Is the World Ready for Another World War?

Before I answer the question of the title of this piece, let me pose another one. How many people in the world are concerned about the growing violence in many developed countries in the world? It occurs to me that the answer to that may be a surprising low number, despite all of the coverage from the media, social or otherwise, there are just not that many people interested in the affairs of the world outside their immediate reality. In such a connected world, that fact is very alarming and why I’m devoting a particularly long article on the topic.

During the years that preceded the last World War, there were plenty of warning signs that a conflict was coming. Stories of pogroms where thousands of Jews were massacred by the Nazi forces were among those reported in the news all over the world, but it took a direct attack on Pearl Harbor for the US to consider joining the fray. Innocent people were dying on a daily basis at the hands of their own brutal governments, just as they are today and the countries with the means to defend them did nothing in an attempt to avoid a full scale war. This strategy failed miserably then and it doesn’t look promising today either; so back to the question, is the world ready for another world war? Probably not-but that doesn’t mean it’s not going to happen anyway.

Since World War II, the aggressors have changed. We no longer have to fear the German army planning an offensive to take Paris, but we do have Syria with a massive stockpile of chemical and biological weapons ready to be deployed on it’s own citizens or anyone who would interfere on their behalf. We have the Saudi Arabian military, with the funding of unlimited resources and a direct pipeline to America’s defense industry ready to jump on any perceived weakness of it’s rival neighbors like Iran and Syria at a moments notice. And then, of course, we have Iran, who has for years built an iron-clad regime of submission held in place by Quds Special Forces and an endless string of espionage meant to bring Iranian military capability up to spec with most of it’s regional rivals. That’s only one corner of the world that we have to worry about, there are others with just as many causes for concern.

One of these is the Far East, not to be outdone by their Arab neighbors, Pakistan, India, and China are all in the hunt for dominance in the next decade. Pakistan, the biggest basket case of the three, is home to a brewing conflict between religious extremists and moderates, that could escalate into a big problem for it’s enemies thanks to it’s arsenal of nuclear weapons. India and China both claim nuclear arsenals, however Chinese leaders have been able to quash all forms of sedition and internal strife with brutal crackdowns whenever challenges to authority show themselves and India has been focusing mainly on it’s rivals in Pakistan instead of threats from within. Long story short, there is no shortage of conflict, weapons, or nationalist zeal to go around in either the Middle East or the Far East, and that’s not even considering the added weight of Russia, the US and European Union and their alliances to many of these same well armed nations.

So what is holding these regimes back?

As mentioned previously, news sources of the events in the world are far more interconnected than they were when the Germans were rounding up Jews and executing them under everyone’s noses. However, the same inertia that kept otherwise honest, liberal nations from intervening on their behalf is still widely prevalent. This inertia is always strongest when economic activity is robust and maintaining stability and economic growth is favored over the deaths of innocent people. Today,  is no exception, however, in absence of economic growth, the prospect for wide-scale conflict will be far more prevalent than it is today.

Historically, there are many examples of conflicts escalating when economic growth is lagging, and mobilizations of war-time economies tend to precede periods of economic expansion. There are many books written about how the Great Depression started, and for the most part, World War II is popularly credited as the source of it’s end, but drawing a parallel to today has not been a popular topic for discussion, that is until now. Today’s economic picture is a fragile one, and combined threats of demographics, debt and deficits may bring about conditions that harken back to the Great Depression and the period of instability that resulted in World War II.

As Europe fell to Hitler and the Nazis, Americans stayed focused on their own problems. High unemployment, falling asset prices, and widespread poverty were chief among them. As the depression was global in nature, industrial nations like Germany, saddled with the austerity measures accompanying reparation payments after World War I had to deal with extreme versions of the same problems. In a climate of extreme unemployment and economic hardship, conquest and war became a sensible solution brought forth by Authoritarian leaders like Adolf Hitler and Benito Mussolini.

Pre-War hardships set the stage for a volatile climate of foreign affairs. Unwinding economic activity between trading partners in Europe and the US led to additional hardship, and it took very little for a spark to ignite war on unprecedented scale. Looking at today’s economic environment we can see a different landscape in some places, but in others, forced austerity measures and widespread unemployment are threatening to undermine even the most concrete of authoritarian regimes; especially those in the Middle and Far East.

China is a prime example of how economic prosperity has been accepted in lieu of freedom and liberty by a very large population. As the Chinese have grown their economy rapidly, liberties like freedom of speech and the ability to hold free elections have been sacrificed. The Chinese success story, however is not one that can last forever and we are starting to see cracks forming in the economic armor that has kept the Chinese people under control since the reign of the Communist Party began. In absence of the growing prosperity that Chinese people have come to expect from their centrally coordinated economy, there is a real possibility for violence and conflict similar to that which took place in World War II, but this time the conflict will originate from within.

