capital misallocation

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Is War Coming Between China And Japan?

Last month, I looked at the legal implications of a conflict between China and Japan, concluding that the likelihood remains low, and that America would not be legally bound to defend Japan:

First of all, it is critical to note that the United States is not legally obligated under its with Japan treaty to intercede on Japan’s behalf. The treaty states that the United States is required to report any such event to the UN Security Council, instead:

Each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes. Any such armed attack and all measures taken as a result thereof shall be immediately reported to the Security Council of the United Nations in accordance with the provisions of Article 51 of the Charter. Such measures shall be terminated when the Security Council has taken the measures necessary to restore and maintain international peace and security.

Very simply, this means that China can attack Japan without fearing an inevitable American retaliation. That fact alone makes a small skirmish fairly likely.

So what if China successfully captured the islands — and perhaps even more Japanese territory — as we can perhaps assume given China’s overwhelming size and military-spending advantages? Well, the United States and presumably the international community other than China’s allies would seek to diplomatically pressure China to stand down and reach a peaceful arbitrated resolution via the UN.

If China refused to stand down and accept a diplomatic solution — that is, if China was absolutely set on staring down the United States — then the United States would be forced to choose between providing military support to Japan — and possibly ultimately escalating up to a global war between China and her allies and the United States and her allies — or facing a humiliating climbdown, and accepting both Chinese sovereignty over the islands, as well as any other Japanese territory that China might have captured, as well as face the possibility of further Chinese incursions and expansionism in the Pacific in the future.

In the last day it has been reported that Chinese forces have been mobilising.

Mobilising

A report out of China by NTDTV (in very broken English) notes:

February 3, Nan’an, Fujian Highway 308, artillery units practical exercise for several days.

February 3 to 6, Fujian, Xiamen, Zhangzhou, Huzhou, a large troop movements, nearly 100 vehicles of various types of military vehicles, armored vehicles, artillery filled the entire road, endless, Xiamen and even the scene of a traffic jam 10 kilometers.

In addition, on February 3 in Shiyan, Hubei, a large number of tanks, wheeled military base from Shiyan room counties is delivered to the coastal areas. Many local residents of the tense situation of some concern.

Prior to this allegation, January 15 and 30, the Chinese navy guided missile frigate, twice the fire control radar lock frigates and ship-borne helicopters of the Japanese Maritime Self-Defense Force, is also considered to enter a combat state.

According to mainland media quoted the “People’s Daily” front-page article claiming that China will not change in point of view on the issue of the Diaoyu Islands , and have to prepare to win the war.

The international media alleged that China has purchased from Russia 239 engine, used in the manufacture of the H-6K. Combat covering the Diaoyu Islands, in this model, the engine can also be used to manufacture transported -20 transport aircraft purchased.

If the engine assembled, will greatly enhance China’s military power.

This may turn out to be much ado about nothing, propaganda released to make a hullabaloo. With China gradually growing relatively stronger, and the United States and her allies growing relatively weaker, China on the surface may seem to have very little incentive to do much other than wait. But with global economic conditions worsening, and both China and Japan becoming more fierce in their rhetoric, it becomes likelier and likelier that China may choose to project its economic problems outward by starting a hot war. Most importantly, with the United States not committed to materially defend Japan, it appears to me like China may see this as a golden opportunity to impose itself on the region, to humiliate the already overstretched United States, and make a statement by pushing Japan out of the islands, or perhaps even by going postal and invading other Japanese islands or even Taiwan. With the world dependent on goods and components produced and assembled in China, China already has a lot of leverage to push the rest of the world into accepting a Chinese-dominated regional order.

Still I would say that by far the most rational course for China is to not start a war. But if China starts, it becomes increasingly likely that the United States will respond.

Governments around the globe are advised to remember that while war may increase GDP, and while it may lower unemployment, it destroys an unquantifiably larger amount of real wealth — lives, businesses, physical capital, social capital.

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The True Cost of Zombification

Hank Paulson, George W. Bush & Ben Bernanke killed Western capitalism. During the 2008 crash, when the banking system was failing (as is entirely predictable and natural in a hyper-levered house-of-cards economy) they decided to end market-led creative destruction, and institute a system of government-led bailouts, bailouts and bailouts — or, more accurately, uncreative stagnation.

Uncreative stagnation deserves its name for a number of reasons:

  1. As Steve Jobs put it: “Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new.” That is just as true for businesses, markets and governments as it is for organisms. When businesses, systems and markets fail, they open holes to be filled by new businesses, systems and markets.  Without allowing for the natural death of failed systems and businesses, governments close the door to new — and often necessary — innovation.
  2. Without the market (i.e. the preferences of people in the economy spending their money) determining what businesses and systems work, those decisions are transferred to central planners and bureaucrats — in this case those who decide who gets bailed out (and who gets state subsidies) and who doesn’t. This means that capital will be allocated to things that people out in the market don’t want or need.
  3. The high debt-acquisition levels necessary to “save the system” necessitate higher taxation, which means that significant quantities of capital — instead of being reinvested into new businesses and ideas — go toward paying down interest on debt. Broadly, because American and Western debt is often owned by Eastern manufacturing nations, this means that productive capital that could be used by Western businesses is being siphoned eastward. So the capital will still get invested, but in businesses in the East.
  4. The money-printing necessary to “save the system” necessitates inflation, which discourages saving and investment and encourages spending on consumption, transferring more capital from Western consumers to Eastern producers.

Just how much debt and money-printing was necessary to “save the system”?

Here’s a chart Nomi Prins produced in 2009. The spending levels (and therefore debt levels) are truly staggering:

So not only did the bailouts disable creative destruction (the engine of innovation and social progress), they also created so much debt that they have already damaged the ability of future generations to save, invest and innovate.

Worse, they did nothing to address the fundamental fragility of the system. All of that interconnected debt means the system is still fragile to a default cascade, which means that if the system is to be “saved” again, it will require more bailouts and more debt-acquisition, further eroding the ability of taxpayers to save and invest, as governments tax and inflate the currency to pay down the debt.

I expect future generations to look back on this episode as a bizarre aberration. America — surely the greatest producer and innovator in the history of human civilisation — forgot how markets work and the notion of creative destruction, forgot that an empire dependent on hostile partners (i.e. China and the Arab world) is hugely fragile, and then forgot the fact that America emerged as a superpower as a direct result of its status as a great creditor and manufacturer, and that the old European empires lost their superpower status through loss of productivity and massive debt acquisition.

Future historians in the post-American epoch may attribute this bizarre lapse of concentration to a desperate desire for stability, in the wake of the world-shattering events of 9/11. The public and the establishment simply could not face radical change. America got too old, too stubborn, too rich and too established to face the kind of creative destruction that had historically shaped American politics and civilisation. America traded the liberty of creative destruction for the “security” of bailouts, the security-state, and governmental paternalism. As we shall see in the next decade (and contrary to Japan’s experience thus far) this is a totally false security.