Rememberings

Be ready for the break that we are on the brink of.

·      Once a case of war fever has taken hold, an isolated conflict can soon spread to unexpected places.

·      The oil embargo placed on Japan in 1941 was not an attempt to achieve peace but rather to force a war sooner rather than later and in such a way as to generate a “Remember!” moment.

·      Bottom Line: American economic policy towards China in 2021-22 has been akin to that of America’s policy towards Japan in 1940-41.  The decision has been made to provoke a war and the headstrong challenger has taken the bait.

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Is there principle in sending others to die for your own principles, assuming you have them?  Worse yet, how can it be principled to send another to die for the sake of credibility?  Should young Americans be sent to die defending - or retaking - Taiwan, or Ukraine?  As the world rapidly careens towards a state of war these questions will soon become unavoidable.

This writer is (gulp) of a vintage old enough to have experienced the terror of the attacks of September 11th, 2001, and to have been a dupe caught up in the intense war fever that soon followed.  The unspoken words on everyone’s lips were not “How could they?” but rather “How dare they?” There was no question that righteous justice be dealt to the evildoers in a distant and nearly forgotten place called Afghanistan.  Our nation’s battle cry literally became “Remember 9/11!“

The initial fight was, as expected, quite easy since the Taliban were just as surprised as the American public about the attacks.  The actual perpetrators of the attack were much harder to find.  The senior members of Al Qaeda were well-hidden in their mountain strongholds, many of which were in Pakistan.  The rapid strike of righteous justice soon turned to a brutal melee for vengeance. 

Only after sending America’s Templars to kill bin Laden and dumping his body in the sea like the garbage that he most surely was could America’s leadership think about walking away.  Across four presidential Administrations the idea of leaving bin Laden alive, but in-hiding, was unthinkable.  Of course, as history would show us, the Bush Administration was just getting warmed up after invading Afghanistan.  George finally had a destiny to strive for other than being the disappointing sequel to his father.  Donald Rumsfeld and his protégé Dick Cheney were the last of the Cold War-era Republicans still fit for office and they intended to settle some old scores. 

As discussed in a prior note, Rumsfeld was a truly dastardly man who spent his adult life starting, accelerating, or expanding conflicts around the world.  He sent young men to die for his principles, such as they were, with utter abandon.  He was the kind of guy who saw nuclear war in terms of “winning” and losing.  Most of all however, Rumsfeld was a man who understood the value of exploiting national “credibility” to realize his goals.  He was the actualization of Charles Foster Kane.

After enthusiastically supporting Saddam Hussein in his war against Iran, Rumsfeld now had an opportunity to clean up some unfinished business.  Khomeini and his angry mob had overthrown a (tyrannical) government on very friendly terms with the United States, which was bad enough.  Worse yet, the Islamic revolutionaries had besmirched American honor by storming the Embassy and holding State Department staff and Marines hostage.  The million dead in the Iran-Iraq war was not enough punishment, only complete regime change would suffice. 

In 2002 the Bush Administration ran a dress rehearsed for a seaborne invasion of Iran and, unfortunately for Rumsfeld, the results were ugly.  At least 20,000 dead and a carrier lost on the first day.  That was a political price the administration was unwilling to pay, and George felt all the dead soldiers were a major bummer as well.  Fortunately, Iran’s next-door neighbor is Iraq, which was ruled by Saddam Hussein at the time.  Saddam had long outlived his usefulness to Rumsfeld and would be easy pickings as an appetizer to the main course, the Islamic Republic. 

The solution Rumsfeld and Cheney came to was to bait Saddam into making a mistake and generating enough war fever to make a large-scale mobilization possible.  They did their best to tie Iraq to 9/11 but couldn’t quite pull it off.  However, they got by with a little help from their friend Tony Blair they were able to get high with 77 senators, including 29 of 50 Democrats, voting “Yea” for the resolution to do something in Iraq.

Point 1: Once a case of war fever has taken hold, an isolated conflict can soon spread to unexpected places.

