When currency wars turn into the real thing, what will happen next?

What happens when economic recession depression turns into a crisis which can’t be kicked down the road—when the short-term “solutions” of bailouts, debt and money printing meet the medium-term consequences of this irresponsibility.

There will come a time when the debts can’t be paid, when paper money collapses, when real panic begins to stalk the corridors of economic impotence.

And then what happens?

There will be a flashpoint. There will be a flashpoint somewhere that will sooner or later—but eventually—transform the crisis from economic to geopolitical; a deeper, much more frightening stage of crisis. And it will happen quickly and apparently unexpectedly, as all such crises do.

Will it be set off by US govt default, where the ratio of Federal govt debt to revenue has leapt upward from 165 percent in 2008 to 262 percent this year (among developed economies, only Ireland and Spain have seen a bigger deterioration)?

Or Europe, where Germany is on the slide, stagnation is becoming contraction and governments now pretend to pay back debt and  other governments pretend to believe them?

Or China, with inventory piling up and still talking up an inflationary boom with growth figures only the Chinese government bureaucrats who write them could possibly believe.

Or Japan, the biggest nation that is deepest in the pooh, that “bug in search of a windshield” where very soon the Japanese govt could be spending almost 80% of tax revenues on just the interest on its bonds.

None of these situations is sustainable. None of them can last. And when they explode, as they will, with currency wars turning into the real thing —as it undoubtedly will when nationalism is on the rise and politicians respond to crises as they’ve always done by making them worse—the fallout could go anywhere.

Here’s the sort of place you need to look: places like the Senkaku Islands in the South China Sea, where historical enemies Japan and China have been sabre rattling for decades, and in the last few days starting to pull the sabres from their scabbards.

“China’s increasingly aggressive posture towards the South China Sea and the Senkaku Islands in the East China Sea is less important in itself than as a sign of things to come,” says historian Graham Allison. And only a historical perspective on China and Japan can inform you of how, and how dangerously, increasingly common situations like this might play out.

With an economically collapsing Japan unable any longer to trade for the resources it needs, and a China increasingly willing to project its power into the world, there’s every chance the flashpoint will be in Asia. And the only good signpost to what will happen next is to understand how things happened in the past.’

Time to enrol in a good course on Asian History—and as you’ll have read here before, I can highly recommend this one.