Great Power Competition Update

This is an update of the “bigger picture” within which we can place the deluge of important events coming at us fast and furious from around the world. We must look at the domestic strength of each great power (USA, China, Russia) which is the underpinning of their global position, together with the allies and vassals which make their coalition.

United States

The US Federal Reserve has maintained a loose monetary policy when compared to actual inflation, US federal government deficits, and the ever-levitating stock market. To tame retail and asset inflation interest rates should be higher and Quantitative Tightening (QT) greater, but this cannot be done given the highly fragile nature of a financial system drunk on two decades of an ever-refilling punch bowl; laid over four decades of financial deregulation and bailouts. The federal government helped rescue the financial markets in late 2022 by significant increases in deficit spending, with a 6.2% of GDP federal deficit in fiscal 2023 and a forecast of 5.6% in 2024. The Congressional Budget Office forecasts that the federal deficit will remain above 5% of GDP for the next decade and beyond. The federal debt was 97% of GDP in 2023 and is forecast to rise to 116% of GDP in 2034.

These deficit and debt forecasts by the CBO are of course based on rosy projections of GDP growth that do not include the possibility of a recession, when tax receipts shrink and federal spending explodes. The average interest rate assumptions also seem a little rosy at 3.3%, as the federal debt matures and needs to be refinanced during a time of unresolved inflationary pressures. The CBO also assumes that the US government will be able to rein in spending to offset increased interest costs, at a time of growing great power competition and US aggressiveness toward Russia and China (and Iran). In a more realistic forecast, the US debt to GDP could be easily approaching the current level of Italy within a few years. At the same time the US is running a 3% of GDP deficit on its current account. The answer of the “Father of Quantitative Easing” to all of this is more QE!

Without the benefit of having control of the global reserve currency, a country with exploding debt, persistent current account deficits, and re-emerging inflation (heavily under-reported by the government statisticians) would already be within the clutches of an IMF structural adjustment program. Imagine if the US government was forced to run a primary (excluding interest expense) budget surplus? Even that would require spending cuts/tax raises in the region of 3% of GDP, which together with the multiplier effects would cause a deep recession that would serve to increase the deficit (increasing outlays and decreasing taxes); the austerity trap. Another way out would be through financial repression engineered by the Federal Reserve, forcing interest rates to be significantly lower than inflation together with another round of QE. But that would drive a 1970s style inflation or even stagflation problem while damaging bank balance sheets and driving down the US dollar and threatening its reserve currency status. With a financial system as fragile as the US one, any such moves could quickly lead to a full-blown repeat of the 2008 GFC, but this time without the fiscal and monetary space that was available then.

So nothing will happen, the Federal Reserve will keep serving up fairy stories while not really fighting inflation and the US government will keep on spending. Until something breaks and a very major crisis ensues. Any cuts to Social Security (pensions) and Medicare (free healthcare for the old and the poor) could cause severe social and political issues and are the expenditures with the greatest economic multipliers (every dollar tends to be immediately spent by its recipients). Cuts to military spending are out of the question, as that would quickly lead to a reduction in the US position abroad (the very scenario which scares European leaders). Increases in taxes are close to impossible with the Supreme-Court facilitated dominance of the “donor class”. The result will be a huge social and political crisis within the US, a nation that has little ability to rebuild its domestic strength as Chinese industrial competitiveness goes from strength to strength. US industrial weakness was emphasized when the US Navy Secretary was “floored” by South Korea’s shipbuilding ability, which came

on the heels of an internal review that discovered that most of the Navy's top programs, including high-priority submarines, a first-in-class guided-missile frigate, and the third Ford-class aircraft carrier, were severely delayed by years, fueling worries from US officials about the ability to maintain the country's pace against great power rivals.

In parallel the USS Boxer amphibious assault ship, which has been dogged by quality assurance and contractor issues, returned once again to San Diego - this time for unplanned repairs to the ship’s rudder. In Congressional testimony the US Air Force Secretary admitted that only a third of the air force’s F35s are mission capable, with the per aircraft operation and maintenance bill now estimated at US$6.6 million per year; compared to the 2018 estimate of US$4.1 million. Actual flight hours are being cut to save money, and the airframe will have a much shorter life than previous aircraft. Each one of these maintenance pigs costs about US$100 million. The USAF has 630 F35’s on its books and plans to reach a full complement of 2,500 by the mid-2040s. A massive boondoggle for the US MIC, and a huge waste of resources for the US government.

Lockheed Martin, the provider of the F35, has spread its manufacturing plants across congressional districts, hired an army of political lobbyists, regularly hires retiring senior military personnel, and is central to so many of the US weapons systems that it has become “too big to fail” while extracting massive amounts of profit from the US government; while regularly failing, experiencing massive cost overruns and being caught flagrantly committing major frauds. The CEO of Lockheed Martin earns around US$20 million per year. This is very different to Russia and China, where the MIC is predominantly state owned and therefore does not have the profit motive conflict of interest.

