Rising energy prices in Europe, an alleged attempt to detain a Fed official in China, efforts to diversify Taiwan Semiconductor’s chip supply: We are in a global financial war.
Financial wars date back at least to the time of the Crusades, but after more than 200 years of increasing globalization, financial conflicts are now much more costly and unpredictable. People on both sides of these conflicts usually do not understand what is going on. All they know is that their world is being turned upside down. For example, ordinary Europeans will be shocked when they struggle to pay for heating this winter. My Putin-supporting mother-in-law in Moscow was shocked to discover that her favorite Starbucks was no longer open in Russia. “What happened?” she asked me.
Tasteless words like “globalization” obscure the crude connections between cause and effect. Over the past two centuries we have learned to produce food and build housing efficiently, and we now feed and house eight billion people more easily than we did one billion in previous centuries.
The reasons for this were industrialization, mechanization, electrification and automation, combined with the ability to finance these innovations. World trade grew rapidly, growing even more after both World War II and the collapse of the Soviet Union. When President Richard Nixon visited China in 1972, the US and China had no trade relations. China is now one of America’s largest trading partners.
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The complexity of this system is also its vulnerability. Spending in any economy consists of two parts – income and borrowing, and financial warfare tries to undermine both. Revenue consists of trade, employment and corporate profits. A loan consists of spending what has not yet been earned. The cost of these loans is determined by the supply and demand of capital. These relationships are interconnected: My spending is your earning.
US sanctions against Russia fit right into the earnings and loans framework. The ban on Russian oil imports was intended to reduce Russia’s income. The ban on investors buying Russian bonds and the freezing of Russian central bank reserves were intended to increase the cost of credit.
But as Russia has shown, in any war it is possible to counterattack. Lower prices for Russian crude found buyers in India and other countries. When Russia cut off natural gas sales to Europe, it tried to destroy European income. Many European companies cannot make a profit with such high costs, BGNES reports.
America’s energy industry insulates the nation from significant harm. But a war over Taiwan would wreak havoc on the world economy. World trade with China is about $4.5 trillion; of these, the US accounts for about 600 billion dollars. No other country could easily replace China. The entrepreneurial infrastructure around Shenzhen is unique. In the event of war, the US may try to freeze China’s foreign exchange reserves. Or, following the example of Russia, China could act first and disrupt the functioning of the American credit markets.
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During those same 200 years that saw a huge rise in living standards, there were many disruptions in globalization. The expansion of world trade from the 1860s to the First World War was followed by a retreat. After each interruption, the world gradually resumed its path of greater trade integration, and the same is likely to happen this time, for the simple reason that isolation worsens welfare.
The basic assumption underlying the post-Cold War order was that economic self-interest would prevent conflict. I certainly believed that. My contacts in China and Russia marked an increase in living standards. The most obvious indicator of increased wealth was their travels abroad, which rose to levels their parents could not have imagined.
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The invasion of Ukraine taught me that this assumption is wrong. After Russia’s military setbacks, Beijing may reconsider its policy toward Taiwan. More likely, Beijing thinks the US needs to review its own policy.
For now, my mother-in-law’s enthusiasm for Mr. Putin outweighs her nostalgia for Starbucks. When she was offered to travel to Finland to see my wife and me, she refused, citing the need to stay and support the war.