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By 1940, American leadership had learned from “Remember the Alamo!”, and “Remember Fort Sumter!”, and “Remember the Maine!”, and “Remember the Lusitania!”, that the best way to generate a bout of war fever is a surprise (to the public) attack on American soil or military personnel. 

Japan had been growing stronger and stronger industrially and militarily though the 1920s and 1930s but in 1940 was stuck in a bloody campaign to conquer China.  The conflict in Europe was raging and Churchill knew he needed a large ally with war production facilities located outside the range of the Luftwaffe.  Roosevelt was sympathetic but, ever the politician, knew that he needed a “Remember” moment to engage the naturally isolationist United States in a global conflict to fight over endless ocean and unnamed lands.

The solution the two found was an escalating series of embargos and asset freezes.  The Wikipedia page on the topic provides concise summary of events leading up to America’s entry into World War II:

“Admiral James Richardson, Commander in Chief, Pacific Fleet “asked the President if the United States was going to war. Roosevelt's view was:

At least as early as October 8, 1940, ...affairs had reached such a state that the United States would become involved in a war with Japan. ... 'that if the Japanese attacked Thailand, or the Kra Peninsula, or the Dutch East Indies we would not enter the war, that if they even attacked the Philippines he doubted whether we would enter the war, but that they (the Japanese) could not always avoid making mistakes and that as the war continued and that area of operations expanded sooner or later they would make a mistake and we would enter the war.'

Japan's 1940 move into Vichy-controlled Indochina further raised tensions. Along with Japan's war with China, withdrawal from the League of Nations, alliance with Germany and Italy and increasing militarization, the move induced the United States to intensify its measures to restrain Japan economically. 

Japan and the U.S. engaged in negotiations during the course of 1941 in an effort to improve relations. During these negotiations, Japan considered withdrawal from most of China and Indochina after drawing up peace terms with the Chinese. Japan would also adopt an independent interpretation of the Tripartite Pact, and would not discriminate in trade, provided all other countries reciprocated. However General Tojo, then Japanese War Minister, rejected compromises in China. Responding to Japanese occupation of key airfields in Indochina (July 24) following an agreement between Japan and Vichy France, the U.S. froze Japanese assets on July 26, 1941, and on August 1 established an embargo on oil and gasoline exports to Japan. The oil embargo was an especially strong response because oil was Japan's most crucial import, and more than 80% of Japan's oil at the time came from the United States.”

America’s strategic position relative to Japan was declining by the day so the conclusion reached by the Roosevelt Administration was to force their hand.  Japan was presented with the choice of becoming a vassal or entering a conflict they had been preparing for since the end of the World War I.  As expected by the President and Prime Minister, Japan took the bait and soon had overextended itself by fighting in China, as well as vying for strategic control over the Northern, Central, and Southern Pacific.  Japan had indeed made the mistake Roosevelt wanted them to.

Point 2: The oil embargo placed on Japan was not an attempt to achieve peace but rather to force a war sooner rather than later and in such a way as to generate a “Remember!” moment. 

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Jump forward to the present and America and its allies are once again faced with another rising power in the Pacific.  Another challenger to the Anglo-Saxon regime of commerce has arisen, but this time the ties between the antagonists are much closer.  Under prior regimes, and during the first half of Xi’s rule, China embraced the global commercial regime.  In the process, China made extensive use of the open seas and extensive financial systems developed and maintained by the West. 

Since the 1970s, and especially since 2000, China’s capital structure has become integrated into the global capital structure.  Capital goods are not an amorphous blob of resources that can be adapted to changing circumstances without cost.  Far from it, the global capital structure is a constantly changing and rearranging assortment of specific capital – human, intellectual, and physical.  Whenever a piece of that structure is changed the effect will reach all shores in one form or another – though for most the ripples will be too small to distinguish from the general froth. 

If China, or Russia, or OPEC – and especially if it is all three – were to be excluded from the global capital structure unexpectedly, there would be major consequences for global growth and inflation.  Indeed, we are already seeing escalating tension from the Trump-era tariffs to the sanctions and embargos placed on Russia and China. 

