A Clash of Titans

With the U.S. on the decline and China on the rise, is a conflict imminent?

War. War never changes. Photo by Birmingham Museums Trust on Unsplash

We are witnessing tectonic shifts in geopolitics and economics. The five-hundred-year period of Western world dominance is in the process of coming to an end; with or without the rise of rivals. Even as western capitalism turns on itself, ending the global system it built for centuries, can it still stop the rise of China? Or does this even matter…? High-tech modernity around the world is at a point of existential crisis, to which great power rivalry is but a symptom.

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Dive! Dive! Dive!

First, we must understand the nature of western economic decline. As American and European capitalist countries turned towards financialization after the oil-shock of the 1970’s and 80's— i.e.: as financial markets, institutions, and transactions gained an overwhelming prominence — the real economy of goods and services began to decline, and with it the living standards of the „bottom” 90% of the population. This, in combination with the loss of the economically viable half of those nations’ natural resources, led to deindustrialization, the loss of scientific and technological innovation, together with the concentration of power in the hands of the wealthy few (the top .1%). The average citizen, as a result, got poorer (much poorer) in the past quarter of a century — eventually giving up on their hopes of a better future — while the S&P 500 just kept rising and rising. Let’s review some key statistics to see why businesses in the real economy and citizens alike struggle to remain on the surface despite ever growing stock market valuations and claims of miraculous productivity growth.

1. Energy. Compared to the 2000’s energy prices today are four times higher.

2. Materials. Businesses now need to pay almost three times as much for the same amount of metals, wood, plastic granules etc. as they used to at the turn of the century.

3. Food. Global food commodity prices have doubled over the past 25 years. And these are just the raw ingredients: wheat, corn, meat, soy beans etc. In order to turn these products into foods you buy in the supermarket, a tremendous amount of energy is needed (which now costs four times as much).

4. Housing. An average US home (according to the Case-Shiller index) now costs more than three times as much as in the year 2000.

Depending on which basket of commodities you take as a baseline, the average citizen / business now have to spend three to four times more on necessities and inputs compared to what they used to spend around the turn of the century. Meanwhile, average hourly wages in the US have not even doubled during the same time period… This negative trend was at least somewhat offset by the flood of cheap goods from China, making inflation look less bad than it actually is (1)… At least until the onset of the pandemic induced lock-downs. Now, with a tariff war between the US and China in full swing, all the hidden cost increases will come back to haunt US consumers, with some pretty nasty ripple effects as an added bonus:

The Port of Los Angeles is projecting a significant decline in cargo volumes, with inbound shipments expected to drop 35% next week compared to last year as major American retailers halt shipments from China in response to unprecedented tariff increases from the Trump Administration. […] During another interview, when asked about how the current situation compared to peak COVID-19, [Executive Director of the Port of Los Angeles, Gene] Seroka responded: “Different but you could see some similarities. A steep drop in arrivals means truck drivers aren’t hauling as many containers, dock workers aren’t getting overtime or they might even work less than a 40-hour work week, along with those in the supply chain. Even manufacturers aren’t going to be shipping out as much, and that’s where it’s really hit us in California. The retaliatory tariffs are really socking the American farmer and those here in Central California.”

So, is it any wonder then that the confidence Americans feel about their current financial status and their expectations towards the future is in a steep decline?

Consumer sentiment fell for the fourth straight month, plunging 8% from March. While the April decline in current conditions was modest, the expectations index plummeted with drop-offs in personal finances as well as business conditions. Expectations have fallen a precipitous 32% since January, the steepest three-month percentage decline seen since the 1990 recession.

Looking at the historic chart, tracking consumer sentiment since 1978, currently we are at levels similar to the 1980’s and 2008/2009 recessions. Based on this indicator the US should already be in a deep recession since 2021 at least (that is, for four years now), with a negative record set in June, 2022. German consumer expectations have also fallen 30 points since January, 2020 and failed to recover to pre-pandemic levels ever since. (Needless to say, the natural gas crisis and the subsequent deindustrialization of Germany did not help to improve the mood over there, either.)

At the same time, US corporate profits have soared to six and a half times their value in 2000. Mind you these exorbitant figures, siphoning out trillions of the economy, are not coming from small businesses, but from giant corporations, financial services, management consultation and law firms, insurance companies and the like (2). And what did they spend these profits on? Not on wages or developing quality products, that’s for sure. Instead of at least trying to maintain a steady living standard for their workers, CEO’s have consistently prioritized mergers, acquisitions and stock buybacks — thereby upping their company’s valuation — and consequently boosting their own bonuses. This, dear reader, is how western capitalism self-terminates in real time. It not only ate up the affordable part of the nation’s one-time mineral and natural inheritance, but at the same time managed to immiserate its workers to a level where they can no longer buy the products they make... ‘But hey, greed is good, right?!’

