Geopolitics post COVID-19

Before the coronavirus caused governments to impose lockdowns, whole economies, markets and even currencies were already on course to be destroyed by a vicious downturn in bank lending at a time of contracting trade and record debt. The additional strains from the virus have intensified the crisis further and quickened the pace of all aspects of monetary destruction.

The coronavirus has permitted America and other Western nations to adopt a war footing by restricting personal freedom in the interest of the state. As tensions against China rise and the global economic crisis escalates, these freedoms will be not be returned, being deemed to be against national interest.

This is an election year for America and the political system is already ramping up blame for the virus and her economic misfortunes against China. We are entering dangerous territory when politics mobilises hate against a supposed enemy by using propaganda tactics which are designed to stir up xenophobic anger.

How China responds will be crucial. Its leadership can defuse the situation with a few simple changes to its foreign policy, isolating America from her allies in the process. But does a highly bureaucratic communist leadership have the imagination to do so?

Introduction

One thing is for sure: the world will be different when it emerges from the coronavirus crisis. Doubtless, on pain of likely death those over seventy years of age must remain prisoners in their own homes while the younger generations are tasked with the return to normality. All this is meant to be under government guidance of course. Over the coming months governments intend to save swathes of business sectors, such as banking, energy production, utilities and the rest, first by lending the money to pay the bills, and then by rescuing the failures, taking them into public ownership in many cases. 

That is what the post-coronavirus environment can be expected to look like, if, as governments hope, the recovery is V-shaped. If not, then greater interventions will be visited on the population to protect it from itself.

While not necessarily intentioned, there has been and will continue to be a dramatic transfer of freedom from individuals to the state, which the state is always reluctant to let go when the crisis passes. The evocation of a war against the virus is to facilitate the transfer of peoples’ freedom to the state, because that is what is required to fight a war. But when it’s over, the bureaucrats’ instincts are never to return freedoms. 

In the vast majority of cases, win or lose, following a war it is usual for a nation to retain the measures adopted, dropping none of them. It might be called a transitional economy, kept in place with all the war-time restrictions until an exit path, inevitably to greater socialism, can be devised. And for America there is a war still to be fought against China for global domination, justifying yet more control.

Nanny meets fascist socialism

Welcome to the new post-coronavirus intensified socialism. As individuals we have given the state enormous power over our lives, which will almost certainly be consolidated. The direction of travel is clear. Not only can big brother censor us, but it can now track our movements more effectively than the old KGB. If you leave your home, leave your smartphone behind. Wear a wide-brimmed hat and change your gait, avoiding the cameras. Your money in the bank, or more correctly in your about-to-be-nationalised bank’s money credited to your account, can only be disposed of for state-regulated products by means of traceable transactions instead of old-fashioned cash.

Instead of the soviet, we have the nanny state. Nanny knows best. This is the real world of the 2020s. It is unnatural and will therefore eventually fail. In previous articles I have written about one aspect of its failure, and that is the impending collapse of unbacked state currencies. I have pointed out that central banks, and especially the Fed responsible for the world’s reserve currency, are embarking on an exercise in inflation designed, above all, to uphold the state by maintaining the values of its debt and therefore all other financial assets. If they fail, and they will because the task is too great, the currencies will fail as well, and remarkably quickly. Until then, free markets are a primal threat to the system and must not prevail.

Doubtless, deep state operatives everywhere believe that the threats from their own people can be contained. Taking that for granted, they are now moving on to contain threats from other states that don’t conform to the West’s democratic model. There is now much more propaganda coming out of America and the UK about the evil Chinese than the evil Chinese are disseminating about America and Britain. 

The story being managed is of a devious state, somehow stealing our souls by selling us their technology. Mobile 5G puts China into our homes and controls our internet of everything. It will allow the Chinese to control us. What is not explained is why it is in China’s interest to abuse its customers in this way. What is not explained is why we, as individuals, will be better off not having Chinese goods and technology. And when Britain’s GCHQ intelligence and security division took Hua Wei’s equipment apart, they couldn’t find any evidence of Chinese state spyware anyway. 

The irony in all this is that our democratic model, the nanny state, is cover for the same internal policies as those deployed by the Chinese, admittedly less vicious; but that is changing. Rather than communist-socialist, both Chinese communism and Western democracies are, properly defined, fascist-socialist. With communism, the state owns your cow and tells you what to do with it. With fascism, you own the cow and the state tells you what to do with it. In these simplistic, but not inaccurate terms, our governments increasingly follow the fascist creed adopted by the Chinese Communist Party after Mao’s death. Give it time and the intense Chinese-style suppression of free speech could become the defining feature of nanny’s management style as well.