The societal-level crisis may be forestalled until the presidential election, but if Trump wins, an already divisive political situation (will the Democrats and parts of the state even accept such an outcome?) may be severely exacerbated by a financial crisis. On the international scene, the US open and brazen support for the genocide by the Israeli regime has greatly damaged its reputation, legitimacy and esteem. A reputation already tarnished by the failures in Iraq, Syria and Afghanistan and its unprovoked destruction of the most advanced nation in Africa: Libya. The failure of the vast sanctions to crush the Russian economy, and the inability of the US (and Western) military industrial complexes to out-produce that of Russia, also removes some of its credibility. As does the abject failure of Western weapons to out perform the Russian ones, and the ability of the Houthi’s to control the entrance to the Red Sea in the face of everything the US could throw at them. The only answer would be to radically restructure the corrupt and careerist US defence forces and the US military industrial complex (MIC), rebuild the US manufacturing prowess, discipline the Zionist regime, and to engage in more “win-win” and less arrogant relations with other nations.

Something desperately required with respect to many African nations which are becoming more independent-minded, especially with respect to the previously French-dominated nations. The US does not treat these nations with basic respect, with US official visits ending up causing more damage than good; in stark contrast to the respectfulness shown by the Chinese. No such things are on the table, instead the bloated and misspent US defence budget will continue to increase, adding to the intractability of the US government spending crisis; while foreign state relationships deteriorate. The recent US threats against Iran to not attack Israel after Israel brazenly murdered Iranian officials in their embassy in Syria only adds to the image of the US as a crazed bully.

At the same time the US has dealt a devastating blow to the European industrial base through its destruction of the Nordstream pipeline and the actions of its European quisling leaders in enacting self-harming economic and financial sanctions against Russia. Without the benefit of cheap Russian fossil fuels, much of the energy intensive sections of European industry have become uncompetitive. The US may benefit from the profits on sales of LNG to Europe, the sale of arms, and from the relocations of some European factories to the US, but it has also greatly reduced the strength of its European allies vassals. Thyssenkrupp Steel is one of the many energy-intensive German industrial entities to recently reduce their domestic production capacity

As those vassals now struggle to fund higher military spending by cutting social expenditures, the populations of those countries may soon decide to remove them; leading to greater domestic repression and social and economic instability. Significantly reducing the strength of the Western coalition. The new EU agenda seems to be “Goodbye Green and Fair, Hello Fortress Europe”. The same goes for a Japan whose industrial base is being diminished by Chinese competition, is massively indebted, and which is already well into an ongoing population decline with little scope for productivity growth to offset it. Japan’s population peaked at 127 million in 2016 and had already fallen to 124 million in 2023, and is now falling at 1 million per year; with a fertility rate of only 1.2. It can ill afford to lose the lives of its young and productive in a war. South Korea now has a fertility rate of only 0.72, and still falling, and is rapidly descending into a population decline. That low fertility rate may be substantially driven by the neo-liberalization of South Korea after the 1997 Asian Financial Crisis, resulting in extreme disparities in wealth and more and more precarious work for the younger adult generation.

The shortage of blue-collar workers is now driving the Japanese ruling class to import more and more foreign workers, directly against the wishes of the Japanese population and possibly leading to social disruption in what is an overwhelmingly homogeneous country. Japanese industry has not been dynamic since the 1990s, and Japan has become increasingly neoliberalized, with living standards for many actually falling. Leading to an increasing number of young people to look for opportunities abroad, worsening the demographic crisis, while companies import cheap labour.

China

In contrast to the US, China is experiencing a deflation in goods prices (with core inflation now at only 0.6%) while its economy maintains 5%+ GDP growth. The manufacturing powerhouse of the world, its continuing industrial policy drive to dominate the “green” and other advanced industries is paying of in trumps; already dominating the solar panel, wind turbine, battery, electric motor and electric vehicle industries. In the past decade the Party-state has also tamed the billionaire-class and made it understand that the Party-state is pre-eminent and that extractive profiteering activities will not be countenanced (e.g. the take down of Ant Group); while enjoying overwhelming levels of domestic legitimacy. The one area of concern is the massive liabilities within the property development sector, but the Party-state does seem to be managing a controlled implosion while the economy keeps growing at 5%+ as other more productive sectors take up the economic slack.

The Chinese move into higher and higher value-added activities is a dagger aimed at the heart of Western capitalism, which is now so heavily reliant on a few industrial sectors (cars and machine tools for Germany and Japan, high technology for the US) for the remaining strengths of their economies. This can be seen in the increasing belligerence of Western governments to any possibility of China becoming the leader in these industrial sectors. Hence the EU investigation of Chinese “unfair competition”, Janet Yellen’s trip to complain about Chinese “over-capacity”, and the explicit blocking of Chinese high-tech investments in the US (e.g. the CATL battery plant for Ford).

