By Mark Melin on May 27, 2015

The U.S. could be poised for a third world war with China and one key to avoiding it could be found in currency accommodation, George Soros said in a recent speech to the Bretton Woods Committee in Washington D.C.

Addressing an issue closely watched by certain hedge fund insiders, Soros bench-marked the declining U.S. role in the world, the rise of China’s currency as competitive to the U.S. dollar and the potential inclusion of the renminbi (RMB) in the International Monetary Fund’s Special Drawing Rights (SDR) currency basket, a topic ValueWalk has been following.
  
As China's economy transitions, Soros says watch carefully for a conflict trigger point

As China’s economy transitions, this could trigger a global military conflict as might other issues in the region, Soros observed.  “If the transition runs into roadblocks, then there is a chance, or likelihood in fact, the leadership would foster some external conflict to keep the country united and maintain itself in power,” Soros said. “If there is a military conflict between China and an alley of the U.S., like Japan, it is not an exaggeration to say we could be on the threshold of a third world war. It could spread to the Middle East, then Europe and Africa.”

Unfortunately, in the days since Soros made his famous remarks, tension with China has reached a boiling point. As we noted yesterday, China has released a new white paper which threatens military action unless the U.S. stops its current actions in the South China Sea.
Specifically, the paper states:

A holistic approach will be taken to balance war preparation and war prevention, rights protection and stability maintenance, deterrence and warfighting, and operations in wartime and employment of military forces in peacetime. They will lay stress on farsighted planning and management to create a favorable posture, comprehensively manage crises, and resolutely deter and win wars.

Soros said U.S. should accommodate China's desire to play on the world stage, bend the rules

Speaking to an elite organization known for setting global currency standards to favor the U.S. as the world reserve currency of choice, Soros noted how it might be currency accommodation with China, and bending the rules, that might avoid the next world war.  “International cooperation is in decline, and instead of a global order we have global disorder,” in both relationships between sovereign nations and in the world of finance.  “How the issue is decided will have a considerable impact… on the world order.”
“China has begun to build a rival set of institutions,” he said, noting that “there is an opportunity to build a binding connection between the two systems.” In doing so one must recognize that “the controlling shareholders are not going to abandon their control.”

Soros noted the SDR system is coming up for their five year review, as reported in ValueWalk, and there is a possibility to include the China’s renminbi. “Although it is not fully qualified, the qualifications are generally more flexible than believed,” Soros said. “The US would be making a major concession by allowing the remumnbi to make a step forward to become a potential rival of the dollar,” touching on an inside topic, the loss of the U.S. dollar as the reserve currency of choice, that being closely watched in certain circles.

Tough negotiations ahead

But getting to the point where China would be allowed to play among the dominate world leaders would involve difficult decisions on both sides of the Pacific. “They would have to make concessions, and there are several things wrong with the Chinese system,” Soros opined. “Chinese leadership does not abide by the rule of law, there is no independent Judiciary, multinational (corporations) are very often mistreated and replaced by domestic favorites. There are other problem areas such as cyber-warfare. These are areas where China would have to make concessions, which would involve very tough negotiations.”

Not engaging China could be a mistake of historic proportion, he said. “It is in the interest of both parties to find accommodation because the alternative is so unpleasant. There has been a breakthrough in climate policy. There needs to be a similar breakthrough in economic policy. If not, China will align itself with Russia, and then a third war will become real.”

The third world war could already be taking shape in Europe, where “you already has an indirect war between Russia and the west, yet no one realizes this.” Russian military spending is now approaching 10 percent of its GDP, and China has made a similar commitment to spending on armaments, he observed.

History of U.S. dominance, according to Soros, started with the collapse of the Soviet Union, ended at derivatives crash of 2008

For history buffs, Soros bench-marked the brief rise and fall of U.S. world dominance. The supporter of a generally liberal political agenda, he pointed to the fall of communism as the moment in history where the U.S. had the world stage on its own and “had an opportunity to become the ‘guardian of world peace’ but squandered that opportunity because there was no political consensus in the US on a vision.”

On the political side, the battle with communism was won, but it was the financial side of world affairs that marked the downfall of the U.S., Soros said. After communism’s defeat, “there was a consensus in market fundamentalism and efficient market theory, but the system was inherently unstable,” which brought us to the key moment in history. “The financial crisis of 2008 led to the system’s collapse,” Soros declared. “The 2008 crash was a watershed moment because it marked the end of U.S. supremacy.”

Some might argue that free market system was not at work leading up to 2008, as many inside the Wall Street financial system partly responsible for the crash believed (correctly) that their criminal acts would not be punished, and thus a completely free market system with equal enforcement of the law was not in place, and this led to the 2008 financial crisis. Soros did not address the topic of equal law enforcement and a lack of deterrence leading up to 2008, but rather looked at the 2008 financial crisis as the historical benchmark. “2008 was also responsible for the euro crisis, and this transformed the European Union from a voluntary association of equals to something radically different, to creditors and debtors," he said, noting that "the crash of 2008 had a significant impact around the world except in China, because the banking system was isolated and state owned.”

After the 2008 collapse, the U.S. was being questioned and the nail in the coffin of world supremacy occurred. It was here history for the U.S. took a decided negative turn, Soros says, as U.S. President George W. Bush’s attack on Iraq “on false pretenses, I must add,” was the point at which the U.S. lost the mantle of global world leader. The U.S. had become sole ruler of world leadership after the collapse of the Soviet Union’s communistic system and in just one short decade lost this title. "This was almost exactly same period of time.

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