclear exchange is clearly self-defeating for obvious reasons. Chemical warfare ditto. Biological? Not in this century.

The third world war, which is, in fact, underway, is being fought economically, as evidenced by Timothy Geithner’s first verbal blunder as Treasury Secretary, where he accused the Chinese of “currency manipulation”, referring to the suppression of the rise of the Yuan against the U.S. Dollar.

Considering U.S. suppression of gold over three decades to create the illusion of a strong U.S. dollar, this is a clear case of the pot calling the kettle black. But that is an entirely different set of cats to skin.

The bottom line is the Chinese, who are the largest foreign holders of United States Treasury Bills, have been underwriting U.S. economic growth for decades, and now hold billions in foreign reserves of a currency being diluted into fractions of its former worth. This monetary hyper-inflation has, in theory, the net effect of devaluing the U.S. dollar denominated foreign reserve holdings in tandem of China and every other holder of Treasurys.

It's like two cowboys each holding a gun with trigger cocked at the other guy’s head, both of them yelling at the other guy to “drop the gun”. The likelihood of a civilized resolution to such a scenario is just about as unthinkable as a nuclear world war.

China deliberately uses manipulation to maintain an undervalued currency. The need to create jobs for the sake of “social stability” has led them to adopt “export led growth strategies” based on an undervalued currency.

This equates to subsidizing its exports and foreign direct investment, and is essentially a tax on China’s imports.

The United States, on the other hand, actively manipulates the value of the United States dollar through the illegal and destructive manipulation of gold and precious metals futures markets, where there is such an accumulation of short interest, that it is inconceivable to think that those contracts will ever be covered by real gold. This amounts to an artificial premium on the United States dollar relative to other currencies, and acts ultimately as a tax on imports.

So the two largest economies are employing similar tactics to achieve identical goals. Both are failing, and the consequence is a global financial system in which confidence has been destroyed, currencies are impossible to value, and the only thing of real value (precious metals and other commodities) are twisting in the wind waiting for somebody to win the third world war.