|Monday 11th of April 2022
Has Vlad the Bad become Vlad the Economic genius ?? @hendry_hugh
World Of Finance
Whether by accident or design the Ruble has metastasized from a peripheral currency into a hardcore commodity backed currency which was an exorbitant privelege it had previously gifted the Euro.
1. You can print money, but not oil to heat or wheat to eat. @CreditSuisse Zoltan Pozsar
In order to execute optimally you need to crash the European economy and essentially hyper inflate weimar(ize) the World which seems to be what @vonderleyen is threatening and whose bluff Russia is effectively calling
Sit back and watch Europe commit suicide @TheCradleMedia @RealPepeEscobar
The stunning spectacle of the European Union (EU) committing slow motion hara-kiri is something for the ages.
Like a cheap Kurosawa remake, the movie is actually about the US-detonated demolition of the EU, complete with the rerouting of some key Russian commodities exports to the US at the expense of Europeans.
It helps to have a 5th columnist actress strategically placed – in this case astonishingly incompetent European Commission head Ursula von der Lugen – with her vociferous announcement of a crushing new 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).
In practice, that translates into Washington shaking down its wealthiest western clients/puppets.
Russia, of course, is too powerful to directly challenge militarily, and the US badly needs some of its key exports, especially minerals.
So, the Americans will instead nudge the EU into imposing ever-increasing sanctions that will willfully collapse their national economies, while allowing the US to scoop everything up.
Cue to the coming catastrophic economic consequences felt by Europeans in their daily life (but not by the wealthiest five percent): inflation devouring salaries and savings; next winter energy bills packing a mean punch; products disappearing from supermarkets; holiday bookings almost frozen.
France’s Le Petit Roi Emmanuel Macron – perhaps facing a nasty electoral surprise – has even announced: “food stamps like in WWII are possible.”
We have Germany facing the returning ghost of Weimar hyperinflation.
BlackRock President Rob Kapito said, in Texas,“for the first time, this generation is going to go into a store and not be able to get what they want.”
African farmers are unable to afford fertilizer at all this year, reducing agricultural production by an amount capable of feeding 100 million people.
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 (although, 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 3 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.
The implications are of course overwhelming. What’s implicit, ominously, is that this state of affairs may even lead to WWIII.
Rublegas or American LNG?
The Russian roundtable Valdai Club has conducted an essential expert discussion on what we at The Cradle have defined as Rublegas – the real geoeconomic game-changer at the heart of the post-petrodollar era.
Alexander Losev, a member of the Russian Council for Foreign and Defense Policy, offered the contours of the Big Picture.
But it was up to Alexey Gromov, Chief Energy Director of the Institute of Energy and Finance, to come up with crucial nitty-gritty.
Russia, so far, was selling 155 billion cubic meters of gas to Europe each year.
The EU rhetorically promises to get rid of it by 2027, and reduce supply by the end of 2022 by 100 billion cubic meters.
Gromov asked “how,” and remarked, “any expert has no answer. Most of Russia’s natural gas is shipped over pipelines. This cannot simply be replaced by Liquified Natural Gas (LNG).”
The risible European answer has been “start saving,” as in “prepare to be worse off” and “reduce the temperature in households.”
Gromov noted how, in Russia, “22 to 25 degrees in winter is the norm. Europe is promoting 16 degrees as ‘healthy’, and wearing sweaters at night.”
The EU won’t be able to get the gas it needs from Norway or Algeria (which is privileging domestic consumption).
Azerbaijan would be able to provide at best 10 billion cubic meters a year, but “that will take 2 or 3 years” to happen.
Gromov stressed how “there’s no surplus in the market today for US and Qatar LNG,” and how prices for Asian customers are always higher.
The bottom line is that “by the end of 2022, Europe won’t be able to significantly reduce” what it buys from Russia: “they might cut by 50 billion cubic meters, maximum.” And prices in the spot market will be higher – at least $1,300 per cubic meter.
An important development is that “Russia changed the logistical supply chains to Asia already.” That applies for gas and oil as well:
“You can impose sanctions if there’s a surplus in the market. Now there’s a shortage of at least 1.5 million barrels of oil a day. We’ll be sending our supplies to Asia – with a discount.” As it stands, Asia is already paying a premium, from 3 to 5 dollars more per barrel of oil.
