In many ways, massive ground wars are relics of the past. While it’s still important to maintain a strong defense, actually applying that military power is a crapshoot as far as results are concerned. If there was a margin in war, then the Middle East would be fantastically rich. Just look at what Ukraine is doing to the Russian economy and what Iraq and Afghanistan did to ours. The inescapable conclusion is that, while sometimes necessary, war is bad for business and the global economy is changing the nature of conflict.
In the modern world, conflict is moving from the battlefield to the bank board. New wars are more likely to involve trade barriers than laser-guided munitions. While the battlefield may be different, the casualties are just as serious. China has been able to maintain an enviable growth rate mostly by manipulating its own currency so that it’s always cheaper to manufacture things there. The Chinese learned quickly that $6 toasters were a far more effective weapon in the modern age than aircraft carriers.
It’s in that context then that the trade deals Russia and China are pushing to use one another’s currency take on their true meaning. Trying to send landing craft ashore in California would be suicide, instead the Chinese are launching an attack on our currency and that war is spreading.
It started off with just China and Russia making energy deals denominated in their own currencies. Then it was Argentina and Venezuela, countries which are not exactly the A Team of economies. While China was making friends with all the kids who sat by themselves at lunch, it was pretty easy to ignore the broader threat.
Then Brazil, India and South Africa jumped on board in a small way with a $150 billion dollar exchange bank. Suddenly the Chinese table in the global lunch room was starting to attract a bigger crowd. Then the cool kids started to show up.
Most recently the Swiss announced a currency deal with China. In the lunch room of the global economy, the Swiss would definitely count as one of the cool kids and a varsity player on the global economic team. Miffed at the United States for the heavy-handed tactics employed against their banking system, the Swiss signed a $21 billion franc deal (about $23 billion in USD) with the Chinese to accept one another’s currency in trade deals. The Swiss move is a snub at both the U.S. and the European Central Bank’s euro policies.
While those deals were ominous enough, by far the most troubling has been a move by U.S. companies to also start trading with the Chinese in their own currency. The same corporate snobbery that lead companies to move their headquarters overseas so they could avoid giving anything back to this country has now transitioned into nearly 17% of them playing currency footsie with a country that is no friend to the United States.
The speed and scope of the attack on the dollar by the renminbi is truly remarkable and should be frightening to anyone paying attention. It all points to the widespread and deliberate move on the part of China to set up the renminbi as the world’s reserve currency, which is a direct shot at the U.S. dollar and the United States.
So far our reaction to the opening shots in this global trade war have been tepid. There’s a tendency here to shrug off economic matters and leave the solution to the invisible hand of the market. But market economics assumes that all the participants are playing fair and when the global economic bully is pounding you on the playground, that’s not the time to hope the market will sort it out; that’s the time to fight back.
Right now we’re in the middle of a war for the global marketplace but only one side is fighting. If you want to do some interesting reading, check out what happened to the economy of the United Kingdom after the U.S. surpassed them as the largest economy; it wasn’t pretty. If the Chinese end game succeeds, and right now it seems to be working, the effect on the U.S. economy and the dollar will be devastating.
