Economic Crisis

Can the US win a Cold War with China? (Part I)

Buenos Aires, Argentina

On the day after Christmas in 1991, the Soviet Union was officially dissolved. The great communist empire had finally reached a dead end.

During the mid-20th century struggle against European Fascism and Japanese imperialism, Stalin’s USSR became an unlikely ally of Britain, the US, France, and others. A temporary alignment of national interests caused a coalition against common enemies.

No less than Winston Churchill had this to say about Russia in 1939 (before he was British Prime Minister): “Everyone can see how communism rots the soul of a nation. How it makes it abject in peace and proves it abominable in war.”

After much brutal fighting on the European Eastern front during World War II, the very same Churchill later said the following, in a speech to the House of Commons in August 1944:

“I have left the obvious, essential fact to this point, namely, that it is the Russian Armies who have done the main work in tearing the guts out of the German army. In the air and on the oceans we could maintain our place, but there was no force in the world which could have been called into being, except after several more years, that would have been able to maul and break the German army unless it had been subjected to the terrible slaughter and manhandling that has fallen to it through the strength of the Russian Soviet Armies.”

But this alignment of interests soon dissolved as the war ended. This ushered in the start of the Cold War in 1947. That was the great standoff between the Soviet Union and its allies (such as Cuba) and the USA and its allies. Given the political backdrop, the Soviet role in World War II was airbrushed from the history taught in Western schools. Russian heroes were not exactly common in the movies that I grew up with, which recounted famous victories over Hitler and Mussolini.

(This is not to say British, American, French or other allied nationalities didn’t fight hard in Europe or play a crucial role. I had a grandfather who was an officer on minesweepers in the Atlantic Ocean. His youngest daughter, my mother, didn’t meet him until the war ended, by which time she was four. I also still have a godfather who took part in the Normandy landings on D-day. As one of the few remaining survivors, a couple of years ago he was awarded the Legion D’Honneur by the French government.)

During the Cold War, stockpiling of weapons became the name of the game, especially of the nuclear kind. People like me, who grew up in Western Europe in the ‘70s and ‘80s, were constantly reminded of how we might be vaporised by nuclear missiles at any moment. Or, even worse, left to die slowly and painfully from the effects of the radioactive fallout that would follow any nuclear strike.

Life was lived in constant readiness for the “three minute warning”…which referred to your life expectancy if the sirens went off. When you’re 12 years old, this tends to stick in your mind.

Then, without much warning, it suddenly ended. Economic stagnation and political unrest dragged the USSR down. The Berlin Wall, which had divided the German capital since 1961, fell in late 1989. Eastern European countries were in open rebellion. It was all officially over by late 1991. The Soviet Union was no more.

As the West did its victory lap, the accepted explanation was that the superior capitalist economic system had grown much faster than its communist adversary. This had allowed the West to massively outspend the USSR on military hardware, bankrupting the latter.

In reality, attributing the success to superior economic performance was only half true. The US economy was 2.9 times as large as the USSR in 1950, but only 2.1 times as large by 1989. US GDP per capita was 3.6 times the Soviet level in 1950, but only 3.3 times as high in 1990.

In other words, the US economy was always much larger and richer than the USSR’s, but it didn’t grow at a faster pace. The following chart compares indexed levels of GDP per capita from 1950 to the early 1990s, which highlights relative progress. The Soviet Union (thick red line) and the USA (medium green line) followed a similar growth path.

Naturally, I was extremely surprised when I discovered this. But, I suppose, even when lugging around the deadweight of an absurd political ideology and centrally planned economy, the industrialisation of a previously agrarian, serf economy is likely to be quick. Early productivity gains are low hanging fruit, in such situations. (For an earlier historic parallel in the UK and US, see here for more.)

In any case, the finding is backed up by data from various sources. The US and its allies certainly had much bigger and richer economies than the Soviets. But they didn’t grow more quickly over the course of the Cold War.

Back to the present…and China

Unfortunately, there’s plenty of scope to believe that we’re in the early stages of a new Cold War. I don’t use that terminology lightly. In fact, I’ve been deliberately avoiding it up until now, for the most part. It sounded too sensationalist. But recent US actions make a new Cold War more likely.

This time the US looks like it’s squaring up to China (and its allies, most notably Russia). Many in the US establishment don’t want to give up the country’s economic dominance or global power (which is understandable). Nowadays, they appear to believe they should do what they can to hold back the advance of China.

The US came out on top when it faced off against the Soviets, effectively winning by economic might. Could it pull off the same trick if it goes head to head with China? I have my doubts.

More to come…

Previous ArticleNext Article
Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.