While the U.S. was busy making its rich people richer the average minimum wage in China has increased eightfold over the same 25 years. Sure, the baseline was much-much lower: China was one of the poorest countries on the planet in the middle of the 20th century. The ability of the Chinese economic model to translate GDP growth into real wage increases, however, is still a feat to be admired. Instead of nurturing its billionaires, China gave rise to the largest middle-class cohort in the world: amounting to some 400 million people. With that said, it’s not all roses over there either: income inequality, regional disparities, slowing social mobility, low birth rates and rising living costs present obstacles to raising more people to the middle-income bracket.

Yeah, that sure looks sustainable to me! Photo by Sebastian Pichler on Unsplash

The Predicament

Capitalism, whether state-managed as in China or left to be ruled by oligarchs — as throughout the rest of the world — is just as prone to hitting limits to growth as any other extractive system humans have came up with during the past ten thousand years. The underlying reason is simple enough: all such economic models are predicated on the ever faster drawdown of natural and mineral resources, leading to mindless consumption, waste generation, pollution and wealth concentration. Then as limits hit — as they always do on a finite planet—and the rate of extraction ceases to grow, stagnation and decline arrives in full force. In our present case this all comes on top of dying ecosystems, increased competition for remaining freshwater reserves and economically viable resources, climate change, persistent chemical pollution and a threat of nuclear war… And we call this “progress”.

Apparently neither the Chinese nor the US economic system has any plans for what to do when their preferred mode of planetary destruction eventually becomes impossible to continue with. Despite all logic, dictated by common sense and supported with a growing body of evidence, both systems remain in full denial of the temporary nature of their success. Without economically viable mineral and natural resources, or a healthy ecosystem and a stable climate to back it up, both systems are destined to fail… And this is not an opinion. Building a civilization on the draw-down of a one-time inheritance (fossil fuels, fertile land, freshwater reserves, metal ores etc.) is by no means sustainable, on neither side of the Pacific nor anywhere else.

Both the Chinese and the American economies are extractive systems, that only know how to grow, but stumble and fall rapidly when that growth can no longer continue. As we burn through the planet’s affordable portion of energy resources, the extraction of coal oil and gas are all expected to hit a peak and then begin to decline. And not because “renewables” will replace them. Without affordable fossil energy (and the affordable metals and other minerals only the burning of those fuels makes possible) industrial and agricultural output are both virtually guaranteed to decline. Worldwide. The unraveling of the global industrial civilization will thus only be the final act in a play which has started some 250 years ago with the perfection of the steam engine by James Watt. And while its tempting to call these two to three hundred years a ‘cycle’ — or part of a series of cycles if you include all previous civilizations — the whole human saga was in fact nothing short of a moonshot. A one time feat, attempting exponential growth at the expense of a living planet and with it our species future prospects.

Global average GDP capita over the past two millennia. Sustainable? Source

The Rift

Lacking a viable plan on how to continue with infinite growth on a finite planet, the two largest economies on the globe decided to enter a contest, serving as a convenient distraction to the mounting difficulties ahead. As a sign of times, top U.S. officials have already named China a “pacing threat” back in 2021 already, indicating “that we will have a more competitive and, at times, adversarial relationship with Beijing.” Acts like arming the Philippines with long-range missiles, turning Taiwan into a porcupine, attempting a coup in South Korea to turn it back into a brutal military dictatorship and Japan’s deepening security ties with NATO (on top of hosting 55,000 U.S. military personell on a number of bases) show eery resemblance with Ukraine’s decades long preparation to fight a war with Russia… (Which has then happened under full US military supervision, using US weaponry, tactics, surveillance, training and included everything but the kitchen sink.) So, why do we expect things to unfold differently this time? Paraphrasing the Russian playwright Chekhov:

„One must never place a loaded rifle on the stage if it isn’t going to go off.”

Just imagine the same thing happening in the Caribbean: the Chinese turning Puerto Rico into an armed porcupine, while stationing fifty-thousand military personnel on a number of military bases in Mexico, and equipping Cuba with long range missiles capable of hitting not only ships, but cities across the lower 48 states. Oh, wait, that happened once already and the world almost went up in flames... Seriously, what in the heavens do we expect to see this time around in the South China Sea?

This is no joke. We are witnessing a full scale preparation for war under the supervision of a self-proclaimed ‘crusader’ eager to wage a holy war. U.S. military forces in the Pacific are already “deploying large numbers of drone weapons and increasing overall force readiness in preparation for a potential 2027 war with China.” I’m not saying that China is innocent, or that it doesn’t want to expand its sphere of influence, doesn’t want to spy on western citizens or that is an enviable place to live. The ‘game’ at this point, however, is so lopsided that it would take decades of watching mainstream media not to see it. This preparation for war is the biggest mousetrap set in human history. Sure, the mouse wants to have the cheese, but the man setting the trap wants to see the mouse dead — and not the other way around. Problem is, as John L. Thornton, former Goldman Sachs executive explains, that the Chinese have something completely different on mind:

The power configuration in the current world should not be defined as competition between China and the United States for hegemony. Rather, we witness a shift from the situation in which a single civilization dominated the globe to common prosperity of diverse civilizations. What China has inaugurated is not a Chinese century but a century of diverse civilizations, a new era in which there will no longer be a single civilizational hegemon. And that’s exactly the way the Chinese see it. As opposed to, you know, Joe Biden says: “this is the century of democracies versus autocracies”. Some of the funnier, more clever Chinese will say “No, it’s the plutocracy versus the meritocracy.”

