11/24/2015

Background
So what does the South China Sea have to do with climate change, the yawning gap in the distribution of wealth and income and the approaching water crisis? In a word, everything.

In “Asia’s Cauldron: The South China Sea And The End Of A Stable Pacific,” Robert D. Kaplan, chief geopolitical analyst for Stratfor and former member of the Pentagon’s Defense Policy Board, masterfully examined some of the reasons why the South China Sea is so crucial. But other powerful esoteric forces are at play –fear of economic collapse and loss of oil supplies being two of them- and they are steering the U.S. and China, the world’s two largest economies and the biggest emitters of greenhouse gasses, toward a terminal collision course.

The American Perspective
The United States emerged from World War II with nearly half the world’s GDP. With victorious Britain nearly bankrupt and Europe, Japan and the Soviet Union in ruins, American industry had no competition. But that situation changed. Overspending in the Korean and Vietnam wars, a defense budget larger than the next 10 nations combined, the space program, and growing domestic entitlements led to a massive devaluation of the dollar. The day of reckoning came in 1971 when President Richard Nixon cancelled the dollar’s direct convertibility to gold. However, in an effort to prop up the value of the dollar, Nixon negotiated a quasi-mercenary deal that in exchange for arms and protection Saudi Arabia would denominate all future oil sales in U.S. dollars. Subsequently the other OPEC countries agreed to similar deals thus ensuring a global demand for U.S. dollars and allowing the U.S. to export some of its inflation. Since these dollars did not circulate within the country and were therefore not part of the domestic money supply, economists felt another term was necessary to describe the dollars received by petroleum exporting countries (OPEC) in exchange for oil. Accordingly, Georgetown University economics professor Ibrahim Oweiss came up with the term “petrodollar,” and it stuck. The rest of the world soon followed, and today all currencies are “fiat.” The difference is that they’re all compelled to earn dollars to pay for the oil they buy. Only the United States Federal Reserve, a privately owned non-governmental entity, is authorized to create dollars at will. This enormous power creates an illusion of safety that investors worldwide have historically flocked to and (still) allows the government to perpetually borrow however much it wants at bargain rates. Its only “restraint” is the debt ceiling, set by Congress, which is routinely raised as needed to accommodate the perennial budget deficits.

Overspending, like gambling, is an addiction, and it has consequences that can be postponed but not avoided. Nixon’s shock happened at a time when America’s industrial base was still relatively intact. Over the last 45 years the manufacturing sector was essentially outsourced to nations with lower labor costs and the American middle class collapsed.

To illustrate, 50 years ago America’s largest private sector employer was General Motors. Its full-time employees made an average $50/hour in today’s dollars, including benefits. Now GM manufactures and sells far more cars in China than in the U.S. Today’s largest private sector employer is Walmart, with 1.3 million employees. Beginning in February 2016 its employees will earn roughly between $9.90 and $24.70 an hour, many without benefits. Think about it. Today’s highest-paid employees make half what the average employee made 50 years ago, and most of the outsourced manufacturing jobs were traditionally filled by men. This devastated non-rich American families, roughly 90% of the population.

The collapse of employment in American manufacturing coincided with the rise of the financial sector.

The new game in town became figuring out new ways make money from money -as fast as possible. The trouble of course was that only those with money could play it.

As a result, median income remained flat or declined while corporate profits skyrocketed. This disparity allowed the latter to influence the electoral process, the government and even the courts to pass laws, adopt policies and legal decisions such as Citizen’s United that favored them at the expense of the mass of the population. Today a symbiotic relationship exists between the government and a tiny number of plutocrats who collectively account for roughly 50% of political contributions that has all but eviscerated what remained of our democracy. Their priority is to protect the all-important financial sector, controlled by a minuscule minority, by attempting to perpetuate the military status quo.

China
China’s spectacular growth over the last 30 years relied on its (then) low-cost labor pool to out-compete foreign manufacturers of consumer goods and entice them to build factories in China, not on attempting to control the world’s oil resources and financial system. This resulted in the world’s largest reserves of hard currency and a vast trade surplus with the United States. But its success, though on an exponentially larger scale than Japan and South Korea, cannot compensate for two strategic weaknesses.

Currently China is not self-sufficient in oil and, despite its peerless South-North Project, its water resources are insufficient to irrigate its arid western half, a necessity to provide living room for its dense eastern half and potentially at least double its economy. Like its industrialized Asian peers, this oil shortage currently compels it to rely on the good will of the U.S., which currently controls the oil routes between the Strait of Hormuz, the Strait of Malacca and on to Japan, and Russia. As a result, China is vulnerable to currently not imminent -but neither unforeseen- events that might conceivably result in either partial or complete disappearance of one or both of these vital oil sources. Given the magnitude of the risk, it is not difficult to understand why China insists on claiming almost all the South China Sea. If not there, then where, and if not now, when?

Ominous Fears
What we have then, is a clash of vital interests. The U.S. cannot afford to lose the only real collateral supporting the value of the dollar –its perceived ability to control and protect the western shore of the Persian Gulf and keep the oil lanes open. Similarly, China cannot afford to pass by a real opportunity to achieve oil independence. For both then, oil is the bedrock of their economies. Not only that, in the U.S. at least, most of the oil stocks are controlled or owned –directly or by proxy- by the same small percentage of the population that controls the financial sector.

The nature of the approaching collision between their vital needs is such that it is difficult to see how they might reconcile them. Indeed, President Obama’s “pivot” to the area and China’s effort’s in the military arena clearly indicate that neither is particularly optimistic about reaching a compromise. Accordingly, there is no evidence they support an all-out push to introduce a low-tech scheme to replace fossil fuels and nuclear fission with hydrogen to generate electricity, at least not in the near term. This despite the fact that hydrogen is the only energy carrier with zero emissions which is what’s truly needed to halt or even reduce them. Our fate is literally in their hands.