Thursday, November 11, 2010

War drums on Remembrance/Veterans' Day?

Yesterday Todd Harrison of Minyanville wrote an article entitled An unfortunate needle points to war, where he expressed his concerns about all the social crankiness that comes with economic stress leading to geopolitical tensions:
I ate dinner with Don Graham of the Washington Post a year or so ago and he asked what worried me most. Before I could self-edit, I said “World War III; global conflicts are usually born from economic hardship and that’s where the needle seems to be pointing.”
He went on:
The signs are pointing towards an unfortunate destination. Earlier this year, we wrote about the percolating cross-border problems, from the Flotilla friction to Iran tensions to saber rattling on the Korean Peninsula to leaks of Afghan war logs, with European social strife on the rise and a global play for crude mixed in for good measure. Sovereign posturing is ever-present and on the rise. Can you feel it?

Personally, I think that Harrison's point about World War III are a little over the top. Nevertheless, his contention is well taken. It seems to be that while there is no immediate threat of war, the current economic conditions represent fertile ground for conflict over the next few years, regardless of whether it's economic or the fix-the-bayonets-and-go-over-the-hill kind.
QE2 is proving to be a sore point. The criticism has been coming from virtually everyone, including Federal Reserve presidents. Michael Pettis wrote:
I think there is a very good chance that in retrospect QE2 will be seen as the equivalent of the Plaza Accord. If the US continues to pursue quantitative easing, it could spell the last stage of China’s great growth spurt followed by the beginning of the big adjustment. And like the Plaza Accord it will sow many years of suspicion and conspiracy theories.

In addition, Pettis pointed out some of the misunderstandings surrounding the Chinese and American positions on both sides which are likely to heighten tensions. He pointed to an FT article by Yao Yang, director of Peking University’s CCER, which stated:
China’s leaders believe that, when the political dust of the midterm elections falls to earth, Americans will see they benefit from the cheap goods a weak renminbi provides. They also gain little from an upward valuation. Research suggests that even a 20 per cent appreciation will have minimal impact on the US economy. China, on the other hand, will see employment and GDP drop by over 3 per cent.

No wonder there is a firm belief among China’s elites that rational American policymakers are not serious about appreciation, because it makes no sense for a rational actor to inflict costs on others without gains.
It's these kinds of misunderstandings and miscalculations about the other side's intentions that lead to conflict. Recall April Glaspie's famous statement to Saddam Hussein:
We have no opinion on your Arab-Arab conflicts, such as your dispute with Kuwait. Secretary Baker has directed me to emphasize the instruction, first given to Iraq in the 1960s, that the Kuwait issue is not associated with America.

I agree with Harrison that people are nervous, cranky and jumpy all over. Risks are therefore rising. Personally, I believe that the risks are more tilted towards social and economic risks than a shooting war but the probability of war over the next few years is not zero.

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