Russia and China Make Geopolitical Moves
Russia’s invasion of Ukraine on February 24th, 2022 came shortly after a February 8th meeting between Putin and Xi on the sidelines of the Beijing Winter Olympics. While I wouldn’t argue that the entire war was scripted at this curious meeting between Russia and China, I think both sides agreed a catalyst was needed to de-dollarize the global economy.
The United States, whose population amounts to less than 5% of the world, was becoming ever more desperate as it faced a loss of leadership in trade, technology, and economic standing. Its one remaining strength came from the financial system governing world trade in which its currency, the U.S. dollar, continued to play a dominant role. America’s military strength, while technologically lagging, was a likely secondary but fading factor.
For the first time in history the world was at a point where it was necessary to deal with existential problems faced not by a single country, or bloc of countries, but by the entire planet. Natural resources had become scarce and unevenly distributed. The sustainability of the world was at stake, and a catalyst was needed to create a system that would ensure decisions would be taken with more than the short-sighted benefits of the favored countries in mind. In fact, such a short-sighted approach no longer would work even for the favored countries. The dollar, as the center of the world’s economy, had to be destroyed for the sake of humanity. It was almost as if some higher power was looking down on the human species and saying, get your act together or else.
Propaganda And Its Pitfalls
When you ignore Western propaganda, the war has been a military catastrophe for Ukraine and those supplying it, meaning the U.S. and some NATO countries. The fog of war only protects military happenings. The war’s monetary effects – especially on those closest to it, and above all the Europeans – have been shattering. The West’s greatest weapons, both military and financial, have been on display, with more sanctions imposed than ever executed in the past. The Russians have been banned from using SWIFT, which is de facto a necessary part of the mechanism for using the dollar in international trade. In other words, without access to SWIFT, you can’t trade with foreign countries using dollars. Being banned from SWIFT is the most severe sanction we’ve imposed, but far from the only one.
Biden and others asserted the sanctions would cripple the Russian economy and make fighting a war impossible. Instead, the sanctions boomeranged – with the return trip turbocharged. They revealed how wholly dependent the West is on the SouthEast for virtually every important commodity and resource, from oil to yttrium. There is not one critical supply chain or vital natural resource in which the collective West (America and Europe) is self-sufficient.
While the U.S. for the moment is mostly self-sufficient in fossil fuels, Europe has been shattered by its need for Russian gas. The loss of Russian gas has led to double-digit inflation and certain recession in major European economies. Germany, the continent’s largest economy and a major manufacturing center, is likely to lose its industrial base. No wonder so many European countries are starting to turn away from E.U. edicts.
The dire situation in Europe has been sharply exacerbated by actions of its putative major ally, the U.S., which is sharply raising interest rates and promising to bring inflation down to 2% from current levels of about 8%, even in the face of Powell’s acknowledgement of the pain this may cause Americans.
This recent reiteration of hawkishness comes when things are hardly great in America. A few recent statistics caught my attention. Americans’ life expectancy is now below China’s. Childhood poverty in America is higher than in Russia. Roughly 20% of U.S. households are delinquent in paying their electric bills. And, no surprise, the pain is concentrated among those that have the least. At this rate it is only a matter of time before half or more of our country is living in total squalor and will join the Europeans in freezing temperatures this winter.
Powell’s Plight To Keep The Dollar Strong
Why has Powell decided to enact policies that will make life so unbearable for so many Americans? It seems that along with losing a sense of what democracy is really about, we’re losing a sense of decency. These are actions born out of desperation. Sharply rising U.S. interest rates join our relative self-sufficiency in oil as a reason the dollar has been rising at a torrid rate. Dollar gains, furthermore, are self-reinforcing in that they come at the expense of a historical weakening euro. The ever-weaker euro means higher import prices across the board, including prices paid for energy and food.
The attempt to suppress the price of gold might be comparable to ‘drying timber’ with a multitude of arsonists on the prowl. And if you’ve been wondering what this high-dollar rationale might be – other than to suppress the price of gold – recall 1998 as just one prior example of what Powell and his ilk might have been hoping for.
Case in point, rising U.S. interest rates combined with a meltdown in a major hedge fund created a fiat currency crisis in 1998, marked by torrid dollar gains. The major difference between now and then – the developing world wasn’t the driver of world growth. Still, its higher dollar debt levels meant a great deal of vulnerability to a sharply rising dollar and was something that could worsen a U.S. crisis.
Today, with more than half of Americans saddled with debt that vastly exceeds their income, the pain is being felt much more in the developed than in the developing world. Indeed, the world’s strongest fiat currency today is the ruble, while indexes of developing world currencies are down versus the dollar but sharply outperforming the euro. As for the effect on investing in gold, investors should view that as a gift. I can’t say how far down gold may go, but I will say that every dollar down will translate into at least two fold gains when the jig is up. When gold starts its inevitable first-leg rampage, it will be even greater than I originally imagined – even five digits is no longer a dream. And that will just be the first leg.
