When you're at school, history is just a bunch of stuff that's already happened. When you enter the real world (after university) history becomes rather useful. Especially if you're trying to figure out the future. So it's no coincidence that both Dan Denning and Greg Canavan are history buffs. But there's one logical progression based on history that they never seem to mention in The Daily Reckoning. And yet it's one that would have a huge impact on all Australians, let alone their finances.

Here's the five step process that seems to be repeating over and over again to Global Instability:

  1. Boom
  2. Stock market crash
  3. Economic crisis
  4. Currency wars
  5. Trade wars
  6. War

That description fits 1929-1945, 1999-2003, and 2005-today. So far, we're at stage 5 - trade wars. The American's latest salvo has been to slap enormous tariffs on Swedish and South Korean made washing machines.

As for the controversial step 6, could there really be war? To answer that, you have to ponder just how the six steps follow on from each other.

The boom is caused by stimulus. Either government spending or manipulation of the money supply by the central bank. Both of these steal economic activity from the future by borrowing or encouraging borrowing, which must later be repaid. Economist and philosopher John Stuart Mill figured this out in 1844:

'The usual effect of the attempts of governments to encourage consumption, is merely to prevent saving; that is to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it. What a country wants to make it richer is never consumption, but production. Where there is the latter, we may be sure there is no want of the former.'

Consumption is a lot more fun than production and happy voters are good for incumbent politicians. But, as soon as economic activity is stolen from the future, the future looks bleaker. Economist John Maynard Keynes said that 'we are all dead in the long run', forgetting that somebody else will be around to experience it.

Because stocks predict the future, the stock market crash is the warning of a bleaker future. Then the economic crisis occurs as the boom turns out to be an artificial debt bubble. Debt must be repaid or defaulted on. One way to escape the bust's horrors is to print money. That has several effects. It makes debt easier to repay, because there is more money floating around to repay it with. And it makes your currency cheaper relative to other currencies, which encourages exports and therefore economic activity.

But not all countries can obtain the second advantage, the export boom, at the same time. For every currency going down, one must be going up. That's why there is a currency war. It's a race to the bottom. There are rumblings that Australia is set to follow the Swiss into battle with a similar intervention to lower the Australian dollar exchange rate.

Here's what the temporary results of a currency war salvo looks like, as highlighted by economist David Rosenberg commenting on the US: '...since the 'recovery' began three years ago, over 70% of real GDP growth we have seen was concentrated in these two areas: export volumes and inventory investment.' But exports are taking a turn for the worse lately, so Rosenberg reckons 'you are looking at the prospects of 0% growth as early as Q4.'

Once politicians figure out that their currency war isn't working well, because it's just an exchange of salvos, they resort to trade war tactics instead. They make imports more expensive with taxes and encourage exports with subsidies. In the US, Obama has advocated just such policies. Commenting on the success of the car company bailouts, he said, 'Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry.' Australia's own auto industry is in the news at the moment because of its assistance packages. This type of behaviour creates tension between countries, which can easily lead to a proper war.

The step in between a trade war and war is sanctions - the kind America is imposing and trying to impose on countries it doesn't like. Congressman Ron Paul is onto the war mongers, as he has been for about forty years. Not that it's changed any policies. If the politicians want war, they get it.

The Americans are already drumming up 'weapons of mass destruction' rhetoric again. This time over Syria and Iran. Does that sound familiar?

So far, some of the west's efforts to throw sanctions at Syria and Iran have been unsuccessful. China and Russia point out those sanctions are as counterproductive as supporting insurgents, which the US is doing in Syria despite Al Qaeda being among them. That's ironic, as the director of the National Security Agency under Ronald Reagan, Lt. General William Odom, once pointed out:

'Because the United States itself has a long record of supporting terrorists and using terrorist tactics, the slogans of today's war on terrorism merely makes the United States look hypocritical to the rest of the world. By any measure the US has long used terrorism. In '78-79 the Senate was trying to pass a law against international terrorism - in every version they produced, the lawyers said the US would be in violation.'

Hypocrisy aside, Israeli Prime Minister Netanyahu reckons that sanctions are impacting everything but the specific part of Iranian policy that they are designed to deal with:

'You recently said that sanctions on Iran are having a big impact on the Iranian economy. And that is correct. And I am sure that the recent sanctions advanced by the president and the congress will have an even greater impact on the Iranian economy. But unfortunately, it's also true that neither sanctions nor diplomacy have yet have any impact on Iran's nuclear weapons program.'

That means sanctions provoke war without addressing the supposed reason for the sanctions. They look like a good natured warning, but are really a provocation and escalation.

It's surprisingly easy to stir up a war. Especially with Australians, who haven't missed out on any opportunity to get involved as far as we know. Here's a quick guide on how to drum up war support:

'During the Nuremburg War Crimes Trial, Reichsmarshal Hermann Göring mused to an interviewer "why, of course, the people don't want war. Why would some poor slob on a farm want to risk his life in a war when the best that he can get out of it is to come back to his farm in one piece? Naturally, the common people don't want war; neither in Russia nor in England nor in America, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy or a fascist dictatorship or a Parliament or a Communist dictatorship."

'"There is one difference," his interviewer interjected. "In a democracy the people have some say in the matter through their elected representatives, and in the United States only Congress can declare wars."

'Göring was unimpressed. "Oh, that is all well and good, but, voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country." Gustave Gilbert Nuremberg Diary (1947)'

We found that quote in Chris Leithner's book The Evil Princes of Martin Place. It's interesting to note that the US Congress hasn't been declaring any of the wars of late. The President has just gone and started them each time. So even a constitution can't stop a war, let alone public opinion.

And Australians have gone along with whatever their American buddies have decided to do for a very long time. Supposedly that makes us better friends. Even if it creates a rather long list of enemies.

Keep an eye out for war mongering here at home too. It's the historical and logical conclusion to the world's debt mess.

Until next week,

Nickolai Hubble.
The Daily Reckoning Weekend Edition

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