China and the United States Are Losing Together

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Godwin’s Law is an internet rule of thumb that states the longer an online discussion goes the chance of Hitler or the Nazis being employed by someone in it approaches one. Also called Godwin’s Rule of Hitler Analogies, it was first used in attachment to the usenet groups of the early internet. Attributed to American attorney Mike Godwin who began referring to the spectacle all the way back in 1990, near three decades later it is pretty close to settled doctrine.

In February 2014, Philippines President Benigno Aquino skirted the edges of Godwin’s Law not in some random reddit thread but in serious international diplomacy. His country, along with Japan, Vietnam, Malaysia, and Taiwan, had been (and continues to be) locked in territorial disputes with the People’s Republic of China. The latter nation having grown more aggressive in its claims on strategic island groups, Aquino in frustration introduced the Nazi comparison.

“At what point do you say, ‘Enough is enough?’ Well, the world has to say it. Remember that the Sudetenland was given in an attempt to appease Hitler to prevent World War II.”

In September 2015, Chinese President Xi Jinping was in Seattle attending a conference and dinner sponsored by the National Committee on US-China Relations, as well as the US-China Business Council. Also in attendance was Dr. Henry Kissinger, former US Secretary of State who introduced President Xi.

The Chinese leader’s speech started off by recognizing the significance of the setting. The Port of Seattle as the number one trading partner with China meant something, Xi said. The city and state had become “an important symbol of friendship between Chinese and American people.” The relationship that has developed between the two countries since China opened itself to modern reforms was, in Xi’s view, a “win-win” of cooperation.

But Xi also issued a soft warning:

“We want to see more understanding and trust, less estrangement and suspicion, in order to forestall misunderstanding and miscalculation. We should strictly base our judgment on facts, lest we become victims to hearsay, paranoid or self-imposed bias. There is no such thing as the so-called Thucydides trap in the world. But should major countries time and again make the mistakes of strategic miscalculation, they might create such traps for themselves.”

This statement was more in line with his purpose. Economic cooperation isn’t strictly enough to forestall conflict. It is taken as unshakable doctrine in the same way Godwin’s Law has become more informally, that trading partners don’t make war on each other.

The reference to the “Thucydides trap” was a purposeful one. Author Graham Allison wrote a book titled Destined For War that caused an international stir of sorts. Allison researched 16 historical instances over the past five centuries where a young economic upstart challenged the commanding national at the apex of the global order. In twelve of those cases conflagration and carnage was the result. The name for the term comes from Thucydides’ Athens’ underdog rise in the face of the dominance of ancient Sparta, and the wars that followed from it.

Writing for The Atlantic on the day after Xi Jinping spoke in Seattle, Allison claimed:

“Based on the current trajectory, war between the United States and China in the decades ahead is not just possible, but much more likely than recognized at the moment. Indeed, judging by the historical record, war is more likely than not.”

Among the 16 cases Allison studied was, of course, Germany’s challenge to Great Britain before, during, and well after WWI. There has been enormous scholarship and debate devoted to The War to End All Wars and how it didn’t actually accomplish that. Briefly, what made the total devastation of WWII so tragic was that the first world war really should have been enough.

It wasn’t by the time of Hitler’s rise strictly about the economic pecking order, either. In Germany’s view, it was national survival tinged with smoldering resentment over Versailles. But that’s not how it looked to anyone in the twenties. While Hitler was still giving speeches in beerhalls and taverns, the major powers were demilitarizing at a rapid pace. No one, they thought, would risk another fight so destructive.

In rational terms, that was true. Germany in the early twenties when disarmament was universal was governed by the Weimar Republic. Matched against that setup rather than the Kaiser, Britain in particular was assuaged as to any future danger. The British government in 1919 had formulated the “ten year rule.” Each of the armed services was required to frame all policy positions, including budgets, on the assumption that they would not be engaged in a major conflict for a period of a decade.

It was none other than Winston Churchill who on becoming Chancellor of the Exchequer in 1924 hardened this limitation perhaps more than any other English official. Given what happened in the thirties, particularly with Churchill becoming the lone voice of warning while in his “wilderness” outside the government, this prior view of determined disarmament might seem puzzling.

Some have argued that as Exchequer it’s a duty anyone holding that office was to uphold – fiscal restraint above all else. And Churchill was the kind who when taken to a task took it to the extreme.

Still, this lack of enthusiasm over the British military proposition that stood in stark contrast to who Churchill was as a person. He was first and foremost a military man, educated and having served that way. His worldview was formulated in the lengthy struggles of the English Peoples, the near constant wars which he viewed as often necessary given the nature of Europe.

