Veterans Day 2010

November 11, 2010

Four score and a dozen years after the last shots were fired in the Great War to end all wars, a state of armed conflict has in fact become the norm rather than the exception.  Although special days like today are set aside to remember and show gratitude to those who faced personal harm so a free way of life for the rest might be preserved, this year instead finds pocketbook issues paramount on people’s minds and reflected in the news.

In retrospect, the end of the Cold War did not make the world safer for democracy any more than the signing of the Armistice at the 11th hour of the 11th day of the 11th month of 1918.  The wars in Iraq and Afghanistan against Al Qaeda have cost U.S. taxpayers over $1.106 trillion.  More than 5,800 lives have been lost, and countless more changed by searing injuries to body, mind and soul.  Homeland security consumes over $42K annually. Unemployment hovers near 10% in both Euroland and the United States, with no expectation that it will be significantly less a year from now, two years from now, or perhaps even when the centennial of the Armistice is celebrated in eight years.   Make no mistake, the challenge of world terrorism bears some responsibility for the slowdown of U.S. real GDP growth from 3.47% per annum over the fifty years to 3Q00 to 1.64% per annum during the ensuing ten years.  The lessons of history are that even the winners of war oftentimes pay an enduring terrible price.  Think of ancient Greece, birthplace of democracy, whose enlightened civilization was cut short after numerous body blows from a series of wars.

The world of today is loaded with strained relationships that one can hope are too big to fail.  India-Pakistan, Japan-China, and Israel-Palestine are three additional ones besides the struggle between the world’s developed countries and radicalized Islam.  Each pair is in a struggle to impose its will over the other.  The grab for power can be fought on the battlefield or in other venues.  The leading corporations of 1918 are not the same ones as now, and today’s giant companies will be supplanted by others before the 22nd century begins.  As it is with firms, so it may be with countries.  There are no guarantees of immortality.

Currency wars are in vogue as leaders of the Group of Twenty meet in South Korea.  Even if political leaders didn’t have incentives to promote competitiveness by all means possible, market forces would eventually grind that way.  Using data from a graphic in Wednesday’s Financial Times, the T-account below illustrates the fundamental economic imbalance driving the currency market strains.

 

2010-f Current Accounts in Billions of U.S. Dollars

-466 United States  
  China +270
  Germany +200
-179 Other Euroland  
  Japan +166
-644 Totals +636

 

Market forces over the past year have demanded that these imbalances be reduced.  Last winter and spring saw heavy strains in Euroland bond markets.  In a pre-EMU era, there would have been a revaluation of the D-mark to varying degrees against the peripheral members.  Instead, sharply higher bond spreads resulted.  Over the summer and into late October, the focus turned to China and the United States.  Yuan appreciation resumed, and the dollar lost ground across the board.  Markets, which for years yawned when economists talked about the sustainability of mounting external imbalances, are now listening up and putting political leaders in a run-but-can’t-hide situation. By design or the force of circumstances, the above economies and many innocent bystanders in the community of nations face enormous change.  In a cooperatively managed adjustment, all nations could benefit from reducing the above current account imbalances, although not nearly to the same degree, and there would be winners and losers between industries and households.  The lack of equality in a market or any other solution creates incentives for nations to compete, rather than cooperate.

A danger always exists that economic competition and the violent competition of war become interchangeable.  Ungracious relations between the battlefield winners and losers of the Great War was prologue to the raucous roller coaster ride of the world economy in the 1920s and 1930s, and the Great Depression was prologue to the even bloodier Second World War.  Protective tariffs and competitive devaluations played a role in that process.   Sixty-five years later, some lessons are forgotten.  Others are ignored or misinterpreted.  One of today’s ironies is that the designers of a single European currency sought that option as a means to eliminate currency wars and the real wars that can follow, only to find that the trade tensions remain and refused to be swept under the rug.

In the years after 1918, governments turned inward and were fractious and generally weak politically.  A big part of the world’s pull toward the dark side in the first half of the last century came from the inability of governments to act responsibly even if they had wanted.  In 2010, as in 1918, the forces pulling governments apart seems stronger than the incentives to act in unison.  With more powerful weapons and greater strains on limited and depleting resources, the challenges to political leaders and dangers if wrong policies are pursued could be arguably larger than then.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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