In the case of China, the production structure for many consumer goods and electronics would be cut off from the Anglo-Saxon sphere of commerce.  The consequences for such a division, even if it occurs in stages, will be numerous and wide-ranging.  Most obviously, primary inputs such as rare earths and consumer goods production capacity will need to be rebuilt in countries remaining within the sphere of commerce.  However, that is a topic for an upcoming note. 

The similarities between Japan in 1940 and China in 2022 do not end there.  Once again, the leadership in the West has elected to present the challenger with a stark choice, fight or walk out like a punk.  Ironically, the attempt to punish Russia with sanctions only succeeded in assuring ample flows of cheap oil for China.

Deprived oil sanctions as a tool, and too afraid to deploy financial sanctions, the leadership of the West found a new way to pressure Xi.  A writer with fewer scruples might say the plan was to squeeze Xi’s balls underneath the table.  Precious semiconductors, the lifeblood of a modern economy and military, became the means with which to force China to face the same choice that Japan faced eighty-two years ago.  The world doesn’t change as much as we would like to think.

The CHIPS Act, passed by the U.S. Congress in mid-2022 was surprisingly porky in the dollar value of funds handed out to semiconductor manufacturers on the basis of thin promises.  However, the purpose of the cash payouts became clear when Congress subsequently placed a “checkmate” on Chinese semiconductors via embargos on parts, technology, and people.  Anyone with an IQ above that of a grape will realize the West is looking to force China into fight sooner rather than later.  Once again, they used embargo as punishment and once again the leadership of the rising challenger took the bait. 

Point 3: American economic policy towards China in 2021-22 has been akin to that of America’s policy towards Japan in 1940-41.  The decision has been made to provoke a war and the headstrong challenger has taken the bait.

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For investors, the implications of a redivision of the global capital structure and markets into spheres of commerce are enormous indeed.  Front of mind must be determining whose assets will be stranded and whether they will be compensated with domestic assets seized from foreign owners.  Along with a division of assets will come a division of liabilities.  China has made extensive use of “debt diplomacy” in Africa, which gives debtor nations a huge incentive to throw in with the West.  African nations will be allowed the opportunity to renounce their debt to China as a sign of “solidarity” with Taiwan and Ukraine. 

The second level of implications for investors will be the scale and scope of the capital restructuring needed as the world is divided into spheres of commerce.  Depending on how fast events unfold, major portions of the global capital structure will need to be recreated in miniature at the national level.   While the restructuring is occurring the actual output of consumer goods will need to be lower in order to provide the resources needed to build and operate the new capital equipment. 

After the restructuring has occurred, the material benefits of a global capital structure have been traded for utils of national security.  Two measures that are fundamentally different and which cannot be compared directly.  Future notes will examine these and other economic issues in greater detail as more information becomes available and the stakes continue to rise.

Conclusion

Readers who casually push aside the prospect of a large-scale non-nuclear war between the United States and China do so at their peril.  Arguments that the war would be so expensive, or the destruction so rapid, that it could only last a few months were made by many in the Autumn 1914.  The willingness of the American leadership to instigate and exploit a “Remember!” moment should not be underestimated.

 A politically vulnerable and utterly corrupt President could easily come to the conclusion that a war was in “everyone’s” best interest.  Once again, the line between gross negligence and willing participation will be tested.  Once again, old men will send young Americans to die on foreign shores with the cries of “Remember!” on their tongues.  And once again, the greater ends will be used to justify base and vulgar means. 

That is not to excuse anything Russia, or China, or anybody else in the world does, has done, or will do.  It does however call for greater scrutiny on any justifications American leadership presents for war, especially anything related to a “Remember!” moment.  Indeed, by the time a “Remember!” moment happens, it will too late for investors, too late for voters, and too late for young Americans to avoid the consequences. 

The key to surviving the next ten years will be recognizing now that one of these moments is coming and that it will rapidly change the political and economic direction of the world once it occurs.  Be ready for the break that we are on the brink of.

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