Economic war could be prelude to shooting war

As we come to terms with the uncomfortable truth that the cold war between China and the United States is intensifying, we must also consider whether the clash between the two superpowers could escalate into a hot war.

Bridgewater founder Ray Dalio, whose firm manages funds worth more than US$160 billion, recently pointed out that the world today is a lot similar to the periods before the First and Second World Wars.

This deserves serious thought.

In an 8,000-word essay on LinkedIn - as part of his ongoing series entitled The Changing World Order - Dalio said that each time a world war broke out, it was because things had gone wrong in not one but several countries, leading to conflicts among nations.

"What is happening now is similar to what is happened in the past because the most important forces and cause/effect relationships behind them are essentially the same," he wrote. "Because the United States and China are now in an economic war that could conceivably evolve into a shooting war, and I've never experienced an economic war, I studied a number of past ones to learn what they are like," he wrote.

Using the Second World War as an example, Dalio stated that while capitalism was the key to the success of many Western nations, the system also fostered many problems.

Capitalism was successful because people wanted to pursue profits and distribute capital and profits through competition, and this led to pricing mechanisms.

These mechanisms however also easily led to inequalities in wealth and fewer opportunities.

And when there are fewer opportunities for people looking for work, more and more debt problems surface,further widening the gap in wealth and opportunity, leading to more and more people believing that the system is unfair.

This can cause serious internal conflicts and lead to revolutionary changes.

Reforms sometimes come through peaceful means but also can appear through violence.

But what's more important is that when capitalist nations experience internal challenges, while other countries become strong enough to challenge their status, then the risk of an external war increases accordingly.

Dalio pointed out that there were several causes for the Second World War. One of these was the Great Crash of 1929, when the economic and financial market bubble burst, and the Great Depression that followed, which lead to serious financial problems for almost all nations across the world.

The global depression generated a lot of internal conflicts, making nations move towards populism and nationalism, and authoritarian or military regimes.

At the same time, these changes deepened the differences among nations.

Countries like Germany, Japan, Italy and Spain - whose economies were severely hit and whose democracies were not mature - witnessed extreme internal conflicts as well as the emergence of right-wing populist autocratic leaders, the fascists, at the same time.

The situation was even more dire for the former Soviet Union and China, and the lack of democratic experiences led to the emergence of populist leaders on the left, the communists.

And while the United States and the United Kingdom became more authoritarian, they did not experience extreme upheavals like Germany, Japan and the Soviet Union, thanks to better economic conditions and strong democratic roots.

However, as all these countries were beset by economic problems, it ultimately led to the Second World War. We will discuss the reasons in detail next week.

Andrew Wong is chairman and CEO of Anli Securities