Saturday, February 10, 2007

Targets of Economic Warfare

I started writing on potential weapons of economic warfare and it kind of got away from me. I kept having to go back and add new ideas and details. I had pages and pages of stuff and I wasn’t even half done. So what I’m going to do instead is post little bits as I get them done. Here’s the first part.

Before I can begin an intelligent discussion of the potential weapons of economic warfare, it is necessary to consider the goals of such a conflict. The common objective of any conflict is to eliminate an opponent’s ability to resist. This is also true of any economic conflict. This may mean eliminating an opponent’s ability to prevent your acquisition of essential resources or means of production. It may also mean eliminating an opponent’s ability to resist a political agenda. How can these objectives be accomplished? Essentially, the economy of the target country or group must be disabled.

This brings about the next question, how is an economy disabled? The answer depends on whether the target is a nation or a non-nation group. Start with a nation. One of the common elements of nationhood today is the printing and circulation of money, almost exclusively a non-commodity backed money. Very few, if any, countries still directly link their paper currency to a real commodity. By and large, the modern monetary system employed in all countries involves an act of faith on the part of the citizenry. This means the monetary system of the country may be vulnerable to attack by unfriendly powers. By destroying the faith in the monetary system, one destroys the many of the possibilities for specialization, thus effectively knee-caps the economy in question. Here is the first potential target.

The second target is the banking system. Many economies in the world now use fractional reserve banking, and in many cases the level of reserves is not mandated by the government. Fractional reserve banking simply means the majority (usually over 90%, and as much as possible if the banking industry is not regulated) of the money deposited in a bank does not remain in the bank. Most of it is lent out again. In short, the bank does not have your money any more. Factional reserve banking systems create a large portion of the wealth in developed economies by allowing banks to serve as financial intermediaries and finance investment opportunities at a relatively low cost. However, a breakdown in the banking system or a loss of faith in the banking system on the part of the populous would bring even the most robust economy to a screeching halt. This is the second potential target.

Expectations play a key role in the demand side of the economy. Consumer purchases are heavily influenced by what people expect future incomes and prices to be. If consumers believe the future will be difficult, the tendency will be to delay purchases and hoard money. This was seen in North America during the 1930’s depression, and helped prolong the depression. Consumer confidence is the third potential target of economic warfare.


Anonymous said...

Are there defense mechanisms available to smaller open market countries to counteract attacks?
Does such a possible 'war' cause the trade barriers to go full bore ahead in response, or does that just cut off your nose to spite your face?
Are regional economic blocks an effective way to close 'an' economy from such actions?

economistatlarge said...

The defense mechanisms will depend on the specifics of the "weapon" used. I'm actually still trying to figure out how to talk about the weapons in an meaningful way.

Trade barriers are problematic. Like any tool of warfare somebody's likely to benefit (arms dealers in the traditional conflict, protected industries in an economic conflict) and somebody's likely to suffer - usually those on the bottom of the socioeconomic structure.

Regional blocks and currency unions maybe effective defenses against such actions. Just like mutual defense pacts and treaty organizations. A lot of it depends on how committed to you your partners are.

I'll be dealing with these isssues in more detail in future posts. Thanks for the great comments.