The Shadow War Playing Out Behind The COVID-19 Crisis

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The Shadow War Playing Out Behind The COVID-19 Crisis

By Gregory R. Copley - Mar 29, 2020, 5:00 PM CDT

The rush to what is essentially a new wartime footing began consciously and urgently in the first quarter of 2020 between some of the most powerful geopolitical players of the modern era: the United States of America, the People’s Republic of China (PRC), and the United Kingdom.

It was not about the “battle” to cope with the COVID-19 (coronavirus) epidemic, or the global fear pandemicwhich it engendered, but those contagions broke the cycle of globalism and the belief in the indissoluble nature of interdependence. It allowed what was already emerging as a fundamental move toward a new, bipolar global competition to come out into the open.

By the end of March 2020, the global framework had changed sufficiently to become — behind the headlines about COVID-19 — about which system and ideology would triumph in the decades after the watershed. That meant a race by each of the major antagonists to determine how quickly national productivity could be resumed.

Even so, the failure of most major societies, including the PRC, to prepare for health pandemics, natural disasters, and associated contagions of fear was a significant function of the transformed realities of the “globalist”-dominated political structures over the earlier lessons of national self-reliance. I made this point in a report in Defense & Foreign Affairs Special Analysis on November 24, 2008:

The unintended, or unforeseen, consequences of economic dislocation — as this writer has repeatedly noted — can be expected to lead to a rise in globalized (or at least regionalized) pandemic health challenges at a time when societies are weakened. These will lead to wealthier societies becoming more nationalistic and isolated, in some respects, merely to protect themselves. Pandemics will be matched by similar anomic social responses, including rising crime, of which the new era of maritime piracy is merely one aspect

Indeed, it is clear that the best avenue which nation-states can take is one marked by gaining as much control over their own destinies as possible. That requires a growing focus on domestic food self-sufficiency, and domestic market bases for manufactured goods and services. In other words: a return to a sense of the nation. The age of globalization is ending; it was a brief window in which the technologies which were created to fight the Cold War became the technologies of global social integration. Now, again, the luxury of internationalism is ending, and survival is based around the extended clan: the nation.

It was a year later that the global H1N1 pandemic emerged, fortunately without triggering the associated fear pandemic which acted as a force multiplier to the impact of the 2019-20 COVID-19 epidemic.

By 2020, a dozen years later, the transformed strategic landscape meant that information dominance (ID) warfare was far more enabled, particularly as social media evolved as a conduit for mass mobilization to force government actions in Western societies. So there was a general transformation in the social and technological context which prevailed when the panic arose around COVID-19. Related: A Wave Of Downgrades Has Hit The U.S. Oil Patch

But, in order to gain the post-epidemic political high ground, the PRC was first to “declare victory” in managing the COVID-19 epidemic and to send its population back to work, despite the reality of evidence which defied the national statistics on the continuing levels of contagion in the PRC. However, it was clear that the epidemic, having its origins in Wuhan in the PRC, would peak first and begin to recover first. Still, it was the degree of top-down control which PRC Pres. Xi Jinping enjoyed — in contrast to Western heads of government — which enabled the PRC to “declare victory”, and to resume his offensive against the West in a now fairly blatant fashion.

Even so, it was clear that the overall nature of the restructured strategic balance would be less affected by a few weeks (or even months) in the battle to restart economic activity than by underlying fundamentals in systems. Meanwhile, as the information dominance (ID) wars between the PRC and (particularly) the US ramped up, both sides were careful to ensure that the risk of actual physical challenge was minimized.

What were some of the fundamental immediate outcomes and questions raised by the 2020 Fear Pandemic?

1. The global economy and the economies of most states have been dramatically weakened, and they will remain relatively weakened and transformed for some years; in many cases for decades. This means that economic deprivation will reach more pervasively down into the mass of society, reversing the trend of the past seven decades. It will exacerbate the polarization of societies, but seems likely to push the trend toward forms of nationalism more than it will reinforce the ideology of globalism;

2. The power of central governments has been dramatically increased, and the rights and freedoms of individuals constrained. By late March 2020, the situation in most Western societies had approached a quasi-martial law environment, with little social resistance;

3. Funding for R&D, national security, and consumer spending will decline, further exacerbated by the reduction in core size/wealth of most populations in advanced economies. The question is whether the limitation in wealth will exacerbate or constrain inflammatory populism and social action;

4. The role of global bodies has been weakened, as have alliances. This will lead to a rethinking of alliance structures and how to manage them. It will, even if only for reasons of fiscal constraints, lead to an increasing momentum toward the bilateralization of trade, even to the point, once again of thinking in terms of structured barter or counter-trade dealings;

5. The reach of formal military structures will be inhibited by funding, and will this open seams in the global power framework? Will it allow space for more independent, regional actions?;

