Is the prospect of looming global recession merely an economic matter,
to be discussed within the framework of the Great Financial Crisis of 2008 –
which is to say, whether or not, the Central Bankers have wasted their
available tools to manage it? Or, is there a wider pattern of geo-political
markers that may be deduced ahead of its arrival?
Fortunately, we have some help.
Adam Tooze is a prize-winning British historian, now at Columbia University,
whose histories of WWII (The Wages of Destruction) – and of WWI (The Deluge) tell a story of 100 years of spiraling;
‘pass-the-parcel’ global debt; of recession (some ideologically impregnated) ,
and of export trade models, all of which have shaped our geo-politics. These
are the same variables, of course, which happen to be very much in play today.
Tooze’s books describe the
primary pattern of linked and repeating events over the two wars – yet there
are other insights to be found within the primary pattern: How modes of politics were affected;
how the idea of ‘empire’ metamorphosed; and how debt accumulations triggered
profound shifts.
But first, as Tooze notes, the
‘pattern’ starts with Woodrow Wilson’s observation in 1916, that “Britain has
the earth, and Germany wants it”. Well, actually it was also about British
élite fear of rivals (i.e. Germany arising), and the fear of
Britain’s élites of appearing weak. Today, it is about the American élite fearing similarly, about China,
and fearing a putative Eurasian ‘empire’.
The old European empires
effectively ‘died’ in 1916, Tooze states: As WWI entered its third year, the
balance of power was visibly tilting from Europe to America. The
belligerents simply could no longer sustain the costs of offensive war. The
Western allies, and especially Britain, outfitted their forces by placing
larger and larger war orders with the United States. By the end of 1916,
American investors had wagered two billion dollars on an Entente victory
(equivalent to $560 billion in today’s money). It was also the year in which US
output overtook that of the entire British Empire.
The other side to the coin was
that staggering quantity of Allied purchases called forth something like a war
mobilization in the United States. American factories switched from civilian to
military production. And the same occurred again in 1940-41. Huge profits
resulted. Oligarchies were founded; and America’s lasting interest in its
outsize military-security complex was founded.
Wilson was the first American statesman to perceive that the United
States had grown, in Tooze’s words, into “a power unlike any other. It had
emerged, quite suddenly, as a novel kind of ‘super-state,’ exercising a veto over
the financial and security concerns of the other major states of the world.”
Of course, after the war – there
was the debt. A lot of it. France “was deeply in debt, owing billions to the
United States and billions more to Britain. France had been a lender during the
conflict too, but most of its credits had been extended to Russia, which
repudiated all its foreign debts after the Revolution of 1917. The French
solution was to exact reparations from Germany”.
“Britain was willing to relax
its demands on France. But it owed the United States even more than France did.
Unless it collected from France—and from Italy and all the other smaller
combatants as well—it could not hope to pay its American debts.”
“Americans, meanwhile, were preoccupied with the problem of German recovery.
How could Germany achieve political stability if it had to pay so much to
France and Belgium? The Americans pressed the French to relent when it came to
Germany, but insisted that their own claims be paid in full by both France and
Britain. Germany, for its part, could only pay if it could export, and
especially to the world’s biggest and richest consumer market, the United
States. The depression of 1920 killed those export hopes. Most immediately, the
economic crisis sliced American consumer demand precisely when Europe needed it
most.”
Wars are frequently followed by economic downturns, but in 1920-21, US
monetary authorities actually sought to drive prices back to their pre-war
levels through austerity. They engineered a depression. They did not wholly
succeed, but they succeeded well enough. When the US opted for massive
deflation, it thrust upon every country that wished to return to the gold
standard, an agonizing dilemma. Return to gold at 1913 values, and you would
have to match US deflation with an even steeper deflation of your own – and
accept mass unemployment as the consequence – or devalue.
Britain actually chose the
course of deflation and austerity. Pretty much everybody else however, chose to
devalue their currency (relative to gold), instead. But American leaders of the
1920s weren’t willing to accept this outcome. They did not want
their industry and markets disturbed by a flood of cheap French and German
products. In 1921 and 1923 – just as today in respect to China – America raised
tariffs, terminating a brief experiment with freer trade undertaken after the
election of 1912. “The world owed the United States billions of dollars, but
the world was going to have to find another way of earning that money than
selling goods to the United States”.
That way was found: (you can
guess it) – more debt. Germany resorted to the printing press. (Printing money
was the only way Germany could afford to rearm in anticipation of the WWII
sequel to the First WW). The 1923 hyper-inflation that wiped out Germany’s
savers, however also tidied up the country’s balance sheet. Post-inflation
Germany looked like a very creditworthy borrower.
“Between 1924 and 1930, world financial flows could be simplified into a
daisy chain of debt. Germans borrowed from Americans, and used the proceeds to
pay reparations to the Belgians and French. The French and Belgians, in turn,
repaid war debts to the British and Americans. The British then used their
French and Italian debt payments to repay the United States, who set the whole
crazy contraption in motion again. Everybody could see the system was crazy.”
Only the United States could fix it. It never did.
Why? Because “[a]t the hub of
the rapidly evolving, American-centered world system, there was a polity wedded
to a conservative vision of its own future” [as global hegemon], Tooze opines.
The flip side to this fixation
with a dollar “as good as gold” was not just the inter-war hardship of a
war-ravaged Europe, but also the threat of American markets flooded with
low-cost European imports: German steelmakers and shipyards underpricing their
American competitors with weak marks. Such a situation also prevailed after
World War II when the US acquiesced in the undervaluation of the Deutsche mark
and yen precisely to aid German and Japanese recovery.
