From Economic Crisis to World War III

The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.

BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.

The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.

But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.

Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.

The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.

In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.

As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.

If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.

For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.

To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.

According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster.

This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including

  • technological disruption, a
  • record-breaking migration crisis,
  • anxiety over globalization,
  • political polarization, and
  • rising nationalism.

All are symptoms of failed policies that could turn out to be trigger points for a future crisis.

.. Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.

Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logicof the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.

Britain Should Not Have Fought in the First World War

Filmed at the Royal Geographical Society on 15th April 2014. The First World War is not called the Great War for nothing. It was the single most decisive event in modern history, as well as one of the bloodiest: by the time the war ended, some nine million soldiers had been killed. It was also a historical full stop, marking the definitive end of the Victorian era and the advent of a new age of uncertainty. By 1918, the old order had fallen: the Bolsheviks had seized power in Russia; the German, Austro-Hungarian and Ottoman empires had been destroyed; and even the victorious Allied powers had suffered devastating losses. It was supposed to be the war to end all wars. And yet barely two decades later, the world was again plunged into conflict. Little wonder then that historians still cannot agree whether Britain’s engagement was worth it. For some, the war was a vitally important crusade against Prussian militarism. Had we stayed out, they argue, the result would have been an oppressive German-dominated Europe, leaving the British Empire isolated and doomed to decline. And by fighting to save Belgium, Britain stood up for principle: the right of a small nation to resist its overbearing neighbours. For others, the war was a catastrophic mistake, fought at a catastrophic human cost. It brought Communism to power in Russia, ripped up the map of Europe and left a festering sense of resentment that would fuel the rise of Nazism. We often forget that, even a few days before Britain entered the war, it seemed likely that we would stay out. H. H. Asquith’s decision to intervene changed the course of history. But was it the right one?

How & Why Germans Bought Hitler’s Pitch

Get the entire film at https://www.createspace.com/204551. This clip from a 1 hour PBS television documentary I made called ” How Hitler Lost the War.” The film takes a unique point of view. Rather than talking about who won the war, my colleagues and I explored what Hitler did that helped lose Germany the war. Although it happened so long ago, it is still a frightening story. Some of the interviews I conducted in this segment were fascinating to me and I hope they are to you as well.

Normany Invasion: Operation Fortitude

Both Fortitude plans involved the creation of phantom field armies (based in Edinburgh and the south of England) which threatened Norway (Fortitude North) and Pas de Calais (Fortitude South). The operation was intended to divert Axis attention away from Normandy and, after the invasion on June 6, 1944, to delay reinforcement by convincing the Germans that the landings were purely a diversionary attack.