Here we must note a fundamental truth. Socialists of either extreme do not see free markets as a rival, because they believe they are useful for progressing socialism towards desired ends. The true rival to your socialism is someone else’s socialism. Newly energised Western state socialism is to be pitted against Chinese state socialism. The World is about to get more dangerous.

US is upping the propaganda stakes

Last week, US Secretary of State Mike Pompeo said China caused an enormous amount of pain and will pay a price for what they did with the coronavirus pandemic. On Tuesday, President Trump threatened to seek reparations from China for infecting Americans. This follows a 57-page memorandum, entitled Main Messages dated April 17, briefing Republican senators, which was headed by the following bullet points:

• China caused this pandemic by covering it up, lying, and hoarding the world’s supply of medical equipment. 

 

• China is an adversary that has stolen millions of American jobs, sent fentanyl to the United States, and they send religious minorities to concentration camps. 

 

• My opponent is soft on China, fails to stand up to the Chinese Communist Party, and can’t be trusted to take them on. 

 

• I will stand up to China, bring our manufacturing jobs back home, and push for sanctions on China for its role in spreading this pandemic.[i]

 

Clearly, the propaganda war being waged by America against China is undergoing a new lease of life. And it’s not just America: anti-Chinese belligerence is being ramped up through other national intelligence agencies. Even senior MPs in the UK’s Conservative Party and “useful idiots” in the media are now spouting renewed anti-Chinese propaganda. 

On one level, American propaganda can be taken as a defence of President Trump, on the simplistic basis of finding someone else to blame for his administration’s increasingly desperate economic plight. But the danger is that the White House train has left the station in the direction of policy escalation with no means of stopping. In this election year someone must be blamed. To improve his ratings and following an established political tradition of diverting attention from the domestic scene, Trump must blame foreigners and China is the easiest target. We are rapidly moving in the direction of unintended consequences.

Meanwhile, we have to hope that President Xi does not take the American bait and escalate tensions from his side. Xi’s equanimity has set the pattern so far. He has made mistakes, and will almost certainly continue to do so, but his Sun Tzu strategy is making it difficult for the Americans: “If [the enemy] is in superior strength, evade him”. 

Of one thing we can be reasonably certain, and that is in a new attack the Trump administration will escalate trade protectionism against China. It is a policy which will backfire on America. Assuming no change in the American people’s savings habits, the budget deficit leads almost directly to a trade deficit, the twin deficit syndrome. The trade deficit is not caused by unfair foreign competition, but as a simple matter of national accounting it is linked to inflationary funding of government spending. The temporary offset with respect to the inflationary effect on prices is the expansion of foreign production which ends up as imports at less inflated prices. Meanwhile, the US’s budget deficit is now set to grow substantially from its trillion-dollar baseline and in the light of recent economic developments it could easily more than double.

If the trade deficit is to be contained, then measures must be introduced to prevent import substitution. This is in accordance with enhanced nationalism, typified by Trump’s Make America Great Again slogan. Therefore, the likelihood of America extending trade protectionism beyond China as the economic crisis progresses is greater than it may currently appear. 

Without lower prices for imported goods and consumption generally restricted to domestic production, inevitably prices for everything will rise at a faster pace. Therefore, at a time when food prices will almost certainly be rising sharply and causing political difficulties for Trump, price inflation for all aspects of consumer spending will be getting beyond the managed control of government statisticians. 

Domestically, the combination of an escalating budget deficit and rising consumer prices will lead to higher interest rates and therefore increased US Treasury borrowing costs. The Fed will then be unable to control financial asset prices, the dollar will slide, and it could turn out to be electoral suicide. Trump may not realise it but in this election year he is conflating two opposing objectives: a geopolitical one against China to improve his political ratings and an economic one which can be expected to destroy them. 

In the past, politicians in this position have responded by clamping down even further on free markets and personal freedom, evoking Hayek’s prophecy of the call for stronger leadership in his The Road to Serfdom. And with respect to foreign policy, imperialistic motivation intensifies, which we are already seeing.

Meanwhile, we must hope President Xi stays calm in the face of American self-harm.