On oil shipments, Gromov also commented on the key issue of insurance:
“Insurance premiums are higher. Before Ukraine, it was all based on the Free on Board (FOB) system. Now buyers are saying ‘we don’t want to take the risk of taking your cargo to our ports.’
So they are applying the Cost, Insurance and Freight (CIF) system, where the seller has to insure and transport the cargo. That of course impacts revenues.”
An absolutely key issue for Russia is how to make the transition to China as its key gas customer.
It’s all about the Power of Siberia 2, a new 2600-km pipeline originating in the Russian Bovanenkovo and Kharasavey gas fields in Yamal, in northwest Siberia – 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 project – which is even larger than Yamal: “the first phase should be finished soon, it’s 80 percent 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.
The positives are that the new paradigm will allow “more cooperation within the BRICS (the emerging economies of Brazil, Russia, India, China and South Africa that have been meeting annually since 2009);” the expansion of the International North South Transportation Corridor (INSTC); and more interaction and integration with “Pakistan, India, Afghanistan and Iran.”
Only in terms of Iran and Russia, swaps in the Caspian Sea are already in the works, as Iran produces more than it needs, and is set to increase cooperation with Russia in the framework of their strengthened strategic partnership.
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 and analysts.
A US Deep State old pro, now retired, and quite familiar with the inner workings of the old OSS, the CIA precursor, all the way to the neocon dementia of today, provided some sobering insights:
“The whole Ukraine issue is over hypersonic missiles that can reach Moscow in less than four minutes. The US wants them there, in Poland, Romania, Baltic States, Sweden, Finland. This is in direct violation of the agreements in 1991 that NATO will not expand in Eastern Europe. The US does not have hypersonic missiles now but should – in a year or two. This is an existential threat to Russia. So they had to go into the Ukraine to stop this. Next will be Poland and Romania where launchers have been built in Romania and are being built in Poland.”
From a completely different geopolitical perspective, what’s really telling is that his analysis happens to dovetail with Zoltan Poszar’s geoeconomics:
“The US and NATO are totally belligerent. This presents a real danger to Russia. The idea that nuclear war is unthinkable is a myth. If you look at the firebombing of Tokyo against Hiroshima and Nagasaki, more people died in Tokyo than Hiroshima and Nagasaki. These cities were rebuilt. The radiation goes away and life can restart. The difference between firebombing and nuclear bombing is only efficiency. NATO provocations are so extreme, Russia had to place their nuclear missiles on standby alert. This is a gravely serious matter. But the US ignored it.”
The @POTUS Official Who Pierced Putin’s Sanction-Proof Economy @NewYorker
Law & Politics
Singh said, “We’ve made him stare into an economic abyss. But he could choose to pull back.”
The markets are where these two systems touch—the supply of buckwheat, the joint energy ventures, the price of the ruble—and within this arena the sanctions were a demonstration that Washington still had levers to pull. “You know, we can play chess, too,” Singh said. “It was important for us to show that the fortress could come crumbling down.”
Sanction warfare against a TriPolar Power is a monstrous debacle
The Commodity-Currency Revolution Begins @zerohedge
World Of Finance
We will look back at current events and realise that they marked the change from a dollar-based global economy underwritten by financial assets to commodity-backed currencies.
We face a change from collateral being purely financial in nature to becoming commodity based. It is collateral that underwrites the whole financial system.
The ending of the financially based system is being hastened by geopolitical developments.
The West is desperately trying to sanction Russia into economic submission, but is only succeeding in driving up energy, commodity, and food prices against itself.
Central banks will have no option but to inflate their currencies to pay for it all.
Russia is linking the rouble to commodity prices through a moving gold peg instead, and China has already demonstrated an understanding of the West’s inflationary game by having stockpiled commodities and essential grains for the last two years and allowed her currency to rise against the dollar.
China and Russia are not going down the path of the West’s inflating currencies.
Instead, they are moving towards a sounder money strategy with the prospect of stable interest rates and prices while the West accelerates in the opposite direction.
The Credit Suisse analyst, Zoltan Pozsar, calls it Bretton Woods III. This article looks at how it is likely to play out, concluding that the dollar and Western currencies, not the rouble, will have the greatest difficulty dealing with the end of fifty years of economic financialisation.
Pure finance is being replaced with commodity finance
It hasn’t hit the main-stream media yet, which is still reporting yesterday’s battle.