Writing about his ancestor John Churchill, 1st Duke of Marlborough, Winston noted how often these grand difficulties were faced by his ancestor during the War of Spanish Succession. There was the most powerful man in Europe, Louis XIV, at the throne of the most powerful nation, France, and yet opposed to his intent on continental domination was the often idealistic squabblers who rather than appreciated the threat purposefully wished to continue on as if the world could never be led to such peril.

“Lying in his [Louis] central station with complete control of the greatest nation of the world in one of its most remarkable ebullitions, with the power to plan far in advance, to strike now in this quarter, now in that, and above all with the certainty of complete obedience, it is little wonder how well and how long he fought. The marvel is that any force could have been found in that unequipped civilization of Europe to withstand, still less to subdue him.”

The later Churchill’s philosophy, borrowing in good part upon the Duke of Marlborough, was to never take such an unrealistic stance on human political affairs; to see the world as it was, not what everyone wished it would be or so often believed it would become if only left alone.

Having contributed to the decay of Britain’s armed forces in the twenties, in the thirties he was transformed to practically their lone advocate. What changed?

The easy and obvious answer is Hitler. He was a nobody in the twenties, a figure even Germans paid little mind to. By 1932, he was in position to run the country with an overly enthusiastic core of support.

It’s also easy to write that the regrettable talents of Adolf Hitler handily won over Germany with impassioned speeches. But Germany at that time wanted to be won over, a point we can never forget. And it wasn’t just the Treaty of Versailles or resentment about the way WWI ended (the so-called stab in the back).

In January 1932, Robert Boothby, a friend and fellow Conservative in Parliament, wrote to Churchill following his travels in Germany. Boothby had been in the country on invitation to lecture in Berlin and Hamburg, speeches given at that particular moment in that particular place on the dangers of fascism and Communism (as well as the Roman Catholic Church) in defense of “the values of democracy and personal liberty.”

“I sat next to a very nice young chap at dinner - a partner in Wassermanns Bank - and he said the most ‘hopeful' characteristic of the younger generation in Germany was their fundamental desperation. The older people were lost without a foothold. But his own generation had never known security. They were thankful for anything - especially a good meal - and ready for anything, because they never knew what the morrow would bring.”

In 1910, just a few years before the Archduke of the Austrian Empire was to be primary testcase for the Butterfly Effect (before the theory was ever formulated), British journalist Norman Angell published a book called The Great Illusion. It was a huge success and made Angell a household name in the UK, pushing him to celebrity even following WWI. Its thesis, in very simple terms, was that the more interconnected economies of Europe and the rest of the world in the later 19th century had rendered major conflict improbable.

The last big one in Europe hadn’t been for four decades by the time of Angell’s publication. This was an unusual and remarkably stable period given human history. Marked by astonishing prosperity alongside, with the British Empire right at the top, there was quite a lot about the pre-WWI period that seemed perfectly lined up with the thesis.

Globalization wasn’t, though, a settled assurance for a permanent peace because it wasn’t truly a permanent platform for prosperity. The illusion of the illusion was forcefully shattered not once but twice; the second somehow far worse than the first. As much as it was taken for granted in 1913, it was again in 1939.

Lurking in between those two pivotal points was the Great Depression. The scale of global economic collapse is still unbelievable to this day. But what really made it into what it has become in the modern mind was that it didn’t really end, at least not on its own. All throughout the middle thirties, economists and politicians spoke of a recovery that didn’t filter down near far enough into the vast areas within the economic system by then long suffering under malfunction and collapse.

People were thankful for anything, especially a good meal, and appreciated anyone who might be willing to give it to them and guarantee it for the future. Economic insecurity is as powerful an intoxicant as there can be, especially when fomented underneath the outward projection of presumed recovery. A boom for whom? Inequality is explosive only when the rising tide doesn’t lift all boats, a focus on the size of everyone else’s boat in comparison to your own when that tide is maybe a few inches.

In 1934, future Prime Minister Neville Chamberlain complained, “The real danger to this country is Winston. He is the warmonger, not Hitler.” Churchill saw the pressures placed upon Germany not just because of the Great Depression, but also going back to the terrible end of Weimar Germany. The Germans were acting as if prosperity was itself the illusion, while Chamberlain, as Stanley Baldwin, would be guided by the theory that out of the depths of depression the world could only hold to cooperation.

The Chinese in the middle 2000’s had taken to building ghost cities. These didn’t really catch anyone’s notice until after the Great “Recession” had ended. It seemed by then so far out of place, the kind of waste John Maynard Keynes had once suggested as “stimulus.”

