Monday, April 11, 2022

Economic Warfare

One reason we all like wars is that they are easy to understand. Admittedly, the current war in Ukraine has elicited a barrage of slanted news, but still, we understand tank columns and drones and bombing missions and sieges in ways that we do not understand currency manipulation and economic sanctions-- for instance.

And yet, among the most important issues in the current Ukraine war is the Biden administration’s willingness to weaponize the dollar, to cut Russia out of most international financial transactions and to punish every and all Russians for Putin’s aggression.

One suspects that the Biden administration needs the war in order to improve its poll numbers. Nothing like winning a war, even if you are sacrificing the lives and the property of another country. In truth, it’s even better, in some ways, to let other people fight and die for your poll numbers.

Anyway, some courageous souls have been pointing out the simple fact-- that the status of the American dollar as reserve currency is now in danger, in ways it has rarely if ever been.

The Financial Times has been reporting and editorializing about this story, more than most other publications. 

Among the facts that it points out in this editorial is that the war in Ukraine, along with the Western sanctions regime, has caused turmoil in the global economy.

And yet, the paper assures us that the dollar is not in any imminent danger. Of course, this depends on what you mean by imminent, but the view is worth examining:

Disruption is everywhere in the global economy. Russia’s war in Ukraine — and sweeping western sanctions on Moscow — has wrecked havoc in commodity markets. The prospects for co-operation over addressing these supply problems look limited. The turmoil is contributing to rising inflation, which is at levels unseen in a generation.

Of course, the paper does not fix blame, but surely there is plenty of it to go around.

And then, it addresses the dollar issue:

Such strains in the real economy have raised questions over whether the monetary order based on the US dollar can remain unaffected. Some change may be inevitable, but prevailing trust in the greenback will not be easily displaced. For now, the US dollar’s status as the leading global reserve currency is assured. It still makes up a majority of foreign exchange reserves and dominates trade invoicing. 

US Treasuries are the safe asset of choice for global markets, while the country’s institutions are still trusted and adept at managing crisis. 

The conclusion-- as of yet, there is no other realistic option to the dollar. And that includes cryptocurrencies:

This trend has been held up as evidence that the need to hold US dollars is fading as technology has made direct transfers between smaller currencies possible in ways that remove the need for the dollar to act as gatekeeper. This may be so but most, if not all, of diversification’s beneficiaries have well-established links with the greenback. Swap lines between the central banks of these countries and the Fed in effect make these currencies nodes in a broader dollar system. Those who hold them as reserves do so in the knowledge that access to dollar funding, and — if the need arises — a smooth “flight to safety”, is practically guaranteed. 

And yet, China, along with Russia and India, is trying to displace the dollar with the yuan. 

A bigger threat is that countries feeling the brunt of western sanctions might look to avoid transacting in and out of the US dollar. These countries certainly don’t trust the currency in the same way that other players in global markets do — the US has shown a willingness to use the status of the dollar as an economic weapon. The most direct alternative here is a second monetary order built through China. Beijing’s digital currency program — which could soon enable relatively frictionless cross-border transactions — makes clear an ambition to improve the global attractiveness of the renminbi. 

However, while greater use of the currency might appeal to those shut out of dollar markets, its broader attractiveness as a replacement for the greenback is still questionable. China’s unwillingness to loosen its control over offshore renminbi trading is a considerable barrier to any hopes of truly competing with the US dollar.

For now, China’s currency is not a serious competitor to the dollar. And yet, take heed of what Kenneth Rogoff told Bloomberg. You might say that he agrees with the Financial Times, but he sees the dollar as losing its reserve status within two decades. In the past, he predicted that it would lose its place within five decades. The fault, Rogoff explains, lies with the Biden administration:

During a lengthy interview with Bloomberg TV on the role of cryptocurrencies in the world, when asked by anchor Matt Miller if we will look back at this moment as the beginning of the end of the dollar as the world reserve currency, Harvard University economics professor Kenneth Rogoff started by claiming "...that's a little hyperbolic but it could be true... a long time from now."

However, Rogoff then quickly admitted that "China and Russia have been looking for an alternative to the dollar for a very long time."

… as we have detailed over the past few years, de-dollarization of the world has been gathering pace and the recent actions taken by the US and its allies to restrict Russia's access to the dollar-dominated global financial system - the so-called 'weaponization of the US Dollar' - could further stimulate moves to develop an alternative to the greenback.

To Rogoff, the Biden administration’s attack on the Russian currency has been a world historical error. Of course, few people really understand that it is such, but that just means that when the fallout hits us, it will be unanticipated:

“The move that the U.S. did of shutting down the reserves, or blocking the reserves of the Russian central bank - absolutely historic” Rogoff says, warning that this precedent "will probably accelerate moves in the international financial system” to compete with the dollar.

“But they’re not going to take place at warp speed. Something that would have taken 50 years maybe is going to take 20 years."

And then, if you prefer a slightly different take on the situation, try these views offered by Brazilian journalist Pepe Escobar. (via Maggie's Farm) Dare we say, he is less optimistic than the Financial Times.

He opens a recent column by pointing out that the sanctions regime enacted by the West has been hurting Europe more than it has been hurting Russia. Huh.

The stunning spectacle of the EU committing slow motion hara-kiri is something for the ages... Like a cheap Kurosawa remake the movie is actually about the Empire of Lies-detonated demolition of the EU, complete with subsequent rerouting of some key Russian commodities exports to the US at the expense of the Europeans.

