Aug
Some of the most horrifying historical events are tied not directly but rather indirectly to financial calamities and the rise of populism in today’s Western world needs to be seen from precisely that perspective. In other words, it is historically unjustified to look for a simple “cause – effect” correlation, it tends to be remarkably hard to find that.
Rather than cause anything from geopolitical to sociopolitical calamities directly, financial calamities tend to trigger a chain of events that leads to them. For example, the (in)famous Great Depression of 1929 certainly didn’t cause World War II directly. However, indirectly, it contributed to it far more than the average analyst cares to admit. In this particular example, yes, the crisis generated humongous economic problems but it was the response of various countries (pretty much all nations, actually) to them that became problematic.
As economies were crippled by unemployment and countries were desperate to help exporters, weakening currencies so as to provide them with an edge over their international competition became an option too attractive to resist. Unfortunately, as almost everyone ended up doing it, things escalated and an outright currency war ensued. As such, frustrations on all sides kept mounting, which paved the way for a tidal wave of populism with protectionist tendencies. And what happens when pretty much everyone decides to “protect” their domestic economies by limiting international trade through tariffs and various other barriers? A trade war inevitable takes place, a trade war which ended up representing one of the main causes of WWII in our 1929 example.
What does this have to do with today’s realities in general and China in particular?
Once again, the financial system malfunctioned dramatically. Not dramatically enough to call the Global Financial Crisis of 2007-2008 the Great Depression again but dramatic enough to call it the Great Recession. A crisis which started as a result of over-exposure to US financial instruments based on mortgages (Mortgage-Backed Securities or MBS, to be more precise) but ended up having catastrophic global effects, leading to a scenario in which major companies such as banks and auto manufacturers had to be “rescued” on the one hand and on the other hand, affecting the economies of pretty much all nations, with the unemployment rate eventually exceeding 25% in countries such as Spain and Greece (Great Depression-level unemployment) and the youth unemployment rate exceeding 50% in the same countries.
Just like in 1929, a financial crisis generated a global economic train wreck.
And just like back then, the main problem lies not in the direct effects of the Great Recession but rather in understanding what followed and the worrying similarities with the Great Depression. Just like in the aftermath of 1929, countries were desperate to help domestic companies and as such, a central banking race to the bottom emerged. In the United States, interest rates were brought all the way down to zero and in the European Union, even in negative territory. Let’s not even talk about China, the “usual suspect” everyone tends to accuse of currency manipulation. Not only that but money had to be injected directly into the financial system, to the tune of $85 billion yearly in the US at the height of the Quantitative Easing process and even more in the European Union at the height of their version of QE. To provide a bit of context, more money was “injected” into the system over in the US in one year than had existed from 1913 up until the Great Recession. As can be seen, this is not just a currency war but a currency war on steroids.
The same way, we are now witnessing the onset of what might end up representing a trade war on steroids. Not necessarily due to the magnitude of the actual measures (we are not there yet) but rather due to the fact that it is remarkably hard to predict what would happen in the event of a full-scale trade war given the deeply interconnected nature of our economies. Needless to say, the trade tensions between the United States and China have been in the spotlight for many months but make no mistake, protectionist tendencies brought about by the rise of populist leaders are becoming significant almost everywhere.
From the rise of populist leaders on the left in nations devastated by the Great Recession, such as Syriza in Greece and Podemos in Spain, to the rise of right wing populist movements with protectionism in the spotlight illustrated by the United Kingdom’s Brexit debacle and the Trump campaign of 2016, it becomes abundantly clear that the average Western citizen has become frustrated with the (geo)political status quo and wants to do something about it.
Furthermore, a lot of frustrations pertain to the excessive “political correctness” which is being perceived by the average individual as both hypocritical and ineffective. Among other things, this also revolves around the Western belief that the West has been “giving China a break” for far too long and that Western prosperity is being eroded by the more than problematic trade imbalance with China. On this front, it is noteworthy just how much attention this particular topic has received during the 2016 US presidential debate and how aggressive Donald Trump has been compared to other US leaders with respect to clearly painting China as an economic enemy rather than simply more or less diplomatically alluding to it.
More likely than not, it will represent an even more important topic in the 2020 elections than it has in 2016, something which makes it clear that when it comes to the attitude of various nations toward China, a populism-induced tidal wave might be emerging. While the average Westerner perceived China as pretty much harmless throughout the early states of its post-1978 economic growth, sentiment has turned for the worse… to put it mildly. As tempted as one may be to consider this rising wave of populism a Western problem with Western implications, it is quite likely that it will represent a Western problem with severe implications as far as China is concerned. Needless to say, analysts should ignore this dimension at their own peril.