The Coming War with China
By Bill Bonner
April 06, 2015 "ICH"
- Somehow, like it or not, the world turns. Today’s hegemon becomes
tomorrow’s also-ran. Today’s reserve currency becomes
tomorrow’s toilet paper. Today’s cock o’ the walk becomes
Hey, we didn’t create
this system. We don’t even especially like it. But that’s just the way it is.
Whether you already have made a fortune, or are trying to
build one, you need to be very careful about what currency… or currencies… your
wealth is denominated in.
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 wealth, power and
status were to be preserved at all costs.
But in the 18th and 19th centuries, firearms
started to become ubiquitous. It was harder
for elites to maintain their authority over
Every farmer on the
American frontier had a rifle. A ragtag band
of insurgents in the American colonies (with
the help of the French Navy) could defeat
the best army in the world. An out-of-work
actor could buy a handgun and pop off a
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. They were
also promised the fruits of others’ labors,
if they voted the right way.
For a time, it looked as
though this new model – social democracies
run by flaming politicians and professional
functionaries – had defeated all rivals.
The Soviet Union – which
relied on more old-fashioned blunt force to
run its slave-driven economy – fell in about
Maoist China had thrown in
the towel, more or less, 10 years earlier
when the country’s “paramount leader,” Deng
Xiaoping, announced, “To get rich is
glorious.” (Historians now claim he never
uttered those words. But they accurately
captured his vision for China.)
And Francis Fukuyama –
hallucinating – 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
Most likely, history will
trundle forward. And the dollar will be
knocked off its perch as the world’s leading
currency sometime before the 21st century
comes to a close.
But how exactly will that
No one knows. But few
imperial elites give up the No. 1 position
without a fight. As they see their power,
their status and their wealth challenged,
they typically find a casus belli, hoping to
stomp the newcomer before it is too late.
The End of
The phenomenon is known to
historians as the “Thucydides Trap.”
Political scientist 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
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: a rising rival and
fear of that rise. 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 former French
president Charles de Gaulle described it.
It allows Americans to buy
things from overseas without ever really
paying for them. Instead, we send over
pieces of paper that we create ex nihilo.
That paper is then sent back to the US to
buy Treasury bonds and other
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
Between 1971 and today,
roughly $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
There is also (with some
overlap) about $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
And that’s not to mention
Washington’s unfunded liabilities…
Boston University professor Laurence
Kotlikoff recently told Bonner &
Partners Investor Network
subscribers that America’s “fiscal gap” –
the difference between Washington’s
projected financial obligations and the
present value of all its projected future
tax income – is a mind-boggling $210
trillion. That’s about 211% of US GDP. (You
can find out more about this shocking
To honor these claims, the
US would have to run a budget surplus.
(When? How?) But instead of running a
surplus, we run deficit after deficit.
Instead of edging toward 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
China is hooked on
producing. As it adds productive know-how
and capacity, it becomes more and more
competitive. Not only can it produce more
consumer gadgets at lower prices, but also
it can produce the latest in military
It’s a matter of time
before that fighting gear comes out. At
least, that’s what history suggests.
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
can invite sluggishness, complacency and
The US military is the
fattest, most zombie-infested bureaucracy in
the world. It suffers from an overabundance
of resources. It supports troops (at a cost
of $1 million per soldier per year) all over
It builds weapons systems
that are often 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.
America’s 10 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…
We will probably find out…
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