Stock markets collapsed in Asia and Europe earlier today, leading to losses here. President Bush spoke from the Rose Garden this morning to urge calm, but shares fell both during and after his remarks. The global financial architecture is disintegrating as economies deleverage, and no bailout, rescue, or emergency plan seems able to restore calm. So we need to begin thinking about the geopolitical consequences of a worldwide depression.
Let’s quickly run through what has already been said. The decrease in global economic activity will lead to further declines in energy prices. Their drop will inevitably weaken the Russian, Venezuelan, and Iranian economies, and this development could reduce the threats posed by Putin, Chavez, and Ahmadinejad. At the same time, the United States will no longer be able to afford such a large military. For example, the Navy’s goal of adding an aircraft carrier every half decade seems more unrealistic by the day. Wall Street will decline in importance. Cashed-up Asian nations will bail out America and the West. The “Beijing Consensus” will gain traction as capitalism is perceived to have failed.
Are these propositions correct? It’s hard to believe that Ahmadinejad will be slowed by changes in oil prices. He may see Washington’s preoccupation with sliding stock markets as an opportunity to act and in any event think that America’s day has passed.
The Iranian president would be wrong, however. In times of severe stress, investors run to safety, which means the United States. So if any financial center suffers relative decline, it probably will not be New York. We may have to get used to living with our “Masters of the Universe” again.
And as for wealthy Asians, their day in the sun is passing. True, they built up large stockpiles of cash after 1997’s Asian Financial Crisis. China, for instance, has $1.8 trillion in foreign reserves. Yet these nations learned the wrong lessons from last decade’s turbulence, and, in accumulating such large sums, have created serious imbalances in their own economies. The imbalances, once hidden in the good times, are now being exposed in the global slide. China, for instance, is on the verge of a once-in-a-lifetime downturn in its export-dependent economy. Chinese enterprises are beginning to go bankrupt-10,000 factories in the nation’s export powerhouse, the Pearl River Delta of Guangdong province, have already closed this year, for instance. Another 20,000 are expected to fail by December. As go the Chinese, so too will the economies that depend on exporting to China. Virtually no nation will be immune to global contagion.
In synchronous failure, nations will probably turn inward as they try to solve economic problems. That would normally mean a more peaceful world as states lose their appetite for conflict.
Yet there are, unfortunately, counterbalancing trends. Before recent events, the Doha Trade Round looked as if it might falter due to intractable differences between the West and emerging nations, especially China, India, and Brazil. Now, the process of trade liberalization appears to be completely dead. If the post-Cold War era of globalization goes into reverse, Tom Friedman will look shallow for talking about a “flat world” and nations will be tied less tightly together. This second development could lead to increased antagonism as governments find fewer reasons to cooperate. And there is always the concern that Iran’s mullahs and other rogues will pick this time to fight.
