Econolypse Money

The China Question

comments 2

Is the American era over? I begin to wonder if the answer is yes. History is the reason. In 1914, the British Empire spanned the globe, and London was the financial capitol (eh, capital would work, too) of the world. Four years later, England’s fortunes had changed. The country had shifted much of its manufacturing production to the war and spent quite a bit of its capital supporting European allies. Meanwhile, the United States picked up manufacturing slack and monetary might. Could America’s fortunes change so quickly?

The answer starts with the 1920s. The Roaring Twenties, a decade of great cultural, economic and technological change, followed World War I. There are shocking parallels between the Roaring Twenties and the Roaring 00s, time periods preceding great economic collapses:

  • Both decades started with brief recessions
  • Federal Reserve lowered interest rates to spur recovery from recession
  • Republicans occupied the White house
  • Taxes declined for the wealthiest Americans
  • Terrorists attacked Wall Street (bombings, Sept. 1920; airliner crashes, Sept. 2001)
  • United States fought wars on terror (anarchists in the `20s, starting a few years earlier; Al-Qaeda in the `00s)
  • U.S. government suppressed freedoms in pursuit of terrorists
  • Minorities’ prominence increased
  • Washington heatedly debated immigration policies
  • Homosexual acceptance/tolerance greatly increased
  • New technologies brought new freedoms to Americans (autos, electricity, radios and telephones in the `20s)
  • New networks (radios and telephones in the `20s; the Internet and mobile phones in the `00s) changed how people communicated, also disrupting established businesses
  • Foreign investments and loans propped up weak economies (from the United States to Europe in the `20s and from Asia to the United States in the `00s)

Both decades reached economic highs that turned into desperate financial lows—huge crises. The New Deal brought modest relief, but it was war in Europe, starting in 1939, that pulled America out of the Great Depression. Like World War I, the Second World War put America in a manufacturing-leading position and in control of most of the globe’s gold. The American Era that briefly emerged in 1918 became tenable and sustainable after 1945. America was the builder, financier and manufacturer.

There are many lessons the 1920s can teach businesses, economists and government officials about the 2000s. The parallels are striking, particularly Wall Street’s boom, increased consumer spending and bubbles that went pop. But I’m more troubled by 1914-18 and the chaos that followed in Europe. For there is another parallel to be drawn. China today and America’s position during World War I and the year’s immediately following.

Today, China is the builder, manufacturer and investor. Like America helped prop up Europe following both world wars, Asian investments contributed to the U.S. mortgage/derivatives bubble and will be crucial to eventual recovery. China’s economic fortunes rose with America during the `00s bubble years, when consumer spending here created manufacturing and related jobs there. Europe’s collapse following World War I contributed to U.S. economic instability between 1919-1921 that later became a boom. Similarly, the U.S. recession is causing trouble in China, where an estimated 20 million are recently unemployed.

But will a boom follow there? I believe so. I’m no economist, but I know history. Europe was the debtor continent following World War I. Today, the United States is the debtor, mainly to the Asian continent. More importantly, like England during the First World War, the United States is preparing to exhaust its financial resources to fight the modern war on greed (some people call it war on the credit crisis).

All the while, America’s debt increases, as did Europe’s, starting about 90 years ago. Recovery will be costly. Congress has already allotted more than 1.5 trillion for bailouts. Meanwhile the Federal Reserve plans to inject another $1 trillion into the economy, in the form of mortgage securities and Treasury bonds. But, as the saying goes, money doesn’t grow on trees. America must borrow from foreign investors to pay off bad investment and mortgage debt. Sometimes I wonder if America has become the Ponzi nation. The country meets its commitments by wooing ever more investors. To reiterate:

  • Clear identifiable cycles define human history. I see two parallels in recent events: 1920s and 2000s boom and bust; change in dominance between 1914-18 and today
  • America may be the biggest economy, but it is one built on debt. Asian countries lead the pack of lenders, like America to European nations in nineteen-teens and early twenties
  • England fell from power by financing the enormous costs of World War I. America will plow trillions into the war on greed

We are at a precipice, where the American Era could end and the Pacific Rim Era begins, with China being the primary benefactor. Some people will scoff at such an assertion. But I say, who could have predicted in 1913 the dramatic change in England’s fortunes—and that of Europe—just five years later?

Photo Credit: Hario Seto Supranggono

Do you have an econolypse story that you’d like told? Please email Joe Wilcox: joewilcox at gmail dot com.

2 Comments

  1. Sounds like you’re on to something here Joe. I have no idea what the future holds but I do agree that the bubbles were caused by nothing other than simple greed and the inability to delay gratification.

  2. N A says on May 2, 2009

    Here is another point of comparison. In the early 1900’s, America was a free market democratic society – what about China? China is a creditor country only because it has made private/state ownership nebulous. If you use the same yardstick here in America (making private/state ownership nebulous), we are no longer a debtor country.

    American economy has problems, sure. There are some parallels between then and now, sure. But in our zeal to arrive at conclusions, we shouldn’t fall victim to picking and choosing only those elements that serve as parallels and ignore other elements that are not.

    Another thing to consider: while we were a manunfacturing economy after the world wars, we manufactured those things we actually invented/innovated. What is China manufacturing now?

    Let us not jump to conclusions.

Leave a Reply