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Shocking Scenarios: Rapid Economic Contraction May Lead to New Wars and Radicalized Politics

Economic contraction could provoke: confrontation between U.S. and China or an unraveling of the European Union.

As the global economy heads for its first annual decline since WWII and the biggest decline in trade in 80 years, more and more commentators are using the term depression to describe the vertiginous economic collapse.

The rate of the decline is astonishing. Nouriel Roubini, a.k.a. “Dr. Doom,” writes, “The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world.”

During the Great Depression the global economy fragmented, leading to the rise of competing power blocs. Eventually, fascist Germany and imperial Japan launched wars of conquest for new markets and lands because they lacked the territorial and trade outlets possessed by the United States, England and the Soviet Union.

This crisis is at an early stage, but the process of global fragmentation has already begun, which means a greater likelihood of interstate military conflict. With the fading of the “war on terror” as the central U.S. battleground, China will probably return as the pre-eminent peril in the minds of the U.S. economic and political elite.

Recently, a sea-going confrontation and China’s lecturing the United States over debt indicates how the powers are skirmishing over military and economic interests.


China is using the economic crisis as an opportunity by dipping into its gargantuan cash reserves to stoke demand with a two year stimulus plan of $586 billion, which amounts to 14 percent of its annual gross domestic product, versus the Obama plan, which at $797 billion is less than 6 percent of U.S. GDP.

China is focusing on improving its industrial competitiveness, but has yet to address its minimal social welfare spending, which provides greater stimulus than infrastructure spending and spurs demand by allowing the Chinese to lower their high savings rate.

The bigger problem is the Asian economic model may be finished, with exports declining 33 percent in South Korea, where exports account for 60 percent of GDP, and 46 percent in Japan. Industrial output has dropped 43 percent in Taiwan. With consumer demand and business investment collapsing worldwide, countries can no longer export their way to recovery (a policy known as export-oriented industrialization).

These export drops are showing up in China, where imports have declined significantly. It plays a critical intermediary role in the global economy. Walden Bello describes China’s economy as the “overwhelming driver of export growth in Taiwan and the Philippines and the majority buyer of products from Japan, South Korea, Malaysia and Australia.”

Even if China can spur domestic demand,  it’s not a long-term solution. Production can’t survive on internal demand alone, and prioritizing domestic manufacturing over foreign trade inevitably devolves into “beggar-thy-neighbor” economic warfare.


This is precisely what’s happening in the 27-member European Union, where “peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline,” according to the Wall Street Journal.

The crisis threatens to unravel the post-Cold War economic order in which the West administered “shock therapy” to former Soviet Bloc countries by restructuring them along neoliberal lines. Twenty years ago, Soviet Bloc populations largely accepted the shock therapy with passivity, disoriented by the rapid collapse of Communism.

Peter Gowan, author of The Global Gamble, argues that the Western-imposed shock therapy in the early 1990s bankrupted and privatized East Europe’s industrial enterprises and dismantled the region’s integrated economy, known as Comecon. This paved the way for unsustainable bubbles in housing and construction, foreign credit and capital flows, low-wage manufacturing and remittances.

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