The world finds itself in an increasing state of fragility. Gone are the days of the post Soviet collapse where the US was the unrivaled, lone Superpower. We witnessed a global economic boom soon after the Soviet collapse, with occasional hiccups such as Russia's default, the Asian Crisis, and the collapse of hedge fund LTCM. But overall, it was a great ride. Or so we thought?
So now we notice that the system of global debt based fiat currency that brought us tremendous wealth gains also gave us tremendous debts and severe global trade imbalances. The US finds itself in a situation of having to devalue the dollar to stimulate exports and to devalue its debt. This policy of dollar devaluation has created a race of devaluations around the world. A currency war, of sorts. It has also created a situation where inflation is being exported by the wealthy West to the poorer East - with unimaginable political unrest in the Middle East and elsewhere.
And so, as the world's resource rich emerging nations experience turmoil, and as currency and trade conflicts intensify, the world's powers are looking at their insurance policies to weather the economic storm. There are two insurance policies that nations rely on: One is the result of the fiat money world we live in: it is gold. Nations know that if the current fiat system breaks down, that nations with the most gold will feel the least pain. That's why China, Russia, and India are racing to accumulate gold. Gold cannot be printed at will by Central Banks, and so in a situation of a severe currency or sovereign bond crisis, gold becomes the only remaining, trusted medium of exchange. But there is another "insurance policy" powerful nations rely on to maintain their access to the world's resources and to keep competitors in "check." It is their military.
Here I report two recent developments that prove the world is becoming increasingly multipolar, and thus increasingly fragile. It is becoming fragile because when clear leadership is lacking - military conflict or re-armament is the resolution mechanism that settles disputes. What are the disputes? Who influences what regions, and why.
From the Christian Science Monitor:
With Russia's $650 billion rearmament plan, the bear sharpens its teeth.
The graying bear is getting a make-over. Russia's military is launching its biggest rearmament effort since Soviet times, including a $650 billion program to procure 1,000 new helicopters, 600 combat planes, 100 warships, and 8 nuclear-powered ballistic missile submarines.
Analysts say Russia, while already the world's fifth-largest military spender, needs strong conventional forces to reduce its overreliance on its aging Soviet-era nuclear missile deterrent. Valentin Rudenko, director of the independent Interfax-Military News Agency, says it could create "a whole new ballgame."
"For about two decades we've had no real modernization, at least not like what's being proposed now," he says. "Russia will finally have a modern, top-level armed forces that are capable of protecting the country.But is Russia merely seeking to upgrade the protection of its borders, or is it thinking something else?
Some experts are deeply skeptical of the expenditures – especially the expensive purchase of Mistral helicopter carriers, which are designed to project power around the globe rather than fight the defensive and local wars that Russian military doctrine declares as the country's main priority.And there is some valid criticism:
Critics say that despite the huge sums of money slated to be injected into the rearmament program, it is far short of the amounts needed to revive Russia's moribund military-industrial complex, which has lost the vast network of subcontractors that existed in Soviet times.
"This is not the first time the Kremlin has talked about military modernization," says Golts. "But all previous programs have failed."
The critics may be right. but we need to keep in mind that Russia is now rivaling Saudi Arabia in oil production and the current high price of oil has been benefiting Russia tremendously.
But it's not just Russia. Ancient rivals Japan and China, are suspicious of each other. From the New York Times:
With Its Eye on China, Japan Builds Up Military
The Japanese F-15 fighters are engaged in an increasingly busy, and at times tense, game of cat-and-mouse with rapidly modernizing China, just across the East China Sea. The pilots say they face intrusions into Japanese-controlled airspace by an array of increasingly sophisticated Chinese aircraft, including advanced fighters like the Russian-made Su-27.
“You cannot let down your guard when you fly up against an Su-27,” said Maj. Gen. Masashi Yamada, commander of Naha’s squadron of 24 fighters.
General Yamada will soon get additional help. In December, Tokyo announced plans to strengthen its forces in the southwestern Okinawan islands, including adding a dozen F-15s in Naha. The increase is part of a broader shift in Japanese defensive stance southward, toward China, that some analysts are calling one of Japan’s biggest changes in postwar military strategy.And there is a bigger concern for Japan, emphasis mine:
This strategic shift is another step in a gradual and limited buildup of Japan’s forces, aimed at keeping up with the changing power balance in Asia while remaining within the bounds of Japan’s antiwar Constitution and the constraints of its declining economic power. Political analysts say Japan is slowly raising the capabilities of its forces to respond to a more assertive China and a nuclear-armed North Korea — and to take a first, halting step out of the shadow of the United States, its postwar protector, which many Japanese fear may one day no longer have the will or ability to defend Japan.
