Enemy du Jour
Every empire must have an enemy to point at and focus upon. If there is not a bad guy looking to destroy all that is good in the world, which is of course defined as your empire, then the reason for the empire’s existence may be called into question. This does not mean that there are no real threats in the world. It certainly does not mean that China is not a rising power. Indeed, it has risen greatly and today represents a peer competitor to the U.S. This has largely been driven by the fact that China has moved to more liberalized markets since the late 1970s and in the process has lifted hundreds of millions of people out of abject, grinding poverty.
The problem is that an empire like the United States runs on paranoia almost as much as an inflated currency. In fact, one way you keep justifying the debasement of the currency and the expenditure of massive amounts of wealth on the military is to conjure up a mortal enemy. China fits that bill nicely. More frightfully China may represent one end of the so-called “Thucydides Trap” whereby a rising power challenging an established power leads inevitably to war. This is so named because the Greek historian Thucydides argued that this was the key reason why Sparta (established power) went to war with Athens (rising power). The historian Graham Allison, who popularized the phrase Thucydides Trap in his book Destined for War, counts 16 such situations in the last 500 years, 12 of which resulted in war. Not good historical odds.
The question then that needs to be answered is whether China is really the kind of threat that the U.S. should be existentially afraid of, or is the U.S. security establishment exaggerating this threat for its own parochial interests.
A (Very) Brief Economic Primer
First it is necessary to remind the reader what to look for in terms of real sustainable economics. Using the insights of the Austrian Business Cycle Theory (ABCT) we can see that a central-bank-fueled credit expansion, especially coupled with price controls, leads to artificially low interest rates and very cheaply acquired debt. This in turn leads to a serious amount of “malinvestment”, that is, building the wrong things, in the wrong place, and in the wrong amounts. Think of excess real estate, or excess industrial capacity. This leads to an inevitable liquidation, and for a time, stagnation. This is the so-called bust phase. In this phase capital, if it is allowed to, readjusts to a more economically sustainable allocation and the economy heals and can proceed to real growth. If this phase is truncated by blowing another bubble and restarting the cycle all over again, the final meltdown is that much more disastrous. Let’s apply this to China and see what we get.
An Economic Superman?
What is the status of China’s economy? Is it of such strength that the U.S. should cower in fear, or even emulate Chinese policies? From an economic perspective I would conclude that China, while possessing real strengths due to its previous market liberalizations is far from the colossus that the hawkish set thinks that it is.
China exhibits all the classic signs of the ABCT. The state creates new credit via its central bank, which artificially lowers interest rates. Resources then flow into longer-term, capital-intensive projects, precisely those most interest-rate-sensitive.
In China the People’s Bank of China and State-Owned Banks moved capital into a massive building spree of housing and other urban infrastructure. This has resulted in huge “ghost cities” and all the attendant infrastructure, built for occupants who are not coming. It also resulted in overbuilt, underutilized high-speed railways. This is simply a staggering waste of capital.
There is also a serious amount of industrial overcapacity. The Chinese government has subsidized various industrial sectors: steel, solar, and electric vehicles. These sectors are setting production targets based upon a centrally planned political calculation, not a market-driven calculation.
These are classic “malinvestments” that have not added real wealth because they are not being sold at a real profit that is enough to sustain their capital base. These investments will eventually need to be liquidated or written off.
All of this is related to the calculation problem. Without freely set prices for the means of production there is no way to rationally allocate those scarce means across unlimited demands. You will simply not know what to produce, nor how much, nor where. Hence, ghost cities.
Chinese economic planners thus engage in what is known as financial repression, that is, the forcing down of interest rates. China’s state banks have done this consistently. They suppress deposit interest rates and restrict capital outflows. They do this to fund decisions that the political apparatus, not a cooperative market, has determined to be the proper course of production. This shunted Chinese savings into real estate in order to try and get ahead of inflation. This blew a bubble that saw real estate rise to 25-30% of Chinese GDP by 2016. This number has dropped since then but still represents a serious amount of housing overhang in the Chinese economy. So, far from being an economic superman it increasingly looks like China’s economy is largely built on a mountain of made-up money and artificially cheap debt. If that sounds familiar it should, as it is also a description of the U.S. economy. The difference is that the U.S. had a deeper base of capital accumulation before engaging in these capital-consuming policies. In short, the U.S. had a longer runway than China.
China has given itself the worst of all possible worlds. It suffers from both an Austrian business cycle in those parts of the market that are more liberalized, such as housing, and a calculation problem in those parts of the economy that are state-directed.
