Why People Who Don't Know History May Be Condemned to Repeat It
by Thomas P. Au, CFA, Author & Market Analyst. May 9, 2006
A stock market crash, a global depression, and a world war. Pick any year in the late 1920s, and all those events would have been encompassed within the following twenty years. More to the point, similar events could be encompassed within the next twenty years. This is considered an entirely plausible scenario, although not quite an outright prediction.
Let's start with the economic crash thesis. There are two great economic bubbles in the world right now; American consumer spending, including and especially housing, and Chinese capital spending. (The recent hike in interest rates by the Chinese government was a belated attempt to rein in the latter.) Americans are consuming more than their savings will allow, with a large chunk of the difference coming from Chinese funds flows, and Chinese industrialists are producing more goods than their own people are willing or able to buy, with American consumers making up most of the difference, using what amounts to vendor financing. These are massive imbalances that can't be rectified, barring a merger of these two countries that will cancel them out. And the resulting American debts can't be satisfied through foreseeable economic means, which implies that they somehow will be liquidated in the political arena.
If, as is entirely possible, the end result is a 1930s-style Global Depression, it would hit China harder than almost any other major country in the world, just as the 1930s hit Germany the hardest. This would likely cause China to pursue desperate economic and political measures to curtail the resulting social unrest, likely bringing about the rise of a Chinese Hitler. Like the reality show "When Good Pets Go Bad," (produced by Mike Darnell, who also brought us "Who Wants to Marry a Multimillionaire"), a geopolitical version of that show might be entitled, "When Good Countries Go Bad." China today reminds me of Weimar Germany, a totalitarian country trying to become democratic, and not succeeding in shaking off its roots, and one that is like to take a turn for the worse if and when the global economy heads south.
These economic problems are linked to national pride. Germany's humiliation dated back to 1918, the loss of World War I and the imposition of reparations payments and military restrictions through the treaty of Versailles. China's period of humiliation goes back even further, to the nineteenth century when the loss of the Opium War gave "foreigners" free rein in China. Until 1997, a foreign power (Britain) occupied a key Chinese city, Hong Kong. Despite its importance in the global economy (at least fourth in GDP on paper, and probably second de facto), China is not part of the world's governing body, otherwise known as the G-7. Germany was in a similar situation in the 1930s.
And the Tian An Men Square demonstration of June 1989 was arguably the greatest humiliation of all. A group of Chinese young people paraded a replica of the Statute of Liberty, a symbol of a rival great power, in the heart of the capital, Beijing. Imagine the effect that a group of American youth might have produced by unfurling the Nazi swastika or the Communist hammer and sickle in a parade around the Washington Monument in the 1930s. It's interesting to note that China will be hosting the Olympics in 2008, much as Nazi Germany did in 1936, meaning that it will be very conscious of how it appears on the world stage.
Other parallels are equally disturbing. The push for "one China," a "unification" between the Peoples' Republic and Taiwan, is the modern version of Nazi Germany's Anschluss with Austria. After it absorbs Taiwan, China will likely stir up problems in a country with a large Chinese minority that can be used as a wedge, in a modern version of the Sudentenland crisis with Czechoslovakia. That country could be Malaysia, or Indonesia or the Philippines, probably one with oil, or some other strategic asset. Finally, China would attack a totally unrelated Asian country, perhaps India, and then menace Japan, which plays a role as America's "front line" in Asia similar to the one that Britain played in Europe for the United States in the nineteenth and early twentieth centuries. At this point, America would have to go to war or see a hostile power displace it as the most powerful country in the world.
Baby Boomers, who collectively haven't saved enough for their retirements, could be bailed out by such a war, because they could finally fund their retirements by earning boom wages by running the robots in the arms factories during the war. (This "Rosie the Riveter" role would not be played by their daughters, who would instead march off to war with the guys in the greatest "mixer" since the anti- (Vietnam) war movement.) Having relied as children on parents from the original World War II generation to keep them safe and happy, Baby Boomers might expect the same approaching old age from their own children, members of the "new World War II" generation born in the 1980s and 1990s.
Some would say that the war won't take place because it would be nuclear. But that may just be the point. China does have nuclear warheads, and its missiles have (barely) a long enough range to reach the United States, but not with the pinpoint accuracy of our MIRVs. In essence, China's missiles and aircraft today resemble our own from the 1950s and early 1960s. But they are trying to upgrade them through "pirating," spying, and reverse engineering, which a war would stop. In much the same way, one could say that World War II started just in time to head off Hitler from attaining the atomic bomb (nuclear science was just reaching "critical mass" in 1939, and the persecution of Jewish scientists like Einstein, Bohr and Fermi tipped the balance in the Allies' favor).
Ben Graham, a German-American (originally surnamed Grossbaum), did not warn us that the Great Depression would bring about a war between the United States and Germany. The Chinese-American author of "A Modern Approach to Graham and Dodd Investing" used the book to warn that a new Great Depression would probably bring about a war with China, if the Depression occurs, as it well may. This theory may seem far-fetched to some. But it addresses too many current problems (at the expense of creating a bunch of new ones) so that it can't be dismissed entirely.
© 2006 Thomas P. Au
Thomas P. Au, CFA | Author & Market Analyst, R. W. Wentworth | New York City, NY | Email