Wednesday, June 16, 2010

Mutually Assured Economic Destruction

The concept of Mutually Assured Destruction (MAD), developed during the Cold War, is a doctrine of military strategy in which two opponents possessed the ability to destroy each other.  As nuclear arsenals within the United States and the old Soviet Union grew during the arms race, it was understood that neither side could "win" a nuclear war, regardless of the relative amount of weaponry built. 

If either side were to launch missiles, the other side would still have a deadly capacity to virtually completely destroy the other.  Thus, this precarious balance kept the peace in that neither side could actually "win".  In fact, the radioactive fallout from any type of strike would prove so injurious to the global environment, that nuclear war was believed to be impossible.

MAD was applicable when there were relatively few world nuclear powers.  However, the number of nuclear-capable nations has expanded significantly, thus the doctrine is vastly more complicated.    Additionally, the concept of defense systems such as anti-ballistic missiles, hardened silos and guided lasers ("Star Wars") makes it possible, although highly unlikely, that a first-strike could be defended. 

MAD is now more applicable to the subtle economic war between the United States and China.  Washington is a major importer of Chinese goods while Beijing holds vast amounts of dollar-denominated American debt. 

China needs the vast U.S. consumer market to keep its poverty-stricken populace employed, while America needs a willing lender to purchase and hold is mounting external debt.  Beijing has become such a large holder of Treasury Bonds that reducing its position would cost it dearly if it tried to dispose of a significant portion. 

China is at risk of the enactment of trade barriers by the American political constituency which plays up to trade unions and enterprises crying foul over losses of jobs and business to "subsidized" Chinese manufacturers.  In turn, the United States is at risk that Beijing will opt to reduce its holding of Dollars and put pressure on interest rates and the value of our currency.  Mutually Assured Economic Destruction.

According to newly released data from the U.S. Department of Treasury, total external debt is now nearly $4 trillion, up more than 20% in the last year alone, as Washington has engaged on a spending orgy to stimulate the moribund economy.  Of this total, China holds $900 billion followed by Japan with nearly $800 billion.  In total, Asian exporters hold more than half.  No other nation has in excess of 10%.

China's Treasury holdings represent nearly 20% of  her annual Gross Domestic Product which is approximately $5 trillion.  Mutually Assured Economic Destruction.

Curiously, the United Kingdom has recently moved into 3rd place as its holding of Treasuries has tripled in the last 6 months from about $100 million to more than $300 million.  The total of all oil exporting nations is  4th at $240 million.

Mutually Assured Economic Destruction is merely another facet of World War III, a concept posited here that future wars will be waged not with cannons and bazookas, but economically and financially, through terrorism, cyber-hacking, ecological destruction and trade sanctions.  For a brief background, click here

Marko's Take

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  1. There are just two power houses in the world.
    China and Germany (producers).

  2. Hi Anon:

    While the U.S. is undoubtedly on the decline, it is still the world's largest economy. Germany is fourth. I don't disagree that Germany's importance is rising, but you can't count the U.S. out yet.



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