China’s long-term plan

China will have been aware that its persistent trade surplus with America would only be tolerated for so long. This realism has driven a longer-term strategy of focusing on a future with Asia and Europe, securing additional resources for these objectives from Africa and putting in infrastructure and transportation and communications links to bind the whole together. In doing so, America will become isolated, or even better as Sun Tzu’s ethereal spirit might conclude, the enemy has isolated itself.

In order to insulate from American sanctions, in recent years China has sought protection from a weaponised dollar. Together with Russia, it has built an Asian security and economic bloc in the form of the Shanghai Cooperation Organisation, where cross-border trade does not require dollar settlements.

As little as possible of China’s non-Asian financial transactions are conducted through the American banking system, having established a twin nexus of Hong Kong and London to develop offshore markets for the yuan. China also set up alternatives to American-controlled international development corporations and established Shanghai Connect, through which foreign capital could invest in Chinese and trans-Asian infrastructure projects free of exchange controls and Chinese taxes. And shrewdly, while the US effectively controlled paper suppression of the gold price, China deliberately began to dominate trading in physical bullion.

In any financial war, control of physical gold markets is the equivalent of a nuclear deterrent. Ultimately, paper gold counts for naught. China’s ownership of a trillion or so of US Treasury debt is a further tactical weapon, that if deployed could destroy the dollar by attacking US Treasury financing at its weakest point. American commentators who claim that the Treasury could always block Chinese sales of Treasury debt ignore the wider damage that would be done to the dollar as the reserve currency. For the Chinese, the write-off of its US Treasury assets would be the equivalent of a pawn sacrifice to capture a queen.

Post-virus, America is likely to find too late that China has abandoned the financial battlefield hitherto fought on the dollar’s ground. It means China ceasing a policy of appeasement in the interests of trade and abandoning a policy of doing nothing to undermine the reserve currency. This would be an important development, because the American deep state has always known that it is in China’s interest not to attack the dollar. But when China’s trade with America becomes severely restricted China will no longer need the dollar, buying energy and other commodities using the dollar as little as possible.

To a large extent China is already following this policy. But coronavirus has fundamentally altered the pace of development and relative strategic positions. From henceforth, both sides will assess not only by how much the opponent is weakened, but by how much itself has been weakened as well. China’s central government has the better finances compared with America’s: China’s central government debt to GDP of roughly 50% is against America’s 110%+, providing some balance to the dollar’s hegemony.[ii]Furthermore, China has a more authoritarian grip over its own people and is therefore stronger politically, compared with America crippled by the coronavirus in an election year.

Monetary events will be key

By default, the assumption in US Government circles is that America can and will continue to spend whatever the nation requires for its military defence and intelligence gathering. The military-intelligence complex has successfully fought off attempts to restrict its funding and almost certainly assumes the resources it requires will continue to be forthcoming. Ever since the Second World War, foreign ventures have been funded by the expansion of unbacked money, and all limitations on this form of funding were removed in 1971, when the pretence of a gold standard was finally abandoned. The military has become accustomed to no accountability, financial or otherwise.

The demands on the US government for fiat money financing are now increasing rapidly to satisfy economic priorities, threatening to crowd out military funding and tip the battlefield against the Deep State in its financial war against China. 

Langley may get the money it nominally needs, but will it be enough? By adopting President Trump’s trade policies into its geopolitical strategy against China, the military-intelligence complex has already contributed to a weakening of the economy, even before the coronavirus hit. All the coronavirus has done is brought forward and amplified the economic consequences of the trade and credit cycle downturn. No one in the administration appears to be aware that the trade tariff strategy against China is already causing major harm to the US economy, which ultimately finances the military-intelligence complex. 

The infinite money-printing by the Fed to support the weakened economy through the coronavirus crisis, and to ensure financial assets maintain their values, threatens to collapse the dollar’s purchasing power. The US Treasury will be unable to fund all government activities except at far higher interest rates, throwing the government into a debt trap, for which the only outcomes are massive spending cuts or yet more inflationary financing.

In the face of an economic depression, spending cuts will be impossible. Consequently, America will be hampered in its financial war against China, unless the yuan collapses at the same rate. That seems unlikely. The high savings rate of the Chinese people offers it a degree of protection that the dollar lacks. When a significant proportion of consumers’ earnings are earmarked as savings instead of current spending, it leads to greater stability of the currency’s purchasing power. It is this difference which is reflected in the Japanese yen’s stability: The Bank of Japan prints money and Mrs Watanabe doesn’t spend it; she banks it. It can also be said of China, where savings of after-tax income are reportedly about 40%.