6. While the Communist Party of China (CPC) probably has the strength to enforce control over the People's Republic of China (PRC), will the European Union (EU) have sufficient cohesion to enforce control over itsmember states? If the EU cannot "hold it together", would this create a space for Turkey to revive its neo-Ottomanist expansions in the Eastern Mediterranean and Balkans? Did the United Kingdom escape from the EU just in time to preserve its economic base? Did the EU’s poor handling of the crisis end forever the chance of bringing Serbia into the Union? And what will this new dynamic do for the encouragement of separate geopolitical alignments, such as the creation of the Three Seas Initiative as a potentially viable successor to part of the EU? Can Three Seas gain traction if Serbia is excluded, given its regional hub importance for the north-south infrastructural needs of the Alliance?;

7. What skills will be necessary in the post-2020 environment? Has the economy sobered enough to embrace the restoration of practical skills training instead of ideological education which has no market, while an impetus toward revived domestic manufacturing (rather than foreign-sourced manufacturing) will see significant demand for trained personnel?;

8. There was a widespread belief that the crisis had caused a collapse in petroleum and gas prices to the point where the US domestic shale industry would be forced from the marketplace, re-opening the US to the need for imported energy. But this is likely both untrue and irrelevant, and the US would remain considerably less vulnerable to energy exposure than the PRC;

9. The PRC would continue to see extreme vulnerability to food and water shortages, which can only be ameliorated by (a) dependence on imported food and agricultural products, most of which would need to come from the United States (given that other suppliers cannot meet the demand), and (b) reduction in the lifestyles and numbers of the PRC population, a factor which could have significant social-political ramifications;

10. The longer the constraints on societies imposed by the crisis, the more pro-found were the likely post-crisis attitude changes likely to be. In other words, if the crisis lingered in various forms through 2020, it was likely that the year would be seen by society and historians as a breakpoint equivalent to the world wars of the 20th Century;

11. Nowhere in the world have we seen the development of economic theories or approaches to managing societies in decline in terms of economics as well as in terms of the downward transformation of market size and demand. Studies of recent-term lessons from Japan, Russia, and Germany would be helpful, even though these examples all predicated their economic thinking — despite market size decline — on growth in economic opportunity, but with notable shortcomings;

12. Africa, which had moved from a Continent gradually modernizing within the framework of a Western model to one dependent almost solely on the PRC, was likely to be left in an almost ruinous situation by late 2020 and beyond. African societies would themselves be forced to evolve new economic models. There was a likelihood that the US would strongly move, in the post-crisis period, to strengthening its dominance in the Americas (where the PRC, in particular, had built a strong presence), and also in Central Asia, as a means of providing an alternate path in the Eurasian Silk Road complex.

The COVID-19 pandemic will do little to impact the demographic trends in global population numbers. The trend toward population decline was set in place in the second half of the 20th Century and is only now becoming evident. Similarly, the disruption to the global economy also began before the COVID-19 crisis, largely as a result of the global demographic transformation, but the 2020 crisis became an iconic breakpoint.

The post-COVID-19 world would thus be markedly different, structurally, than the world which preceded it. But most significantly, the perception of that "new" world would have changed, ensuring that a linear extrapolation of older remedies or progressions of earlier thinking would no longer be acceptable.

It is important to stress that the two underlying strategic trends impacting the US-PRC competition had begun well before the 2020 pandemic scares. The PRC economy had been essentially in decline for several years, disguised by ongoing state-sponsored investments in infrastructure projects, which boosted the appearance of growth in the gross domestic product (GDP). Moreover, the PRC’s water shortage and quality problems had reached almost panic levels over that same timeframe.

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Why The World Needs A Weaker Dollar

By Yale Global - Apr 01, 2020, 6:30 PM CDT

Major economies should pursue currency agreements to stabilize the US dollar, especially during the COVID-19 crisis, preventing a rapid rise against other currencies that is sure to trigger calls for protectionist measures.

There is historical precedent. In 1985, the US dollar soared. The United States, West Germany, Japan, France and the United Kingdom – the Group of 5 world powers – met at the Plaza Hotel in New York on a Sunday in September, when markets were closed. Four nations agreed to appreciate their currencies to depreciate the US dollar.

Rising dollar: With market volatility, investors seek safety with holdings in US dollars, hiking the currency's value in recent months (Source: Reuters)

Multilateralism and discrete action were necessary to realign exchange rate stability and counter the strong dollar in the early 1980s, with particular significance to West Germany and Japan, two former adversaries that were gobbling up increased US industrial output.

Former US Treasury Secretary James Baker III convenedthe meeting, expressing concern about rising protectionist sentiment among US industrial interests over an account deficit for the United States and surpluses posted by Japan and Germany. The meeting, held in stealth, was based on Baker’s close relationshipwith then-President Ronald Reagan, whose trust he had gained earlier as chief-of-staff. Baker’s idea ran counter to Reagan’s policy about controlling inflation with a strong dollar, but the president listened and liked the idea, knowing that protectionism over the long haul would do more to damage markets than promote domestic interests.

The global economy faces a more calamitous situation today, namely with the COVID-19 pandemic, which has destabilized world markets and caused the dollar to rally against other world major currencies in a few weeks. Countries have feasted on cheaper, liquid dollars for several years and now the piper calls.

In essence, a new Plaza Accord is necessary, even more so than in 1985, to soothe market volatility. Nonetheless, consider the many monetary changes over the last 35 years that may preclude such action:

- World capital markets are much deeper, more complex and electronically integrated than in 1985.