Now, the hawks will respond that the ghost cities argument does not hold sway in 2026. The key issue they claim is one of “industrial asymmetry”. That is, the Chinese economy has a huge advantage over the U.S. in shipbuilding capacity, missile production rates, and overall munitions production capabilities that makes China a large threat to the U.S.
However, the reality is that the Austrian economic insight into economic calculation and the prevalence of malinvestments in a state-centric environment is still relevant, even in the face of this seemingly daunting industrial capacity of China. In reality any production capacity that is erected upon subsidized credit is capital consumption no matter what rolls off the line. Tonnage produced under a regime of financial repression tells us nothing about whether this production capacity is sustainable.
When interest rates are artificially lowered below the rate of inflation you penalize real savings and misallocate real resources. These ventures appear profitable because of the false signals sent by the artificially lowered rates. In reality, though, these ventures are not returning a profit and are instead incurring real (inflation-adjusted) losses which constitute capital consumption. Since capital is the term given to tools that allow for the production of goods and services, all this policy is doing is degrading the economy’s ability to raise real output.
Also, the presence of large export markets for many Chinese products does not change the calculation here. Exports sold under the veil of a subsidy are not profitable. If China sells products below the cost of being able to replenish your capital (tools of production) then this is still capital consumption.
Is China A Real Economic Threat To The U.S.?
The answer to this is a clear no…if the U.S. does not try to emulate Chinese state-directed capitalism more than it already has. There should not be an exaggerated fear of a state-planned economy. Neither China nor the U.S. can suspend the laws of economics, no matter what their hubristic leaders think. China cannot keep growing via debt-fueled fixed-asset investment without having to face the music and deal with its malinvestment. What happened to Japan in the post-1990 “lost decades” is what will happen to China if it continues down this road.
Also, as this malinvestment continues, the productivity of new capital takes a nosedive. China will have to inject increasingly larger amounts of new credit just to generate the same marginal unit of GDP. The credit to GDP ratio in China is already at an estimated 300%, so this appears a daunting task indeed.
Additionally, there is the issue of per capita economic wealth and growth. If any nation aspires to global power it must feed, clothe and shelter its people in a manner they find acceptable given the current world environment. This is true even for an authoritarian regime. Currently on a Purchasing Power Parity (PPP) basis, which adjusts for differing price levels, the Chinese economy is in the aggregate the largest in the world. On a per capita PPP basis, it ranks 85th. This means that there is a limit to what the Chinese government can devote to its military without creating serious political unrest. When the Chinese economy starts to buckle under the weight of the malinvestment and the need to liquidate these errant capital allocations the potential for unrest grows significantly. A terrific analysis of all of this from a non-Austrian economist and China expert Michael Pettis can be found here.
I would therefore conclude that China is not a credible economic threat to the U.S. given its authoritarian top-down, state-directed economic policies. Its policies contain the seeds of its own demise. The only way it is a threat is if the U.S. follows China further down this road of economic illiteracy.
Is China A Genuine Military and Geostrategic Threat To The U.S.?
In the short to medium term, I would conclude that it is a threat to the U.S. empire. That is not to say it is a threat to legitimate U.S. defensive rights. If the U.S. gives up the empire all sorts of “threats” evaporate. I evaluate it as a threat because the U.S. will, with its imperial perspective, judge them to be so, thus raising the risks of war.
On its own terms China poses a military and geostrategic threat in the near term because as an authoritarian regime it can direct massive resources to its military, which it has been doing. It does not need to answer the demands of economic efficiency. Even an economically inefficient, distorted nation can build up significant amounts of lethal military power. For a time at least, China can choose guns over butter.
A Cornered Tiger is A Problem
However, there is a risk that as China’s economy starts to buckle under the weight of its internal contradictions and the bubbles start to burst, and unemployment (especially among the young) rises, China may end up being a “cornered tiger”. China would not be the first nation to resort to an external conflict to divert domestic unrest. Also, it may strike out if it sees its deteriorating economic situation as potentially knocking them out of the ranks of a peer competitor of the United States. Of course, this cornered tiger phenomenon applies to the U.S. as it is close to buckling under the weight of its own economic stupidity. However, this is an essay on China so I will not digress.
In the long term it poses no existential threat to even the U.S. empire. Again, it is not a threat currently to the actual rights of the U.S. Since military power depends upon wealth creation this power is a result of economic growth. An economy riddled with massive malinvestments will not long be in the position to generate enough wealth to create a long-term military threat. This is especially true if an intense arms race heats up and puts even more pressure on China’s economy. The U.S. must, however, be careful in the short and medium term to not needlessly provoke a potentially cornered tiger.