But in March, the US Administration passed a death sentence on its own hegemony in a last desperate throw of the dollar dice.
Not only did it misread the Russian situation with respect to its economy, but America mistakenly believed in its own power by sanctioning Russia and Putin’s oligarchs.
It may have achieved a partial blockade on Russia’s export volumes, but compensation has come from higher unit prices, benefiting Russia, and costing the Western alliance.
The consequence is a final battle in the financial war which has been brewing for decades.
You do not sanction the world’s most important source of energy exports and the marginal supplier of a wide range of commodities and raw materials, including grains and fertilisers, without damaging everyone but the intended target.
Worse still, the intended target has in China an extremely powerful friend, with which Russia is a partner in the world’s largest economic bloc — the Shanghai Cooperation Organisation — commanding a developing market of over 40% of the world’s population.
That is the future, not the past: the past is Western wokery, punitive taxation, economies dominated by the state and its bureaucracy, anti-capitalistic socialism, and magic money trees to help pay for it all.
Despite this enormous hole in the sanctions net, the West has given itself no political option but to attempt to tighten sanctions even more.
But Russia’s response is devastating for the western financial system.
In two simple announcements, tying the rouble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in roubles, it is calling an end to the fiat dollar era that has ruled the world from the suspension of Bretton Woods in 1971 to today.
Just over five decades ago, the dollar took over the role for itself as the global reserve asset from gold.
After the seventies, which was a decade of currency, interest rate, and financial asset volatility, we all settled down into a world of increasing financialisation.
London’s big bang in the early 1980s paved the way for regulated derivatives and the 1990s saw the rise of hedge funds and dotcoms.
That was followed by an explosion in over-the-counter unregulated derivatives into the hundreds of trillions and securitisations which hit the speed-bump of the Lehman failure.
Since then, the expansion of global credit for purely financial activities has been remarkable creating a financial asset bubble to rival anything seen in the history of financial excesses.
And together with statistical suppression of the effect on consumer prices the switch of economic resources from Main Street to Wall Street has hidden the inflationary evidence of credit expansion from the public’s gaze.
All that is coming to an end with a new commoditisation — what respected flows analyst Zoltan Pozsar at Credit Suisse calls Bretton Woods III.
In his enumeration the first was suspended by President Nixon in 1971, and the second ran from then until now when the dollar has ruled indisputably. That brings us to Bretton Woods III.
Russia’s insistence that importers of its energy pay in roubles and not in dollars or euros is a significant development, a direct challenge to the dollar’s role.
There are no options for Russia’s “unfriendlies”, Russia’s description for the alliance united against it.
The EU, which is the largest importer of Russian natural gas, either bites the bullet or scrambles for insufficient alternatives.
The option is to buy natural gas and oil at reasonable rouble prices or drive prices up in euros and still not get enough to keep their economies going and the citizens warm and mobile.
Either way, it seems Russia wins, and one way the EU loses.
As to Pozsar’s belief that we are on the verge of Bretton Woods III, one can see the logic of his argument. The highly inflated financial bubble marks the end of an era, fifty years in the making.
Negative interest rates in the EU and Japan are not just an anomaly, but the last throw of the dice for the yen and the euro.
The ECB and the Bank of Japan have bond portfolios which have wiped out their equity, and then some.
All Western central banks which have indulged in QE have the same problem. Contrastingly, the Russian central bank and the Peoples Bank of China have not conducted any QE and have clean balance sheets.
Rising interest rates in Western currencies are made more certain and their height even greater by Russia’s aggressive response to Western sanctions.
It hastens the bankruptcy of the entire Western banking system and by bursting the highly inflated financial bubble will leave little more than hollowed-out economies.
Putin has taken as his model the 1973 Nixon/Kissinger agreement with the Saudis to only accept US dollars in payment for oil, and to use its dominant role in OPEC to force other members to follow suit.
As the World’s largest energy exporter Russia now says she will only accept roubles, repeating for the rouble the petrodollar strategy.
And even Saudi Arabia is now bending with the wind and accepting China’s renminbi for its oil, calling symbolic time on the Nixon/Kissinger petrodollar agreement.
The West, by which we mean America, the EU, Britain, Japan, South Korea, and a few others have set themselves up to be the fall guys.
That statement barely describes the strategic stupidity — an Ignoble Award is closer to the truth.