- Unilateralism, not multilateralism, is the guiding theme that most countries now pursue, as led by the United States.

- China, a dollar-backed economy, would not readily agree to the depreciation of its vast dollar holdings.

Related: Trump Proposes A $2 Trillion Infrastructure Intervention

First, regarding the capital markets, dollar credit accounts for 14 percent of all non-bank global GDP as of 2018. In fact there are more $100 bills circulating worldwide than $1 bills, with 80 percent outside the United States. Bonds, loans and payments around the world are today denominated in dollars. These are not dollars owed to the United States, but rather covenants made between various parties that rely on the dollar as the most stable currency and the only game in town. The financial calamity caused by the coronavirus has delayed payments in king dollar, with numerous defaults expected soon or debts called in by creditors early. This has precipitated a global ripple. Dollars must be had, and quickly, or depreciating local currencies will result. The crisis has not spared even so-called safe-haven currencies such as the Japanese yen and Swiss franc from volatility, due to their liquidity for such payments. During crises, lenders seek to minimize risk. Further, commodity currencies, such as the Norwegian krone and Canadian dollar, which garner most of their support from stable oil prices, quickly depreciated with Saudi Arabia and Russia warring over oil-production cuts in the face of slackening demand.

Second, with unilateralism, protectionism ensues. Countries try to contain the carnage on their own. Coordinated leadership is required. The US president, strongly unilateralist, seeks to influence economic policy directly. In the process, he has undermined trust among nation-states that he perceives as abusing US markets. This contrasts with Reagan’s style in 1985, authorizing Baker to pursue multilateral negotiations on his own. Massive credit “swap” lines, contracts recently opened by the US Treasury to reduce risks and assist aligned countries with dollar loans, are not enough to stem the tidal wave of demand. There are simply not enough dollars in the system to placate all outstanding dollar indebtedness. These debts include dollar-denominated sovereign and corporate issues from countries like Indonesia or Nigeria, which were later sold on world markets. Such bonds were not only absorbed by US investors, but also by those in the United Kingdom, Singapore, Dubai, and China.

Third, China holds more foreign exchange reserves than any other country in the world, at last count, around $3 trillion. Foreign exchange is synonymous with the US dollar, generally speaking, with 62 percent of world reserves in dollars and euros a distant second at 20 percent. It would work against Chinese interests to devalue the yuan further. China, not a party to the 1985 Plaza Accord, is today the second-largest economy in the world, and its vast dollar reserves have assisted the nation in weathering financial storms better than other countries. Much of this was born during the financial crisis in 1997 when most Asian countries lacked the dollar reserves necessary to placate the stampede on local currencies.

Yet such an agreement is unlikely.

This time, developing countries are loaded for bear, hoarding dollars to the extreme. Nonetheless, many developing countries, such as Nigeria, Lebanon, and Turkey, have a much larger dollar debt-to-reserve ratio, even with large holdings, and feel the dollar squeeze.

 

Slowdown: International trade growth was already slowing when the COVID-19 pandemic hit, triggering protectionist instincts and hoarding of US dollars (Source: Visual Capitalist)

Nothing would assuage world markets more than orderly depreciation of the US dollar, with stabilization and appreciation of other currencies. A multilateral approach – conducted by a handful of leading finance ministers, with the backing of strong US financial leadership, away from news media – might calm global markets. None would want to tip the markets early, similar to the 1985 agreement when orderly depreciation of the dollar occurred and accomplished the immediate goal of rebalancing the dollar.

Related: U.S. Drillers Face Doomsday Scenario As Some Crude Blends Hit $1

Today, the G20 has many more actors, many with political tendencies that resist the appearances of compromise. The European Union’s euro, successor to the French franc and Deutsche Mark, did not exist in 1985. Further, the digital world instantaneously conveys currency moves of any type. Any sudden market move would invite not only speculators but also reactionary capital controls from governments, both on dollar holdings and domestic currency. Nonetheless, this trying time of pandemic and collapsed oil prices mandates compromise and multilateral action – along with cooperation from a US president who holds his position based on "America first" policies.

To be precise, the Plaza Accords were a prescription to soothe a short-term symptom of uncontrolled dollar strength, exactly what the world experiences now. Soon afterward, another agreement, the 1987 Louvre Accord in Paris, halted the dollar’s 18-month decline, exacerbated by speculators. Once again, the G5 agreed to exchange their currencies in a range, with a compromise between a pure floating and fixed-exchange-rate system. Japan was recognized as a world financial powerhouse during the Plaza Accord, and swelling of the yen’s value from ¥250 to ¥150 per dollar in a few months contributed to asset bubbles and fiscal mismanagement, eventually leading to stagnant growth and the “lost decade” of the 1990s for the Japanese economy. Nevertheless, the real target of both accords was West Germany, with its growing industrial might threatening to overwhelm US industry with an artificially low Deutsche-Mark exchange rate.

Left unchecked, a soaring dollar will wreak havoc in emerging markets with rising inflation, collapsing currencies and a decline in US competitiveness. The 1985 agreement may have marked the last great initiative for multilateral control of the dollar’s ascendancy.