In our previous article, we gave a rough road-map of what can possibly happen in the short to medium term. Today, we are going to straining our vision to look further ahead. Since we are looking too far out into the future, we are essentially guessing. Our guesses of the long-term are as good as yours. Therefore, please feel free to pitch in some of your ideas in the comments below.
Currently, the US and Chinese economies are like two partners in an unhealthy co-dependency relationship. Simplistically speaking, one lends and produces and the other borrows and consumes. As with any unhealthy relationships, this state of affairs is unsustainable. In the long run, we believe it is only a matter of time before the Chinese economy decouples from the US economy. To imagine how such a scenario will look like, consider what we wrote in Can China really ?de-couple? from a US recession?,
The needs of the Chinese consumption economy is different from the US consumption economy. Some Chinese are rich. But some other parts of China are unbelievably poor. Wealth distribution in China is rather uneven and there are still many pressing social and environmental issues to be solved. Currently, the Chinese export economy is tooled towards US consumption. To re-tool and re-configure the Chinese economy towards its domestic needs requires a period of adjustment in which capitals are destroyed and built.
A de-coupled Chinese economy will be driven by its own internal consumption and trade with its neighbours. When such a day arrives, it is doubtful that the US dollar will still remain the world’s reserve currency because the Chinese will no longer have any reason to accumulate them.
The loss of reserve currency status will be a serious problem for the US. As we wrote in How does the US export inflation?,
Through this convention, the US can expropriate resources from foreign countries by buying their goods and services with its own printed money.
Without the ability to expropriate resources from foreign countries, the US government will not be able to honour its unfunded liabilities to its own citizens (see Is the GFC the final crisis?). What can the US government do? It can repudiate its unfunded liabilities to its own citizens and protect the US dollar (to still function as money) or fulfill them by destroying the US dollar (hyperinflation). It cannot remain solvent and protect the US dollar simultaneously unless it finds a way to expropriate resources from foreign nations by force (i.e. go to war).
But war is out of question in an age of nuclear weapons. A military dwarf can be on the same par as a military giant just by possessing nuclear weapons (and a way of delivering them). With mutually assured destruction (MAD) no nuclear armed nation can be at a military advantage from another nuclear armed nation.
Unless…
… the nuclear armed nation has a way of neutralising the other nuclear armed nation’s means of delivering nuclear weapons. Well, the US Pentagon is working on that as we speak- missle defence shield system. That’s the reason why American’s missle defence shield project is highly provocative. A working missle defence shield gives the US dollar a military backing, which is highly useful in forcing the status quo to be maintained.
The Chinese, on the other hand, mindful of their humiliation in the 19th century due to their weakness militarily, will not be standing idle (and surely, they will not mind if they can take over the role of America). Last year, they shot down one of their own satellites in space, which is said to be quite technically challenging.
We believe the ability to shoot down any satellite is a very powerful way to neutralise any missle defence shield. In a missle defence shield system, the challenge is to shoot a missle with another missle, which is like shooting a bullet with another bullet. That requires sophisticated communications between base stations and anti-missle missle, navigation and tracking capabilities- all done on real time. Without satellites, all these complex tasks will not be possible. And the Chinese had demonstrated that they can shoot down any one they wish.
In addition, the Chinese and Americans are now preparing cyberspace as another military frontier.
As we wrote in Nations will rise against nations,
Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.