The Middle East, with it’s brutal dictators propped up by petroleum based export economies are just as vulnerable to violence and collapse as their Far East counterparts. In absence of the Billions of dollars a year brought in by sales of petroleum products, there is little in the way of domestic industry to maintain employment in these export oriented economies. As a result, conflicts that threaten the flow of oil to the rest of the world remains a key leverage that they hold in keeping their populations who want real reforms and freedom in check, while holding off much stronger enemy nations from intervening on their behalf.

In absence, however, of high oil prices driven by demand and speculation, the firewall keeping armies paid and holding rivals at bay will be eliminated from Middle East dictatorships exposing a real vulnerability to violence from within and regional rivals. In fact, if economic activity were to slow down sufficiently to reduce the value of commodities exported by Middle Eastern dictatorships, we would most likely see export activity from the Far East suffer just as much. In this climate, unemployment and unrest will be insufferable, especially where large populations of young men are faced with an inability to work.

What Would a Commodity Value Collapse?

At this point, the economies of the Middle East and Far East seem fairly stable. The price of oil and other commodities remains high and exports continue, albeit at a slower pace of growth, from China and other Far East nations.  Thanks in large part to the Central Banks of Europe, China, the US and England, the growth of international currency supplies have grown as these banks extended loans to troubled banks and made available credit facilities for all manor or debt restructuring of over indebted institutions. Debt and leverage among financial institutions and sovereign states has grown at a blistering pace over the past 10 years, while demand has plateaued and that represents a fundamental challenge to the success of these interventions.

As long as banks and governments are able to find lenders willing to refinance their debt at lower interest rates and longer maturities, there will be no material impacts on their respective economies. Under lower interest rate environments like the one created by these interventions, however there are many  unintended consequences that threaten to unravel this equilibrium, but the main threat to continued economic stability is an overall shift in the demographics of the workforces of the nations with the largest debt obligations. Europe, the US and China all share the common characteristic of a population that is aging and soon, the number of retirees will outnumber workers entering the workforce by a factor of 10 to 1 in the US alone.

With so many workers exiting the largest economies in the world, there will be fewer income earners to support the massive debt burdens that these countries will have in supporting their aging counterparts. As if that was not enough of a problem, because of the interventions meant at stabilizing financial institutions and sovereign debtors, there will already be high balances to pay. The strategy of expanding government spending and intervening to keep debt demand growing, although successful in the short term at maintaining price stability cannot be maintained successfully long enough to reach a point when the number of workers entering the workforce surpasses the number exiting and the expansion of debt that will have to accompany the entitlement programs that will be extended to these retirees.

As workers retire, demand and consumption in the largest economies in the world will fall. The consequence of falling demand will be falling prices and this will be the mechanism to transmit economic hardships to the most unstable parts of the world. Today, we see evidence of this very phenomenon occurring in China, which as revised it’s GDP growth estimates down to 7.5% from 8% on the heels of announcement that their largest consumer economy, the European Economic Zone will contract by .3% over the next quarter. This runs counter to the belief that continued growth and development of China’s economy can act as a counter force to the demographic shift taking place elsewhere and although the growth rate has not slowed rapidly, the sudden decline and it’s relationship to problems with Europe demonstrate an unmistakable correlation that will only grow worse as conditions there deteriorate.

Why are People Not Taking this Warning Seriously?

Until recently, the demographic winds have been at the backs of policymakers in the US, China, and Europe. As a result, the importance of demographics have been largely overlooked in economic policy making. Globalization’s dominance of economic headlines and the prosperity it has afforded those who have taken advantage of expanding trade relationships has only served to cloud the importance of a growing base of consumers of a sufficiently young age whose demand for goods and services outpaces the number of retirees exiting the market. The effects of this shift, due to their nature are not being felt all at once, and because life expectancy has been extended, more workers are choosing to delay their exit from the markets, but this effect is temporary.

As with previous debt crises, the situation tends to unwind very quickly and those who are affected by a default and subsequent lack of access to credit are usually caught completely by surprise. The same complacency that has allowed decades of sovereign and private debt to accumulate without any concern for reduction will undermine reactions. With so many conflicting assumptions as to the trajectory of economic growth, there exists a strong belief that expansion will continue in economies with demographic imbalances despite warnings to the contrary. It is these notions of perpetual growth that are giving a false sense of security to actors who might behave otherwise in absence of these supportive theories, or with greater intensity of warnings as to the affects of the fundamental imbalances that they are facing.

In terms of the effects of a major decline in economic activity throughout the world, there are just not enough recent examples to point to in order to spur action to prepare for the problems that lie ahead. World War II, although somewhat recent, is largely cited as a cause for improvement in economic activity. This dichotomy is a false causal relationship, as it was the economic instability of the Great Depression that fostered an environment where people were willing to go to war with their neighbors and former economic trading partners in absence of the prosperity that cooperation afforded them. In the case of the Great Depression, a similar situation occurred as the number of retiring workers in America outnumbered those entering the workforce, only the mechanisms for intervening in loan growth and money supplies were less sophisticated. The bottom line is that if there had been warnings of dire consequences, they would have been ignored then, just as they are today.