It helps to have a 5th columnist actress strategically placed, in this case astonishingly incompetent European Commission head Ursula von der Leyen, with a brand new vociferous announcement of an extra sanctions package: Russian ships banned from EU ports; road transportation companies from Russia and Belarus prohibited from entering the EU; no more coal imports (over 4.4 billion euros a year).

Escobar seems to be alone in pointing out that the leader of the EU is fundamentally incompetent. 

That translates in practice into the Empire of Lies shaking down its wealthiest – Western – clients/puppets. Russia of course is too powerful militarily. The Empire badly needs some of its key exports – especially minerals. Mission Accomplished in this case amounts to nudging the EU into imposing more and more sanctions and willfully collapsing their national economies, allowing the US to scoop everything up.

As for the everyday lives of the average Europeans, the economic situation is going from bad to worse:

Cue to the coming catastrophic economic consequences felt by Europeans in their daily life (but not by the wealthiest 5%): inflation devouring salaries and savings; next winter energy bills packing a mean punch; products disappearing from supermarkets; holiday bookings almost frozen; Le Petit Roi Macron in France – maybe up to a nasty electoral surprise – announcing “food stamps like in WWII are possible”.

This sounds slightly exaggerated, were it not for the fact that one of those sounding the warning is the president of BlackRock-- not a member of the right wing conspiracy:

We have Germany facing the returning ghost of Weimar hyperinflation; BlackRock President Rob Kapito saying, in Texas, “for the first time, this generation is going to go into a store and not be able to get what they want”; farmers in Africa not able to afford fertilizer at all this year, reducing agricultural production by an amount capable of feeding 100 million people.

And then there are the views of one Zoltan Poszar. One has seen the name pop up on occasion in these debates, because Poszar is one of the most important thinkers in the world of currencies. Thus, his word is highly respected, especially since he is not a government bureaucrat. He works for a Swiss Bank:

Zoltan Poszar, former NY Fed and US Treasury guru, current Credit Suisse grand vizir, has been on a streak, stressing how commodity reserves – and here Russia is unrivaled – will be an essential feature of what he calls Bretton Woods III (yet, in fact, what’s being designed by Russia, China, Iran and the Eurasia Economic Union is a post-Bretton Woods).

Poszar remarks that wars, historically, are won by those who have more food and energy supplies, in the past to power horses and soldiers, today to feed soldiers and fuel tanks and fighter jets.

China, incidentally, has amassed large stocks of virtually everything.

Poszar notes how our current Bretton Woods II system has a deflationary impulse (globalization, open trade, just-in-time supply chains) while Bretton Woods III will provide an inflationary impulse (de-globalization, autarky, hoarding of raw materials) of supply chains and extra military spending to be able to protect what will remain of seaborne trade.

As for the energy markets, Escobar quotes one Alexey Gromov, another expert in the field. The issue is when and how Russia can divert its energy resources from European markets to China. Since Paul Krugman has already said that it cannot be done, we should assume that it can:

An absolutely key issue for Russia is how to make the transition to China as its key gas customer. It’s all about Power of Siberia 2 – which will reach full capacity only in 2024. And first the interconnector through Mongolia must be built – “we need 3 years to build this pipeline” – so everything will be in place only around 2025.

On the Yamal pipeline, “most of the gas goes to Asia. If the Europeans don’t buy anymore we can redirect.” And then there’s the Arctic LNG 2 – which is larger than Yamal: “the first phase should be finished soon, it’s 80% ready.” An extra problem may be posed by the Russian “Unfriendlies” in Asia: Japan and South Korea. LNG infrastructure produced in Russia still depends on foreign technologies.

That’s what leads Gromov to note that, “the model of mobilization- based economy is not so good.” But that’s what Russia needs to deal with at least in the short to medium term.

And then there is the issue of whether or not Europe can replace Russian gas with American product. Those who are optimistic about the fallout from sanctions often point out that Germany is now building more liquid natural gas terminals, so this suggests to them that Germany will, with a few years, cease to depend on Russia.

Escobar offers a different take:

It was up to Chinese energy expert Fu Chengyu to offer a concise explanation of why the EU drive of replacing Russian gas with American LNG is, well, a pipe dream. Essentially the US offer is “too limited and too costly”.

Fu Chengyu showed how a lengthy, tricky process depends on four contracts: between the gas developer and the LNG company; between the LNG company and the buyer company; between the LNG buyer and the cargo company (which builds vessels); and between the buyer and the end user.

“Each contract”, he pointed out, “takes a long time to finish. Without all these signed contracts no party will invest – be it investment on infrastructure or gas field development.” So actual delivery of American LNG to Europe assumes all these interconnected resources are available – and moving like clockwork.

Fu Chengyu’s verdict is stark: this EU obsession on ditching Russian gas will provoke “an impact on global economic growth, and recession. They are pushing their own people – and the world. In the energy sector, we will all be harmed.”

It was quite enlightening to juxtapose the coming geoeconomic turbulence – the EU obsession in bypassing Russian gas and the onset of Rublegas – with the real reasons behind Operation Z in Ukraine, completely obscured by Western media psyops.

Let's not ignore the fact that China has been buying Russian gas with yuan. Now, we will want to know whether Saudi Arabia follows this path.

At the least, this analysis allows us to gain a more objective perspective on what is going on in the real world. The verdict-- the Western sanctions policy is likely to hurt the West more than the East.

Time will tell.


David Foster said...

Actual US LNG exports:

Based on Fu Chengyu's analysis, no one would ever build a factory unless he already had signed contracts with all customers and suppliers.

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