Meanwhile, as part of the preparation on the home front, there is already a technological rift going on. The U.S. has already banned certain Chinese components from being built into cars sold in America, prevented a number of telecommunication companies from entering their market, and tried to ban Chinese social media platforms (and the list is far from being complete). At the same time, and despite the many sanctions on exporting western technology to China, the biggest adversary of the U.S. is rapidly emerging as a high-tech superpower with its own tech-stack and products often performing better than their western counterparts. One could have said a few decades ago that China stole this or that technology, but with top notch Chinese universities training 1.5 million engineers and scientists every year, this is no longer the case. In many instances they are already well ahead of the pack.

As an unexpected side-effect to the many sanctions slapped on the technology transfer between the East and the West, high-tech products will have to be developed twice by big multinational corporations: once for BRICS countries, and once for the European and North-American markets. This will not only lead to technological incompatibility, but also increased expenditures (effectively doubling development costs for the same technology). As a result certain products will only be developed for the still relatively fast growing Chinese and Asian market, and not for the West which is already in a steep economic and technological decline (especially it’s European half.)

Tariffs and sanctions will make this rift even wider. By forcing China to sell their ever more advanced and competitive products in Asian markets, European and American exporters will find it harder and harder to sell their old and expensive technologies in the Asia-Pacific region. The world market, as a result, might all too easily be torn into two halves: a still developing East and South, and an ever faster declining West. The limitation on rare earth minerals export from China (which still dominates the market), only adds to this problem, making high-tech devices not only costly to develop for a shrinking western market, but also hard and costly to manufacture.

Should this process be allowed to reach its logical conclusion, Western citizens will become even more immiserated and desperate than they are today. They will become more susceptible to narratives blaming the West’s growing economic malaise on the Chinese, portraying them as mortal enemies. Voila, the perfect recipe for war: a lot of immiserated young man bereft of all hopes for a better future and full of hatred. (The fact, that it was US corporations who initiated the whole process by shipping manufacturing lines overseas and getting filthy rich over the past decades, while their workers became materially poorer and poorer, will be conveniently forgotten by then.)

The crisis of modern capitalism, as we have discussed above, is a crisis of sustainability. And while, so far at least, such crises were temporary as the baton was passed on from one empire to the next (3), this time around we are facing a global crisis of the entire extractive over-financialized economy. With or without Chinese ambitions. There is a way out, though, and fighting a world war over who gets to use the last batch of viable resources (then go under as those, too, run out) is not the only option. By stopping the pretense that this process is reversible, and by coming to terms with the reality of resource depletion and a looming ecological collapse, we in the West could start building our own small, local, low-tech economies saving on both resources and energy. By focusing on local needs — as opposed to corporate profits and stock valuations — and by bringing in regenerative practices, repurposing old products, delivering results with minimal material and energy footprints, we could chart our own way through the massive bottleneck ahead. The question is, what does our leadership class mired in their fantasy world have in mind for us?

Until next time,

B

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Notes:

(1) Fun fact: cumulative inflation for the same time period, on the other hand, officially stood at a “mere” 87% indicating no loss of purchasing power in “real terms” as wages rose in tandem with prices. So, why not to measure the dollar’s value in gold then? Well, the price of this precious metal has risen more than sixfold over the past 25 years, which compared to the inflation of real stuff indicates a rather speculative behavior. Besides, if the U.S. were still on the gold standard, the phenomena of rising input costs would still hold true. The amount of energy, steel and other raw materials needed to produce the same amount of copper, coal or oil is rising year after year as wells and mines have to go deeper and deeper to bring back ever lower quality stuff.

(2) As of today 37% of the US GDP comes from real estate, finance, insurance and professional business services (law, consulting, brokerage etc.). Activities, which produce very little tangible value, yet cost exorbitant amounts of money. For comparison manufacturing, mining, agriculture and construction together represents a mere 28% of the US economy…

(3) As Satyajit Das, a former banker and author of numerous technical works on derivatives explains: „The Kindleberger Trap after the eponymous economist, identifies the danger that a fading power lacks the ability but the ascendant one lacks the will to supply a reserve currency. This was a factor in the Great Depression with the Bank of England unable to act as international lender of last resort and the US Federal Reserve unwilling to do so. It helped the crisis escalate into a full blown economic collapse. Any change to the Federal Reserve’s willingness to supply dollars would signal the end of its dominance as foreign ownership of US assets would diminish.”