Summary of economic drivers
In this summary, the things and events have been considered from the perspective of great power competition, in the triangle of the US – China – Russia.
Strategic resources and capabilities
When looking at the energy resources (oil, natural gas, coal, nuclear) in its entirety, all the great powers possess sufficiently amount of resources, both now and for the next ten years. If natural gas and nuclear power can be assumed as “the base energies of the future”, the strategic positions of Russia and China may obtain some cutting edge compared with the US, due to extensive Sino-Russian cooperation in gas and oil pipelines (Power of Siberia, ESPO) and in nuclear power.
In rare earth elements as well in the majority of other strategic metals and minerals the whole picture is quite different, China and Russia being in superior position compared with the US. This is particularly important regarding the military industrial base, where the strategic know-how and capabilities of the US have deteriorated dramatically during last two decenniums, as stated in the US Presidential Report.
The future position of any great power will be largely based on the digitalization and effectively utilized AI-applications as well as scientific breakthroughs both in economic and military capabilities. Here it seems, based on Chinese and Russian public plans that centrally-led and –planned societies may be in the better position being capable to concentrate coherently massive resources into certain common focus sectors, which are essential for the future development of the society.
Reserve currency & sanctions and trade wars
As to the reserve currency situation, the US dollar has held its hegemonic position so far but the picture is now changing noticeable. China, Russia, Iran, India and Turkey have speed up the de-dollarization process and now even EU and a number of other countries are bandwagoning. This is incrementally undermining the position of US dollar as a sole global reserve currency.
As to sanctions and trade wars, many observers warn that “trade war leads to real war”. Using with large scale of sanctions and many other punitive actions, the US has set itself at odds with the majority of the mankind in 2018. This may be a new normal to the present and vanishing unipolar power US but to the rest of the world the situation is at least extraordinary and not necessary a particular promising sign for the future.
Blind faith in the US dollar is one of those disabilities, economists have in studying our economic future. Historically speaking, fiat currencies are entities with short lives and world reserve currencies are even more prone to an early death. But for some reason the notion that the dollar is not vulnerable at all to the same fate seems to be a general delusion.
China, along with Russia, has been a leader in this de-dollarization effort, despite being one of the largest buyers of US Treasury debt and dollar reserves since the 2008 crash. China and Russia are a perfect example of the de-dollarization trend, with the two nations forming a trade alliance on natural gas, oil and other energy sources and resettling the bilateral trade in national currencies.
With Germany and Russia entering in the final phase of the Nord Stream 2 gas pipeline despite condemnations from the US, means the moving away from the US dollar into a “basket of currencies”.
The US sanctions against numerous energy and other trade projects only seem to be hastening the international departure from the US dollar as the center of trade currency. American sanctions on Iranian oil support this argument, as China, Russia and much of Europe are working together to sidestep US restrictions on Iranian oil.
China has even instituted its own petroyuan market and the first shipments of oil from the Middle East to China paid for through a petroyuan contract occurred in August 2018. Mainstream economists like to point out the small portion of the global oil market that the petroyuan represents but they seem to have missed the bigger picture entirely. The issue is, now an alternative to the petrodollar exists where none existed before. And this is the crux of the matter that needs to be examined: The trend towards alternatives.
Beyond the shift away from the US dollar as a global reserve, there is a new matter of alternative international payment system. SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global network of “financial messages” between major banks, including central banks. The US government has exploited extensive economic control using influence on SWIFT, including mass surveillance of international financial transactions and denying countries like Iran access to SWIFT through sanctions. In the past, the US has seized or frozen funds being transferred through SWIFT between banks outside of US borders, including entirely legal transactions, indicating that the US has overt control over the system. Reserve status of the dollar, combined with US influence over the most important tool in international banking transactions has solidified US fiscal dominance for many years.