The European elites are even becoming increasingly resistant to Chinese investment in Europe, in what they consider to be “strategic” assets. Some of the peripheral countries, such as Hungary and Greece, are more accommodating to such investments The Chinese may very well be able to play one EU nation off against the other, helping to rebalance power away from Germany, France and Italy/

The US ruling class has at last begun to wake up to the reality that no matter how many high-technology export controls the US enacts and forces upon its vassals, the Chinese will continue to climb the value-added high technology industrial ladder. The biggest player in Europe, Germany, has only maintained its export position in the past few decades through domestic wage-suppression and enjoying a weaker than otherwise exchange rate within the Euro. What we see is increasing Western protectionism while China is increasing its economic openness. Of course, the Western ruling classes who happily outsourced their manufacturing to China to gain massive profits will never be held to account!

China had already developed strong ties with Russia, Iran and Central Asia, ties which are only being deepened with the advent of the Ukrainian War and the increasingly aggressive stance of the West toward China. It also has the neutrality of the ASEAN countries (excluding possibly the Philippines) assured and has also developed strong relations across the Middle East and Africa. A Western war with China could rapidly develop into one with BRINCISSTAN (Belarus, Russia, Iran, North Korea, China, Iraq, Syria, the Stans), with ASEAN, Pakistan, India, Africa, the GCC, and Latin America standing aside.

China may only spend 2% of its GDP on military spending, but that spending has increased at an exponential rate as the economy has grown exponentially. With Chinese economic growth set to remain above 5%, its military spending will continue to grow faster than the West. SIPRI (Stockholm International Peace Research Institute) estimated Chinese military spending at US$292 billion in 2022 compared to US$877 billion for the US. This is at market exchange rates though, at purchasing power parity rates (PPP) Chinese expenditure would more in the region of US$529 billion. If China’s manufacturing industry dominance, and access to Russian military technology is taken into account, the Chinese military expenditures may be functionally very close to those of the US. And much of the US expenditures are on its 100+ foreign bases, while China is only focused on the defence of the homeland. With both Chinese and Russian military power judged to be close to par with the US by Global Firepower’s 2024 Military Strength Index, far ahead of any others, and the Western powers (excluding somewhat South Korea and Japan who still rely heavily on the US defence industries) having highly extended oceanic supply lines, any such war seems pre-ordained to be “won” by the Chinese side.

China is in no hurry to start a military conflict with the West, because as each year passes, it and its allies improve their relative strength compared to the West. China does have a low fertility rate of only 1.22, but its relatively low GDP per capita provides ample room to offset any population drop; as the ongoing 5% per annum GDP growth attests to. With a static or slowly shrinking population, all GDP growth goes toward the raising of living standards at a rate of 5% or more per year, further supporting the domestic legitimacy of the Party-state.

Russia

The Western sanctions upon Russia together the Ukrainian War in general have proven to be major positives for it; in sharp contrast to the expectations of the West. The latter has had to accept that Russia is in fact a strong power, rather than a “gas station with a nuclear arsenal attached”. The 2014 and later sanctions have acted to force Russia into a successful Import Substitution Industrialization (ISI) mode that has greatly reduced the dependence upon Western goods and technologies while also deepening the ties with China and Iran. The sanctions also freed up Russia to bring North Korea into the BRINCISSTAN coalition from the cold, a nation that has a large military force.

Internally, Putin’s power has been reinforced and much of the opposition liberals have either left the country, been delegitimized in the eyes of the Russian population and/or had their platforms shut down. With their assets open to seizure by the West, the Russian oligarchs have also become much more dependent upon the Russian state and ready to invest at home rather than abroad. Together with the exit of so many Western corporations, these trends have removed much, if not all, of the liberal and Western penetration of Russia. The nation is aligned around the leadership of Putin more than ever, and overwhelmingly supportive of the Russian military actions in Ukraine.

At current exchange rates Russia is estimated by SIPRI to have spent US$86.4 billion on its military, but its exchange rate is extremely undervalued. At PPP that becomes US$201.3 billion. With that budget, Global Firepower’s 2024 Military Strength Index considers Russia to be a close second to the US in military power, and Russia is predominately focused on its regional presence and therefore is much more focused than the US. Its ability to out match a Ukrainian army supported and supplied by the whole of NATO is indicative of its relative strength.

Russia’s ability to deal with the Western proxy Ukraine, and to not only withstand but flourish against the Western sanctions, has raised its esteem across the Other 7 billion. The refusal of the Other 7 billion to sanction Russia has also delivered a stark message to the West that they cannot isolate Russia the way they isolated the Soviet Union during the Cold War. China has also proven that it is a strong ally, refusing repeated Western remonstrations to not aid Russia’s war effort.

Russian GDP grew by 3.6% in 2023, more than overcoming the 2.1% drop in 2022, and is forecast to keep growing at approximately 2.5% going forward. Its government debt to GDP ratio is only 21% and the government deficit is only 1.9% of GDP. Inflation had dropped to only 2.3% in April 2023 but has risen to 7.7% in recent months. With low levels of government debt and deficits, a current account surplus of 3.5% of GDP and much of the inflation driven by increased military expenditures, this is a manageable issue.