Economics

From Economic Crisis to World War III

Nov 8, 2018 Qian Liu

The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.

BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.

The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.

But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.

As a registered user, you can enjoy more PS content every month – for free.

Already have an account? Log in

Introductory Offer: Save 30% on PS Digital

Subscribe now to gain greater access to Project Syndicate – including every commentary and our entire On Point suite of subscriber-exclusive content – starting at less than $5 per month.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 13 Comments on this article

jagjeet sinha Nov 28, 2018

TWO GOVERNORS - MONETARY & FISCAL
The author has brilliantly crystallized the inadequacy of One Governor.
Monetary Policy alone has limits to the heavy lifting it can guarantee.
Fiscal Initiatives need to supplement Monetary Policy.
Inequalities been bequeathed by 70 years of Economics Architecture.
Democracy will overwhelm Economics - if the Inequalities are not addressed.
The Governor that changes the Fiscal Architecture - does not exist.
Except in China - where the PBOC Governor was supplemented.
Governor Chen Yuan of CDB - is the reason China was transformed.
Growth and Development was a superbanking genius unleashed by CDB.
The PBOC Governor ensured that China's Banking system was synchronised.
Synchronized banking system enabled China to remain linked with the World.
Worldwide Financial Governance required synchronization - ensured by PBOC.

Inequalities bequeathed within the West have not been redressed.
Hence Monetary Policy alone has been heavy lifting.
The Fiscal Architecture needs fine tuning to ensure realignment.
Economics needs realignment with Democracy - otherwise Trump happens.
The West so far relies on One Governor - in command of Monetary Policy.
The West needs a Second Governor - in command of Fiscal Architecture.
Otherwise Inequalities bequeathed will not get addressed.
Unless the Chancellor of The Exchequer acts as Governor II.
Governor I must continue to ensure synchronization with the World.
A new reply to this comment has been posted.
Robert O'Regan Nov 16, 2018

This is an excellent statement; I wonder if the talk about abandoning SWIFT is not a large factor in this scenario as well; what do you think?
A new reply to this comment has been posted.
Per Kurowski Nov 13, 2018

Indeed, they just kicked the crisis can forward, without doing the structural changes needed.
https://subprimeregulations.blogspot.com/2017/08/ten-years-ago-ecb-decided-to-ignore.html
A new reply to this comment has been posted.
Kurt Bayer Nov 12, 2018

While I agree that the rabalancing of monetary policy stimulus may cause problems in the financial markets - even though I do not understand why, since for years they should have "priced in" this event - the author's call for "structural policies" to prevent a third World War is vacuous, especially since she does not specify what she means by "structural policies". This is a case of Fritz Machlup's "weasel word" use of "structural". If she means flexibility-enhancing policies, this would drive populations even further into the populists' camps. If she means actively growth-enhancing policies, she might have a point. But waving the war banner is absolutely reckless.
A new reply to this comment has been posted.
j. von Hettlingen Nov 11, 2018

Qian Liu is an economist, not a geopolitical analyst. Her commentary is a veiled attack on Trump’s trade war with China, highlighting the economic woes in the West, which she says could trigger a “World War III” if left unadressed. She compares the 2008 financial crisis to a disease that had only been given a palliative treatment – quantitative easing and near-zero (or even negative) interest rates – without being properly cured.
The author says “treating a sick economy requires structural reforms.” The world tends to overlook the deeper causes of the 2008 crisis that appear as entrenched as ever. A decade after the global financial meltdown, the underlying problems have not been fixed. Financial regulators’ first response to the debt-fuelled crisis was to pursue a “paradox of policy” – they slashed interest rates to encourage spending and to prevent recession turning to depression. The medicine was supposed to be only for short-term emergency use.
Since then banks had been transformed from the under-capitalised, over-leveraged and inadequately supervised system of 2007. It is safer and more transparent today, but cheap credit, low interest rates and mountains of debt remain the same. In fact China is grappling with similar challenges – how to handle its debt-ridden economy.
The author fears that “a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.” She illustrates how World War II started as a result of economic nationalism – a chilling reminder of Trump’s protectionist policies. President Herbert Hoover’s 1930 Smoot-Hawley Tariff Act to protect American workers and farmers from foreign competition led to the Great Depression, economic conditions that helped cause World War II.
Sharing the views of many scholars and economists, the author is right about how “high levels of inequality can play a significant role in stoking conflict.” Momentarily we are witnessing “wealth and income inequality at historically high levels.” But populists, whose rise has the “current social, political, and technological landscape” to thank for, seek to convince working-class voters that job insecurity, competition from trade and immigration, loss of culture are more treacherous than inequality. Trump’s poor supporters turn a blind eye to wealth gap, as long as they feel good about being white.
In Europe the influx of refugees and resentment against globalisation had whipped up nationalism and stoked popular dissent, plunging countries like Germany and Italy into political disarray, in which “sustaining governments now seems to take more time than actual governing.” This has deprived leaders of time and resources to pursue meaningful reforms. “All are symptoms of failed policies that could turn out to be trigger points for a future crisis.”
The author says “voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse.” Indeed, looking at the chaos in the US and the paralysis in Europe, Chinese leaders tout that their model of governance is better than liberal democracy. Unsurprisingly most Chinese are satisfied with authoritarian rule, as long as the economy remains robust.
The leadership in Beijing benefits from multilaterialism and the world’s “unprecedented interconnectedness,” and it critises Trump’s pursuit of “unilateral, isolationist policies,” while doing little to end the proxy wars in Syria and Yemen.
The international community has been speculating about a “World War III” since the Cuban missile crisis in 1962. Its very name has implied its own inevitability, especially when now and then tensions rise in certain parts of the world, that could ignite an armed conflict. The Syrian war shows that a local conflict can morph into a global one, as the US and Russia are directly involved there. We have talked about a third World War not only as something that might happen, but something that will. The danger is that World War III would be more devastating, due to the potential use of nuclear weapons – no something we all wish for.
A new reply to this comment has been posted.
Matheus Parmezani Nov 9, 2018