There is the issue of Taiwan that hawks will claim is necessary for U.S. security. First, it is only essential to U.S. power projection thousands of miles from U.S. shores. Its control by China would seriously damage the ability of the U.S. to project this power, but it would not dent legitimate U.S. defense rights.
Second, there is the issue of Taiwanese semiconductor production and the reality that its destruction would be a serious blow to the global economy, including China’s. Conquering Taiwan (even if you did not destroy the production facilities) would not transfer chip production capabilities; it would sever that capability. Chip production is a global process that involves everything from Dutch lithography to Japanese chemicals to American design software. These facts would certainly give the Chinese pause before attacking, because it would destroy the thing worth possessing.
Third, the defense of a nation should be up to that nation. Taiwan should determine what level of resistance it wants to put up and how far it would go to remain independent. I would pray Taiwan follows a nonviolent path of resistance. The U.S. should not presume to make that decision for Taiwan, nor should it warp the calculation by offering to subsidize Taiwan’s defense. Let Taiwan decide. This is far more respectful of the 23 million souls in Taiwan in the crosshairs of the U.S. and China.
Fourth, the ability of China to actually conquer Taiwan should be in serious doubt. No nation has undertaken an amphibious assault against a well-armed, well-prepared defender in the modern missile age. The reason is that with relatively cheap shore defenses available today such a landing would be problematic at best. Power projection across water is always the most difficult and China would be faced with a mountain of a task to pull it off. Speaking of mountains, Taiwan is full of them, which makes a land conquest by China even more difficult. A war of China on Taiwan would likely devolve into a brutal, bloody quagmire that would seriously degrade China’s military and economy. For a full analysis see here. So, we see that with this issue as with the others the hawks are taking a true threat and blowing it out of proportion. That said, there is still the corned tiger to contend with. If the U.S. presses too hard regarding Taiwan, an issue the Chinese view as existential then war could very well be the result.
The Threat The U.S. Can Control
The U.S. can however control much of the tension between the two nations. First, the U.S. must get its own economic house in order. There is still time to manage this in an orderly fashion. If, however, the U.S. continues along its present course then the unraveling of its welfare/warfare state will be forced upon it. This will leave the U.S. vulnerable to the temptation to strike at China while it is still in a relatively good position. A cornered eagle perhaps.
So, this next decade is a potentially dangerous one for both nations. China is weaker than we think, which is why it may be so dangerous, at least unless the U.S. gives up its empire. The U.S. remains dangerous because it may fall into the Thucydides Trap and strike at what it perceives to be a rising threat while it still can.
The U.S. can only right its economic ship if it gives up on global empire. History does not offer much hope here. Nations typically do not do that. On the other hand, Britain did give up its empire without a major conflagration (not to ignore those deaths that did occur as Britain faded), and a nuclear-armed Soviet Union did disintegrate without blowing up the world. So, it can be done. It is a question of whether the U.S. possesses a rational enough mindset to pull back from global hegemony.
Part of this rationality should recognize that it is not likely that China is aspiring to global domination. It is more likely that it simply wants to be a regional hegemon and a great power within the system. Indeed, compare the number of Chinese military bases outside of China (one permanent base in Djibouti) with the 750-800 U.S. foreign bases. If the U.S. recognizes that then that would go a long way to giving the U.S. the space to stand down its global military posture and set itself on a path of peaceful, sustainable growth.
That is the path for God’s people to make the case for a rational stand down. This is not total disarmament (as good as that would be), but simply a more rational way to look at the world and engage in some simple yet meaningful harm reduction.
Also, keep in mind that this threat exaggeration is a bearing of false witness against another. As Luther pointed out, we are to defend our neighbor’s reputation and put the best light on his actions. This remains true even on a national scale. Remember too that Jesus repeatedly tells us not to fear. Regarding fear, Isaiah 8:12 says it well, “do not fear what they fear, and do not dread it.” Fear is in reality the liturgy of the empire. It demands belief, mandates repetition, and funds itself. To follow Jesus and reject fear is not naïve sentimentalism, it is a rejection of a pagan liturgy.
So, reject the charge against us of being pie-in-the-sky naïve waifs. Use the brains God gave us to make a rational argument about the true nature of Chinese capabilities and intentions, and help to build enough space for a more peaceful and prosperous world to emerge.
Praise Be to God