Ukrainian Frontlines And Nato’s Fate
Back to Ukraine. As I said above, the war began shortly after the Xi-Putin pow wow. The recent escalation from a special military operation to a war and the call-up of 300,000 reservists with prior war experience, along with referendums for the annexation of several Russian-speaking territories, followed very closely upon the recent gathering of the Shanghai Cooperation Organization (SCO). I doubt that coincidence is involved in this bookending of the initial phase and latest phase of Ukraine operations.
My conjecture is that the overwhelming success of the special military operation, especially in the financial sphere, suggested the moment was right to go in for the kill. Keep in mind that in addition to the stunning surge in the ruble and the breakdown in Europe’s economies, a number of non-dollar international trade deals have been announced. A complete victory by Russia in Ukraine could mark the end of NATO as an alliance to rely on. Given that NATO is America’s strongest link to the other side of the globe, it would also possibly mark a finishing blow to America’s prestige in the SE.
A break-up of the E.U. is also increasingly likely. If Sunday’s Italian election goes according to plan, the third-largest European country will be represented by a government with friendly ties to Moscow. Despite Germany’s harsh stance, a rapidly gaining opposition party has been visiting Moscow. Recent elections in both France and Sweden have strongly suggested dissatisfaction with E.U. policy. Political protests are already widespread and will likely intensify as European economies crumble. Increasingly a trade alliance with Russia will be the only way out for particular countries. Perhaps the E.U. can remain intact, but its days as a trusted U.S. ally are on the potential brink of extinction.
I first began writing about the SCO, formed in 1996, about five or six years ago after Pakistan and India joined the initial five members. Those initial five were China, Russia, and three central Asian countries. The fact that bitter rivals Pakistan and India both joined, in combination with the presence of central Asian countries, signals just how special SCO is. Many historians have long argued that control of Eurasia requires control of Central Asia along with a major navy. SCO clearly has both.
China’s Tech Prowess
Also relevant is that China, once willing to brag about its technological progress, has gone silent on this front. But a careful reading of scientific journals reveals China has at least two exascale supercomputers and is at least a year ahead of rivals in this critical industry. Similarly, China’s advance in quantum computation has been riveting. This is an arcane area even for highly trained physicists. Yet a couple of peer-reviewed articles show China as perhaps many years ahead of the best in the West.
The only area where China has been pumping its chest has been in military technology. I have talked a lot about this in the past. Recently, New Asia, a respected publication from the East, headlined a recent article with:
“China may now have air superiority over the U.S. in Pacific.”-excerpt from New Asia
The article cites U.S. military sources who said that “China has been steadily improving the quality of its jet engines… To the point of exceeding Western models.”
Another recent headline notes: “China unveils supersonic missile-torpedo anti-ship weapon.” Though not yet fully commercial, this weapon is years ahead of any rival. Thus, it is not surprising that The Wall Street Journal recently admitted that China can fully blockade Taiwan and the critical Taiwan waterway. Noted in a previous article, I believed China’s military exercises following Pelosi’s visit demonstrated that fact.
Despite insistence from the West that China is ready to take over Taiwan by force, this is simply talk, perhaps intended to bait the Chinese into action. It won’t happen. I believe even if the U.S. were to invade Taiwan, China would simply block Taiwan’s communications access with the rest of the world by cutting underseas cables that connect the island’s internet to other countries.
My point is that the SCO, with China and Russia among the key players in an organization now numbering more than half the world’s population, has both the naval chops and the Asian control that historically have been a precursor to Eurasian domination. The current members include four central Asian countries, bringing the number to eight. The process of becoming a member is long and fairly opaque. One clear precursor, though, is for a country to have either “observer” status or be considered a “Dialogue Partner.” Out of about 15 countries in one of these two categories, Iran is likely to join in the near future followed by Turkey. Middle Eastern countries including Saudi Arabia and Qatar are eager to join, and the UAE recently requested expedited admission to the group. The list of current and prospective members clearly suggests an organization committed to harmony with the ability to put bitter rivals on the same page.
The bottom line is that the new world order has been fast tracked. The West and in particular the U.S., which has orchestrated much of the current divide, must take a collective look in the mirror and ask whether it wants to go down in history as demons who hold nothing sacred but their own secular aims or take a major step towards regaining what they once were.
Netflix has a superb series entitled Borgen, a fictionalized account of the first woman to be Danish PM. In one episode the country is a temporary stopping place for a dissident to an authoritarian country that is claiming to be a democracy. During the episode the dissident is asked by a TV interviewer if he can define democracy. He answers that it’s not a simple question – it’s like asking what love means. Love and democracy may be defined differently by different people, but both concepts are at their heart sacred and nonmaterial and imply certain material principles – mostly respect for all and a willingness to accept others. The U.S. was once that kind of democracy, and I long for us to return to what we were. It is never too late until it is too late. I am praying we can find the courage to become what we once were.