Hi, good analysys,,I agree on the economic part of it,,,lessons learnt not executed from 2008 to now...however,,,the opportunity costs today are far higher than any other period in past to have a general conflict in the world. The level of trade interconnection and the amount of international money flowing around (real money, not finance short term gambling) is at a dimension I see very hard to achieve thinking on positive economic outcomes of a new world war period.
A new reply to this comment has been posted.
Niklas Monrad Nov 9, 2018

While I don't discard the possibility of another large war there is one major difference between the present and the time of the two world wars of the past: Previous wars were about grabbing land and natural resources, but doing so in modern times is far less valuable than it used to be due to the changes in a world economy far less dependent on production when we consider how ruinously costly it is to maintain occupying forces in any conquered territory.
A new reply to this comment has been posted.
Mike Robinson Nov 8, 2018

Qian, I do not fear World War. But I do fear a financial system that is stuffed with "currency units" of many different flavors which do not correspond to any real asset, product, or service. Today there are thousands of times more currency-units on Planet Earth than would be required to buy everything that can be sold. So-called "QE" simply injected more currency-units and, on paper, made-good on a mountain of frauds and other blatant financial crimes that still continue. No one went to prison.

I believe that you are correct that "the economy" is key, but "the economy" does not consist of these currency-units nor is it anymore meaningfully measured by them. I believe that you err when you champion "globalism" and decry what you call, "isolationism" or "nationalism." I would argue that what you decry, is actually the key.

Your country might be the only one that prospered from "globalism," because of its governments' ability to micro-manage millions of people's lives even to dictating the place where they must live. Would these workers, if they could speak freely, say that they feel that they also are sharing in the "prosperity" that their labors are creating for others? Would "globalism" reign if specifically your government did not possess the unique power that it has? I doubt it.

I believe that "my-country first!" should be the universally-understood mantra of every country without exception. Then each country WILL build up its own strength and manufacturing capabilities, it WILL employ its own citizens in preference to everyone else, and when negotiating with other nations it will drive a hard – but good – bargain, knowing that everyone else at that table is doing the same thing. Now, nations will only make deals that build everyone up, not those (like "globalism") that play one party against the others. The result will be sustainable, truly prosperous, resilient, and fault-tolerant ... none of which words can now be used to describe the present.

Globalism has made many glowing promises that it cannot keep. It is flawed. It insists that "my country first" is ignorant or unenlightened, but I argue that there is a critical strength inherent in it which we must not forsake, even as we trade with each other. We shall trade because we are strong and because trade we choose to engage in makes us even stronger; we do not permit trade which makes one party weak. Call it, "mutually assured self-interest." If everyone uniformly looks out for themselves, they also inevitably look out for each other.
A new reply to this comment has been posted.

https://prosyn.org/lje0Ctx

From Economic Crisis to World War III

Introductory Offer: Save 30% on PS Digital

New Comment

Contact us

Log in/Register

From Economic Crisis to World War III

Introductory Offer: Save 30% on PS Digital

Edit Newsletter Preferences

Set up Notification