But the dollar’s reign is quickly coming to an end as global bank authorities like the IMF seeks to centralize monetary authority under a single world structure. The world is getting smaller as everyone except the US is consolidating economically. This includes alternatives to SWIFT. Russia dumps US Treasuries but maintains close ties to the IMF and BIS, calling for a world currency system under the IMF’s control.
China does the same, increasing ties to the IMF through its SDR basket system, while cutting its ties to the dollar one by one. Europe is embracing closer trade with both Russia and China, working to defy US sanctions. As part of the effort to undermine the US sanctions on Iranian oil, the EU has established a program to construct a new SWIFT system outside of US influence. It is a model that Russia, China and Iran have agreed to participate in.
The pace of the trade war will dictate the pace of the de-dollarization shift. The more aggressive the tariffs become between the US and China, Iran, Europe and Russia, the faster that already existing alternative systems will be implemented. Currently, the speed of the US – China conflict suggests a move away from the dollar and into an international basket of currencies. The recent SDR basket system will act as a bridge over time to a new world reserve currency; a single global currency system.
Preparing for this event requires as much financial independence as possible. This means tangible alternatives to the dollar, like precious metals, and localized economies based on barter and trade. Once the dollar loses world reserve status the transfer of price inflation into the US will be immense. Dollars held overseas will come flooding back into the country as they will no longer be needed for international exchange of goods and resources. This switch could occur very quickly, like an avalanche.
Indebtedness and various bubbles
The massive indebtedness and various bubbles in the national economies and in the global scale indicate the looming economic crisis and the coming of Great Global Depression.
So many Nobel Laureate economists, stock market and bond analysts, fund managers as well as top management of large international corporations have shared the common view that the present debt-drawn economies with ever-growing bubbles cannot continue anymore for years. The five next years of the 2020s will be fateful and crucial.
As to the great powers, the US is in very labile and dangerous position, per se, compared with the position of China or Russia. As one strategic risk consultant said: “The US is in debt trap death spiral”.
The Inequality of Demise regarding the US Federal Debt is the following:
annual interest payments + maturing debt > annual tax revenues
The US will face this dangerous situation in 2023 at the latest, according to the recent Report of Congressional Budget Office. What will actually happen, when approaching this moment, remains to be seen.
Economic crisis and military conflicts
The 2008 global financial crisis almost bankrupted governments and nearly caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.
The response to the previous crisis relied far too much on monetary stimulus and included far too little structural reforms.
But monetary stimulus is like an adrenaline shot to jump-start an arrested heart, it can revive a patient but it does nothing to cure the disease. Treating a sick economy requires structural reforms like improvements in infrastructure, reforming financial and labor markets, tax systems, fertility patterns as well as social and education policies. Policymakers have utterly failed to pursue such reforms, despite promising to do so.
The lack of structural reforms has meant that the unprecedented excess liquidity that major central banks injected into their economies was not allocated to boost the real economy but instead has raised global asset prices (= bubbles) to levels even higher than those prevailing before 2008.
As monetary tightening is coming sooner or later, it reveals the vulnerabilities in the real economy and the collapse of asset-price bubbles will trigger another economic crisis. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.
If history is any guide, the consequences of this “mispolicy” could extend far beyond the economy.
The next economic crisis is closer than generally has been assumed. What is really worrying about is what comes along. In the current social, political and technological landscape, a prolonged economic crisis, combined with rising income and other inequalities in majority of countries as well as with new cutting-edge military technological innovations could well escalate into a major global military conflict.
Although there is no standard path to war there is reason to believe that high levels of inequalities can play a significant role in stoking social unrest, diplomatic tensions, migration crisis, anxiety over globalization, political polarization, rising nationalism and other conflicts. All those features are symptoms of failed policies that could turn out to be trigger points for a future crisis.
Against this background, it must be taken seriously the possibility that the next economic crisis could lead to a large-scale military confrontation.
By the logic of the political scientist Samuel Huntington, considering such a scenario could help us avoid it, because it would force us to take correcting actions. The alternative may well be global conflagration.