Periods of recession may come and go, but a depression is a different animal altogether. When the last struck, in the 1930s, it took a World War to fully overcome the crisis. A century later, we seem to be hurtling down the same path again.
With the global recession spawned by coronavirus, history is, in some ways, repeating itself. Experts are already calling it Great Depression redux. As nations bicker among themselves about the path forward, war clouds are gathering on the horizon. The world is watching with bated breath as the US-China spat threatens to boil over into an armed confrontation in the South China Sea.
President Xi Jinping is clearly displeased with the US attempts to vilify China and has pointed the bayonet at his neighbors to let off some steam. For his part, Trump – who seems to have given up all hope of reviving his cherished trade deal – is hoping to ride a wave of public angst against China back into the White House. If there was a time the world needed a mediator to avert World War III, it is now.
Watch: International Monetary Fund Boss says we are in the worst crisis since Great Depression
What’s At Stake?
Though this wouldn’t be the first time there has been a recession in the new millennium, the scale and scope of the present crisis are unprecedented. Governments worldwide have already committed more than $8 trillion to reboot growth even as lockdown is being progressively eased. The US Fed has been working overtime with central banks around the world to keep businesses and communities insulated. However, a full recovery is expected to take the better part of 2022.
Watch: Warren Buffet compares the Depression to the current state of the economy
With the extent of China’s culpability yet to be fully established, any attempt to blame or penalize the Middle Kingdom is likely to worsen tensions. Forced into a corner, the Chinese are likely to lash out. In the words of Chinese Foreign Minister Wang Yi, the US was “attempting to push the ties to brink of so-called ‘new Cold War’. The World Health Organisation’s mission could be compromised if no solution to the impasse can be found.
Tussle for power
After making peace overtures to North Korea and resisting pressure to hit back at Iran, you’d have thought US President Donald Trump had been sobered by the massive cost of war – the US has spent an estimated $6.4 trillion on its military campaigns in Afghanistan, Syria, and Iraq. Strategic wonks say that notion is far from the truth. In fact, the US now wants to get back into the great power game with Russia and China rapidly closing the yawning technological gap that once existed between them.
The Trump Administration is moving quickly to secure America’s place at the high table.
It has already stood up the fifth US military service – the US Space Force – earlier this year after backing out of the Intermediate-range Nuclear Forces (INF) treaty in 2019. A nuclear test may also be in the offing. Truth be told, neither Trump nor Xi has the appetite for war but given the political compulsions at home, they cannot afford to be seen as backing down from a fight. Hubris has clouded the minds of men before with disastrous consequences, like Japanese Admiral Isoroku Yamamoto, the architect of the attack on Pearl Harbor.
Lessons from the past
Politicians have long used external threats to drum up public support. Trump’s foot-in-mouth tendencies are legendary; and Xi Jinping, too, is likely feeling the pressure from the Chinese Communist Party (CCP). The trade war had already exposed the soft underbelly of China’s economy when COVID-19 struck.
For all its bluster, the country’s leadership knows it cannot afford to antagonize everyone even as international businesses dust off plans to move at least some part of their supply chains out of China. With the US tightening controls on critical semi-conductors, the global dominance of Chinese companies could be eclipsed, a prospect which spurred China to look to its domestic market for growth. However, looking inward could be a counter-productive strategy for growth in the long term.
In the 1930s, there was little co-operation between governments to address the problems faced by the global economy.
Currency exchange rates were determined by the value of gold back then, and a common understanding could not be reached on delinking them, which made it harder to control interest rates. Despite the aggression of the Axis powers, the US preferred to stay away from war to tend to its ailing economy. It wasn’t until Pearl Harbour that the US surged in industrial production to meet military needs. At the peak of WWII, defense spending accounted for a whopping 37.5% of US government expenditure. This, in turn, gave a fillip to manufacturing and employment in the US economy and eventually saw the country come out at the top of the table.
Watch: How World War II ended the Great Depression?
A New Cold War?
A US-China war may do little for the US economy this time around. In the 4 years that it took the Allies to overcome the Axis powers, the cost to the US Treasury was $4 trillion. The equivalent, in 2020 dollars, is $56 trillion, a figure that dwarfs America’s $20 trillion economy. China’s military is no pushover, having amassed an array of weapons that can make it risky for US forces to fight away from shore bases. Though it has not fought a war since 1979, China’s military modernization has been nothing short of extraordinary. The other alternative for the US: Outspend the Chinese ‘to oblivion’ on military expenditure like it once did the Soviet Union. Despite the appeal of punishing China, the average US taxpayer surely does not have the stomach for it.
In the final analysis, Trump could still leave the office with a remarkable legacy if he invited Xi to Camp David and thrashed out a plan of action acceptable to both. Surely, he has a better chance of a deal with the Chinese leader than he ever did with Kim Jong Un. The trade deal he has left for the dead could potentially be revived. The world would finally have something to be thankful for in 2020.