In the battle of the currencies, the dollar can be expected to lose purchasing power more rapidly than the yuan. Everyone’s concern should then be the Deep State’s actions as the dollar’s failure becomes more apparent. The Dr Strangeloves at Langley are not in the business of backing down, and China knows it. The answer can only be for China to become less militaristic and more mercantilist. Sun Tzu again: [A clever fighter] wins his battles by making no mistakes. Making no mistakes is what establishes the certainty of victory, for it means conquering an enemy that is already defeated.

To avoid those mistakes China should address its weakness in the propaganda aspect of the war. The Americans are on their way to convincing its five-eyes intelligence partners of China’s evil intent. As mentioned above, the British appear to be swinging onside with the Americans, following the granting of Hua Wei a reduced role in its 5G mobile network. Australia appears to be very supportive, particularly having been honoured with the five-eyes intelligence gathering on its Gold Coast in August 2018. Canada is heavily dependent on the US, and despite the positive relationship with China fostered by Trudeau Senior, Trudeau Junior dares not take China’s side. Only New Zealand has not bought the American Kool-Aid without reservations, despite threats to be expelled from membership.

For China, fences need to be mended to disarm and isolate the Americans, not least because America continues to undermine China’s relations with Western Europe, and it will need to keep the other South-East Asian nations onside.  The strongest signal would be a change in policy with respect to Taiwan. By recognising its national status, China would be signalling to all its trading partners in the region it will respect national sovereignty. Abandoning the attempt to amend Hong Kong’s extradition treaty and moving to enhance the “one country, two systems” approach would be another powerful signal. 

On trade, China should champion free trade and abandon all tariffs, including against American imports. Tariffs are simply a tax on one’s own people and given that the time has come to abandon America as an export market, there is little point in trying to use tariffs as a negotiating tool.

If China took these three measures, by and large it could weather criticism of internal policies, such as the suppression of Uyghurs.

Britain’s free trade policies

Having left the EU with only trade terms broadly left to be agreed, Britain as an entrepôt has an overriding interest in free trade. Its best policy would be to abandon all trade agreements and all tariffs, but politics make that an unlikely choice and trade agreements will be negotiated instead.

With willing member nations of the Commonwealth trade agreements should be relatively simple. In principal, America is ready to fast-track a trade agreement, but with growing trade autarky on the American side, that prospect will recede. Increasingly, Britain will find itself torn between supporting American imperialism through the five-eyes intelligence agreement, likely to be a condition of a future US-UK trade agreement, and the economic benefits that flow from an unrestricted free-trading agreement with China.

It should be noted that Boris Johnson as London Mayor played a significant role in promoting London to China as an alternative international financial centre to New York, when he led a City of London trade delegation in October 2013. He summoned George Osborne, the then Chancellor of the Exchequer, and under the cover of a rapidly convened second trade delegation, Osborne met with senior Chinese leaders and agreed that London would act in that capacity.

This also explains Johnson’s current approach to China. He cannot be publicly supportive for fear of souring relations with the US but equally he understands the economic importance of a working relationship with China. His agreement to permit Hua Wei a role in Britain’s 5G network was a carefully balanced decision. Publicly, the Americans were very upset, but that clamour has died down only to be replaced by renewed calls from his own backbenches to backtrack on Hua Wei. These moves can only have been prompted by US intelligence sources with the connivance of their British counterparts.

From China’s point of view, there is a potential gap to exploit. If they can improve their propaganda effort on the lines recommended in this article, a pragmatic British government would drift away from an isolationist America towards free trade with China and the other members of the Shanghai Cooperation Organisation, which together with the nations yet to join represent over 40% of the world’s population. And where Britain goes, the rest of Europe is likely to follow.

But it will require China to rethink its stance on Taiwan and Hong Kong as a minimum. Dropping all tariffs, even against America, would be even better.

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[i] See https://static.politico.com/80/54/2f3219384e01833b0a0ddf95181c/corona-virus-big-book-4.17.20.pdf

[ii] American commentators usually side with their government, claiming China’s banks and industries are more indebted that America’s. At roughly 300% of GDP, that is true, compared with about 250% for the US. But the major banks in China to which the debt is owed are owned by the government. Furthermore, in a deep recession US government debt rapidly escalates, not to mention the additional escalation of future liabilities. China’s government is considerably less affected by these factors.

 

 

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