And let's not forget about China's Nuclear arsenal. From the Sydney Morning Herald:
China determined to rival US arsenal
HIGH-RANKING Chinese officials have declared there can be no limit to the expansion of Beijing's nuclear arsenal, amid growing regional fears that it will eventually equal that of the US, with profound consequences for the strategic balance in Asia.
Records of secret defence talks between the US and China reveal that US diplomats have repeatedly failed to persuade the rising superpower to be more transparent about its nuclear forces and that Chinese officials privately admit a desire for military advantage underpins the continuing secrecy.
According to US diplomatic cables obtained by WikiLeaks and provided exclusively to the Herald, the deputy chief of the People's Liberation Army general staff, Ma Xiaotian, told US Defence and State Department officials in June 2008 that the growth of China's nuclear forces was an ''imperative reality'' and there could be ''no limit on technical progress''.
The article concludes, emphasis mine:
In separate talks with US envoys, Japanese officials were concerned that the Obama administration's plan to negotiate a cut in nuclear forces with Russia would encourage China's build-up.
A senior Japanese official said that while China had declared a ''no first-use'' nuclear weapons posture, ''no nuclear expert believes this is true''.
After the release of the Obama administration's nuclear review last year, the US and Russia signed a new Strategic Arms Limitation Treaty on April 8 to halve their nuclear arsenals to 1550 strategic weapons over the next seven years.
The International Institute for Strategic Studies estimates China has up to 90 intercontinental ballistic missiles and more than 400 intermediate range missiles targeting Taiwan and Japan. US intelligence predicts that by the mid-2020s China could double the number of warheads on missiles capable of threatening the US.
The recent turmoil in Libya is probably the most recent, and long overdue example of nations deploying their military for their own self interest. This was no "Coalition of the Willing" like we saw in the run-up to the Iraq War. No one sought the OK from anyone else when it came to rescuing their nationals in and unstable and violent Libya. China sent naval frigates to escort a Greek ferry carrying Chinese Nationals out of Libya. Germany sent naval ships to Libya as well. And the US is deploying its military to encircle Libya.
During the Great Depression of the 1930s, nations manipulated the gold standard to devalue their currencies. It didn't work, and economic conflict ensued. Economist Murray Rothbard wrote on the episode:
The chaos and the unbridled economic warfare of the 1930s points up an important lesson: the grievous political flaw (apart from the economic problems) in the Milton Friedman-Chicago School monetary scheme for freely-fluctuating fiat currencies. For what the Friedmanites would do — in the name of the free market — is to cut all ties to gold completely, leave the absolute control of each national currency in the hands of its central government issuing fiat paper as legal tender — and then advise each government to allow its currency to fluctuate freely with respect to all other fiat currencies, as well as to refrain from inflating its currency too outrageously. The grave political flaw is to hand total control of the money supply to the Nation-State, and then to hope and expect that the State will refrain from using that power. And since power always tends to be used, including the power to counterfeit legally, the naivete, as well as the statist nature, of this type of program should be starkly evident.
And so, the disastrous experience of phase IV, the 1930s world of fiat paper and economic warfare, led the US authorities to adopt as their major economic war aim of World War II the restoration of a viable international monetary order, an order on which could be built a renaissance of world trade and the fruits of the international division of labor.
But I will admit, it is not just the fiat global model that is creating this recent uptrend in militarization. It is also due to many other factors such as a rising quest by more nations for the world's limited resources, a post Cold War re-balancing of power, and of course, the current monetary breakdown of devaluing currencies, global trade and debt imbalances.
Just as a new world order is emerging, so too will a new monetary order emerge. One can not divorce geopolitics from economics or monetary theory. All three co-exist and affect each other. And so the question we are faced with is will the world cooperate and agree on some sort of fiat money management, despite all the existing self-interested conflicts? Or will there be an eventual breakdown of the global monetary order, and in such a chaotic event, what new monetary may order arise from it?
See also my post from last November: