The Other War

Of course, there’s the war on the ground. You can read different opinions about how it is going, but it seems clear enough that we in the West are willing, as the old saying goes, to fight to the last Ukrainian.

And then there is the economic warfare, being waged by America and many, but not all of its European allies. We are imposing sanctions, not necessarily because they work, but because it all makes us feel good. Besides, we have denounced Vladimir Putin as a war criminal and as a genocidal maniac. 

As it happened, we have imposed all manner of sanctions on China, and are continuing to do so. Does this make it more or less likely that China will side with Russia or with us in the current Ukrainian conflagration? And, we note that we have been decrying China for genocidal practices and even war crimes, just as we have been saying about Russia. Since we have declared China to be an enemy, it is acting like an enemy.

To imagine that American policy, dating to the last administration, has nothing to do with this is naive beyond imagining.

So, we are imposing sanctions because it’s just about all we now know how to do. When it comes to military readiness, President Biden recently announced that American military hardware would be environmentally friendly. I trust that the powers in charge at the Kremlin and in the Forbidden City are quivering. 

Joe Biden’s America is hard at work fighting thought crimes in the military and is pledging eternal obeisance to the Goddess of the Planet. If you do not think that that looks pathetic, you need new spectacles.

In any case, as I have been reporting, the second battlefield involves the status of the dollar as a reserve currency. To be fair, many serious thinkers, people who know much more than I do about this, have suggested that this is a risk factor, but not just yet. Others have suggested that the possibility of overturning the dollar is seriously remote. Still others have pointed out that the nations allied with Russia, beginning with China, play a long game. They are not concerned with short term results.

So, here are some observations by one Christopher Irons, proprietor of a Substack called Quoth the Raven.

As for the current state of economic warfare, here is the QTR summary.

Over the last 48 hours, China and Russia have taken big steps toward separating themselves from the monetary policy and economies of the west – and nobody has even noticed.

Those who have been reading my blog for the last couple of weeks know that I have been predicting that China and Russia would grow far closer economically, creating, in essence, a second global monetary system where the US dollar is no longer the reserve currency.

As for the currency situation, we have cut Russia off from international currency transactions. As a result, and as one guru, by name of Zoltan Pozsar has predicted, Russia and China are setting up their own currency systems backed by commodities:

A few weeks ago, I wrote an article proclaiming that Russia would back the ruble with gold as a way to fight back against western economic sanctions. I also made similar predictions about the new digital Chinese currency last summer when I first started Fringe Finance.

This shift is happening as a result of the United States and the rest of the western economies foolishly thinking that they’re going to be able to effectively sanction Russia economically, despite the fact that Russia is a massive producer of oil and the country seems prepared to back its currency, the ruble, with this productive capacity.

So, there is a country that is acting in a way that we seriously disapprove of. It is also a major energy and food producer. We pretend that we are going to sanction it, without considering how many people are going to starve because of our sanctions.

QTR is not optimistic about America’s current condition:

Meanwhile, back at the ranch, we continue to run enormous deficits and have very little productive capacity, and even less to back our currency with. Our destiny seems to be to continue printing money regardless of the negative consequences. We’re nothing more than printing press junkies that won’t cease our inflationary addiction until we inevitably hit rock bottom.

He points out an action that seems trivial in size or that may be the canary in the coal mine. The Israeli government is shifting some of its foreign reserves out of dollars and euros and into-- yuan. 

Bloomberg reports:

First, it was little noticed yesterday when Bloomberg reported that “Israel’s central bank has made the biggest changes to its allocation of reserves in over a decade, adding the Chinese yuan alongside three other currencies to a stockpile that last year exceeded $200 billion for the first time ever.”

Following discussions held by the monetary committee last year, the pound and the yen will account for 5% and the currencies of Canada and Australia will have 3.5% each. Under the new approach, the yuan’s proportion is set at 2% for 2022, according to the Israeli central bank’s annual report published at the end of last month.

To accommodate the changes, the euro’s share will fall to 20% -- the lowest in at least a decade -- from just over 30%, while the dollar will account for 61%, down from 66.5%. The pound’s weighting, by contrast, will almost double to 5%, returning to a level last seen in 2011.

The “dramatic” rise in Israel’s foreign-exchange reserves led the central bank to lengthen its investment horizon, Abir said. “We look at the need to earn a return on the reserves that will cover the costs of liability.”

In other words, Israel is reducing its exposure to the dollar and to the Euro to add exposure to the Renminbi.

And so perhaps isn’t just little old me here chipping away at my blog daily that has noticed that China and Russia could be on the verge of effecting meaningful change to the global monetary landscape. It sure seems like Israel is catching on.

Of course, we do not know whether or not Saudi Arabia, which is going to host Chinese president Xi Jinping next month in Riyadh, is going to sell oil for yuan-- thus bypassing the dollar exchange mechanisms. That would certainly not be a canary in the coal mine.

As for those Russian assets that Western companies are recklessly abandoning, Chinese companies are now looking to buy them. As the old saying goes, in contrary investment strategy you should buy what no one wants and sell what everyone wants.

China’s key state-run energy companies are in talks with Shell Plc to buy its stake in a major Russian gas export project, according to people with knowledge of the matter.

Cnooc, CNPC and Sinopec Group are in joint discussions with Shell over the company’s 27.5% holding in the Sakhalin-2 liquefied natural gas venture after the European firm said it would exit Russian operations following the Ukraine invasion

I had previously argued on my podcast and on my blog that even though the west was going to be ignoring Russian investments, there would definitely be a strategic buyer who would come in and scoop up what can only be described as long-term strategic energy assets from Russia.

Many people smarter than I am, including macro analyst Luke Groman, predicted that China would be the strategic buyer for such transactions. I agreed.

While many serious thinkers insist that the dollar cannot be dethroned, some countries seem to have a different idea:

China and Russia continue on a cooperative path together: doing business together, backing their currencies with tangible commodities and, as I wrote just days ago, we’re in the process of watching the dollar become dethroned as the global reserve currency. We just don’t notice it yet.

As it happens, QTR is also a gold bug. He expects that China will back its currency with gold:

The next prediction I have, that hasn’t yet taken place, is that China will back its digital currency with gold. I’ve predicted this since August of 2021, long before the current macro picture has emerged. Now, my convictions are even stronger.

When the rest of the world catches on to what is playing out here, there’s going to be a mad dash for gold, in my opinion. I still prefer gold over any fiat currency and, as I wrote weeks ago, consider miners to be one of the market’s truly undervalued sectors.

Make of it what you will.