Fast forward to today – and here lies the root of Trump’s economic
Zeitgeist. The US fear has returned in a new iteration: America’s global primacy
is being overtaken, this time by China.
The austerity of the 1920s, and
the depression that followed, eviscerated governments throughout Europe. Yet
the dictatorships that replaced them were not, as Tooze emphasizes in The
Wages of Destruction, reactionary absolutisms; rather, they aspired to be
modernizers. And none more so, than Adolf Hitler. Tooze writes: “The
originality of National Socialism was that, rather than meekly accepting a
place for Germany within a global economic order dominated by the affluent
English-speaking countries, Hitler sought to mobilize the pent-up frustrations
of his population to mount an epic challenge to this order.
Hitler dreamed of conquering
Poland, Ukraine, and Russia as a means of gaining the resources to match those
of the United States, Tooze argues. “The vast landscape in between Berlin and
Moscow would become Germany’s equivalent of the American West”. Hitler’s
original aim, Tooze suggests, was more that of a highly modernised and
industrial first Reich – a Carolingian ‘empire’, such as that instigated by the
Franks after the Fall of Rome.
Although configured
differently, the German National Socialist dream of a ‘modern’ Caroligian
empire still underpins an EU vision of Europe today, as its
lineal descendent.
After WWII, a weakened, and
chastened Europe definitively turned away from raw ‘power’; or to put it a
little differently, it moved beyond power towards a different
style of ‘empire’. Still Carolingian in essence – that is, with a centralized
command (in the Frankish style), overseeing a self-contained world of laws and
rules and tightly regulated cooperation.
But, with the post-war ethos of
‘never again’, it evolved into a millenarian project, grounded
in Kant’s ‘Perpetual Peace’ – and of his ‘compelling’ logic of global
governance as the only solution to the brutal politics of Hobbesian anarchy,
(though Kant also feared that the “state of universal peace” made possible by
world government would be an even greater threat to human freedom than the
Hobbesian international order, inasmuch as such a government, with its monopoly
of power, would become “the most horrible despotism”).
So, Europe lives a “postmodern
system” that does not rest on a balance of power, but on “the rejection of
force” and on “self-enforced rules of behaviour”. In the “postmodern
world,” wrote Robert Cooper (himself a senior EU official):
“raison d’état and the amorality of Machiavelli’s theories of statecraft … have
been replaced by a moral consciousness” in international affairs.
The result is a paradox. The US
solved the ‘Kantian paradox’ for the EU of its Liberal rejection of power
politics through providing security, which rendered it unnecessary for Europe’s
supranational government to provide it. Europeans did not need power to achieve
peace, and neither have they needed power to preserve it.
It is precisely this paradox on
which Trump has ‘zeroed-in’, in order to mobilise his base towards a new view
of Europe, as a predatory trade rival. The US, faced by a rising China, is retrenching
into a Hobbesian world where hard ‘power’ is paramount, and will thus be
increasingly unsympathetic to European liberal, moral-concern narratives.
Here is the point: The EU initially
would never have come into being, without America’s covert political engineering.
And Europe was, (and still is), consequently founded on the premise of
unreserved US benignity towards the EU. But that key premise no longer holds:
Can a Europe on the cusp of recession successfully manage to balance away from
a US now focused on trade war toward Eurasia?
What might a looming recession
then portend? The pendulum will (almost certainly) now swing to the other
extreme from the 1920s. Trump is a zero-interest, bail-out man. But this
extreme swing in the opposite direction, however, is likely induce similar
rounds of ‘daisy-chain’ sloughing-off of toxic debt onto someone – anyone –
else; of competitive devaluation, and attempted deflation-export.
A substantive global recession
may set the whole ‘crazy debt contraption’ in motion again. But this time,
amplified by a collapsing oil price, toppling Middle Eastern states, etc. Everybody
can see the system is crazy. The United States could fix it, but it never will.
It has weaponised the financial
system so thoroughly that the US will never yield on the dollar status. The
question is, do China and Russia have the political will – and capability – to
assume the task of mounting a different financial order?
Why did the US not fix the system in the inter-war years? Because,
Tooze tells us (in coded terms), the system had proved a gold-mine for the
weapons-manufacturing oligarchs, and America was mightily taken with the
unfolding prospect of its leading the world: the ‘American century’ ahead.
Also, before WWI, Tooze writes
in The Deluge, the ability of the US to act was hindered by its
ineffective political system; dysfunctional financial system, and uniquely
violent racial and labor conflicts. “America was a byword for urban graft,
mismanagement and greed-fuelled politics, as much as for growth, production,
and profit”.
Well the two ‘world wars’ – as
principal weapons’ provider – did not make that situation much better. Oligarchic fortunes and
influence blossomed. The interwar years saw the intersection of certain
oligarchic interests with that of organized crime in America, and WWII
saw the linking of the Italian mafia into US foreign
operations – and thus to the US political class.
In 1916, the US output
surpassed that of the entire British Empire. Ninety-eight years later, US
output supremacy (in PPP terms) came to an end. China surpassed America. Will a
more fractured, increasingly belligerent US domestic polity be able to fix the
financial order, as the latter careers from one extreme to a disordered, sanctioned
and tariffed other? America most likely, will once again be wedded to a
“conservative” [i.e. Hobbesian] vision of pursuing its own future.