That’s not really what they were, or are. Ghost cities were the future transformation of China from a rural subsistence agrarian economy into the world’s leading industrial powerhouse. To move from the former to the latter requires, obviously, more than just a job for the previous farmer and family. There must be facilities waiting in reserve to absorb the largest demographic transformation in human history.

In other words, ghost cities aren’t ghostly for very long, or at least they were never meant to be. They showed up in the Western consciousness because following the 2008 global economic collapse they tended to be vacant longer than they had before. The reason was obvious, or at least to anyone who didn’t listen to Ben Bernanke, Mario Draghi, or whatever other Economic official whose description of the global condition was and is never really honest nor comprehensive.

Nobody is really sure how far into the process the Chinese got. I’ve seen a wide range of estimates. Nor are we really sure how far they intended to go. One official document from 2006 that has been made public called for an additional 250 million Chinese to be moved into the cities by 2026 at the latest. Another suggested 400 or even 500 million were intended to be.

The only thing we are reasonably sure of is that China isn’t close to being finished with it. Except that, starting in 2017, they claim that they are. The process is, for all intents and purposes, starting to wind down early.

The Communist Party’s 19th Congress held last October declared a new phase for China. The idea of a “harmonious society” had been raised ten years before at the 17th Communist Party Congress, an acknowledgement that growth created problems including for those Chinese who hadn’t yet experienced the benefits of it. By 2017, the idea was still in effect, only this new version of harmony would shift away from the growth part of it. Quality of growth over quantity.

Xi Jinping spoke repeatedly of rejuvenation at the event. Rejuvenation from what? By all Western accounts, China’s economy is still booming even as ours is about to. Neither of those characterizations are true, so what China and its officials have been up to recently makes little sense to those who refuse more honest economic assessments.

Somewhat unexpectedly, Xi’s name was added to the Communist Party’s political constitution, placing it alongside only Chairman Mao’s. This elevation for Xi was further amplified recently by reports the constitution will be amended again, now to remove term limits currently in place upon the President (Xi). Having been given the privilege of Mao, the path is, presumably, clearing for him to govern in the same destructive fashion.

Was Aquino right, at least in principle?

There is no Thucydides trap, he said. But what “strategic mistakes” was Xi Jinping referring to that might create one? What the hell is going on in China?

I can’t really speak for China’s President, but I’ll presume to anyway. The Chinese, I believe, are following more closely to Churchill’s doctrine, to see the world as it is not as we wish it might be or faithfully hold as a guaranteed future. Economic cooperation may have built China, but its economic foundations (eurodollar) were never as stable as they appeared – an illusion, you might say. And it didn’t finish the job.

It leaves the Chinese Communists facing some very scary prospects, some of which are going to be shared, if not shared already, by a very large number of regular Chinese people who may wonder about economic security for the first time in their lives. I’ve recited enough times already the grim statistics, low levels that despite everything done in 2016, considerable stimulus all around, didn’t change all that much in 2017 (in some key economic sectors, not at all). Officials gathered late last year at the 19th Party Congress may have even taken to the impression that the degree and pace of economic growth was no longer a choice.

Conflict is not inevitable. That’s the choice. To avoid it requires recognition of our shared common ground. I don’t mean the standard bland boilerplate paean about how wonderful globalization is and how the status quo must be maintained at all costs. Quite the opposite, actually. Eurodollar-based globalization has been an utter disaster, and the consequences of its continuing defect are now much more than economic in nature.

There has to be a Western political movement toward reality. Voters in Italy are the latest to try and push that agenda on the recalcitrant Western political elite who refuse any economic explanation at all. It doesn’t matter how many times Janet Yellen has given off her patented blank stare, or Mario Draghi runs into one of his near lunatic anecdotes to filibuster for having to explain why these things happen the way they do, opposite, always, how they are supposed to go. If Jerome Powell says the economy is booming, or, what he really says, is just about to, why should anyone continue to believe him? Why would anyone in China?

Conflict with China is inevitable only so long as the American political establishment refuses to understand the far larger common ground we share with the Chinese. The global economy doesn’t work for us, so Trump proposes tariffs and a trade war. But the global economy doesn’t work for them, either. We are all already losers together.

Godwin’s Law, as I understand it, compels me after such a typically lengthy examination to call someone a Nazi. It may be tempting to fit Xi Jinping into that role. Hitler, however, was a unique historical case. It’s more than unhelpful to think only in those terms. But it’s far more dangerous to purposefully ignore the world as it really is.

In his so-called Locust Years speech given on November 12, 1936, before the House of Commons, the greatest man of the twentieth century warned, correctly, that:

“The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.”

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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