So far, South Korea, Taiwan, America and Japan have all sent warplanes careening through China’s new ‘air defence identification zone’ in the South China Sea. And they’re playing right into our hands for the upcoming Port Phillip Publishing symposium.
Yes, those must be some big hands. But we’ll need them to keep up with our fellow symposium speakers. One of them was a negotiator with Iran in the 1981 hostage crisis, and took part in America’s first ever economic war games. A second made his finance career in Hong Kong and Asia before it was fashionable. And a third is an expert on alternative warfare tactics.
That’s the perfect combination to make sense of what’s going on in South-East Asia right now. But despite the humbling amount of experience, we reckon their speeches will all make one crucial mistake. The same mistake the Chinese made in the early 1800s when it was the British hanging out in the South China Sea. And the Chinese have only just recovered from that experience. Literally recovered in the sense that they finally got Hong Kong back. So they haven’t forgotten their mistake.
What’s our point? Well you’ll have to come and see at the symposium. Unfortunately, it’s the opposite of what we’d like to tell the attendees. We’d like to say that the world will get rid of its skin disease known in the medical profession as ‘national borders’. Or that governments will leave people alone. But they won’t.
Behind every government act is violence. Even something as warm and fuzzy as foreign aid to the Philippines is only possible because the Australian Tax Office has the power to throw you in jail. Economic warfare between nations is no different to internal economic warfare. Currency wars and trade wars might seem benign, but have the same hidden violent nature to them. That’s why they often end up starting real wars.
Here’s an example. Back in the 1800s a very similar set of economic imbalances faced the world. An east-west trade deficit, a western military superpower and greedy crony capitalists rorting a government created, rent seeking opportunity. (That’s an opportunity to make money which is created by the government and is therefore not subject to free market competition or restraint. In this case it was a monopoly on trade given to the East India Trading Company, and a drug prohibition in China.)
The British sold opium grown in India to correct the trade balance and stop British silver flowing into China. The Chinese banned the opium. Merchants from both countries smuggled it into China anyway.
It was all going well for the British until a bunch of drunk merchant sailors beat the pulp out of a Chinese store keeper who refused to sell them more grog. Chinese junks attacked British merchant shipping in retaliation and the Royal Navy took sides. British interests, and all that.
That’s how the Opium Wars began. They ended with the British getting Hong Kong in exchange for giving the Chinese a break from the Royal Navy’s guns. British opium flowed into China freely once more instead of British silver.
Today, it’s the threat of open warfare that keeps our economic system functioning, just as it was in the 1800s. The US dollar is no longer backed by gold, just as the British Pound Sterling was no longer backed by a pound of sterling silver. It was backed by opium and the Royal Navy’s insistence that China buy opium.
Gold and silver are irrelevant when you’ve got guns. You can dictate terms. And so the US dollar is actually backed by Chinese faith in the US military. Remember, economic warfare, such as dumping a nation’s debt or challenging reserve currency status, has proper warfare hidden behind it. Right now the Chinese are testing whether they should have faith in the US military and the balance of power in economic and military terms. Our bet is that they’ll find the Americans about as insistent as the Royal Navy was.
for The Daily Reckoning Australia