By phasing out fossil fuels before they could be replaced entirely with green energy sources, an enormous shortfall in energy supplies has arisen.
With an almost religious zeal, Germany has been cutting out nuclear generation. And even as recently as last month it still ruled out extending the lifespan of its nuclear facilities.
The entire G7 membership were not only unprepared for Russia turning the tables on its members, but so far, they have yet to come up with an adequate response.
Russia has effectively commoditised its currency, particularly for energy, gold, and food. It is following China down a similar path.
In doing so it has undermined the dollar’s hegemony, perhaps fatally. As the driving force behind currency values, commodities will be the collateral replacing financial assets.
It is interesting to observe the strength in the Mexican peso against the dollar (up 9.7% since November 2021) and the Brazilian real (up 21% over a year) And even the South African rand has risen by 11% in the last five months.
That these flaky currencies are rising tells us that resource backing for currencies has its attractions beyond the rouble and renminbi.
But having turned their backs on gold, the Americans and their Western epigones lack an adequate response. If anything, they are likely to continue the fight for dollar hegemony rather than accept reality.
And the more America struggles to assert its authority, the greater the likelihood of a split in the Western partnership.
Europe needs Russian energy desperately, and America does not. Europe cannot afford to support American policy unconditionally.
That, of course, is Russia’s bet.
The Commodity-Currency Revolution Begins @zerohedge continued
World Of Finance
Russia’s point of view
For the second time in eight years, Russia has seen its currency undermined by Western action over Ukraine.
Having experienced it in 2014, this time the Russian central bank was better prepared. It had diversified out of dollars adding official gold reserves.
The commercial banking system was overhauled, and the Governor of the RCB, Elvira Nabiullina, by following classical monetary policies instead of the Keynesianism of her Western contempories, has contained the fall-out from the war in Ukraine.
As Figure 1 shows, the rouble halved against the dollar in a knee-jerk reaction before recovering to pre-war levels.
The link to commodities is gold, and the RCB announced that until end-June it stands ready to buy gold from Russian banks at 5,000 roubles per gramme.
The stated purpose was to allow banks to lend against mine production, given that Russian-sourced gold is included in the sanctions.
But the move has encouraged speculation that the rouble is going on a quasi- gold standard; never mind that a gold standard works the other way round with users of the currency able to exchange it for gold.
Besides being with silver the international legal definition of money (the rest being currency and credit), gold is a good proxy for commodities, as shown in Figure 2 below.
Priced in goldgrams, crude oil today is 30% below where it was in the 1950, long before Nixon suspended the Bretton Woods Agreement.
Meanwhile, measured in depreciating fiat currencies the price has soared and been extremely volatile along the way.
It is a similar story for other commodity prices, whereby maximum stability is to be found in prices measured in goldgrams.
Taking up Pozsar’s point about currencies being increasingly linked to commodities in Bretton Woods III, it appears that Russia intends to use gold as proxy for commodities to stabilise the rouble.
Instead of a fixed gold exchange rate, the RCB has wisely left itself the option to periodically revise the price it will pay for gold after 1 July.
While non-Russian credit institutions do not have access to the facility, it appears that there is nothing to stop a Russian bank buying gold in another centre, such as Dubai, to sell to the Russian central bank for roubles.
All that is needed is for the dollar/rouble rate to be favourable for the arbitrage and the ability to settle in a non-sanctioned currency, such as renminbi, or to have access to Eurodollars which it can exchange for Euroroubles (see below) from a bank outside the “unfriendlies” jurisdictions.
The dollar/rouble rate can now easily be controlled by the RCB, because how demand for roubles in short supply is handled becomes a matter of policy.
Gazprom’s payment arm (Gazprombank) is currently excused the West’s sanctions and EU gas and oil payments will be channelled through it.
Broadly, there are four ways in which a Western consumer can acquire roubles:
By buying roubles on the foreign exchanges.
By depositing euros, dollars, or sterling with Gazprombank and have them do the conversion as agents.
Gazprombank increasing its balance sheet to provide credit, but collateral which is not sanctioned would be required.
By foreign banks creating rouble credits which can be paid to Gazprombank against delivery of energy supplies.
The last of these four is certainly possible, because that is the basis of Eurodollars, which circulate outside New York’s monetary system and have become central to international liquidity.
To understand the creation of Eurodollars, and therefore the possibility of a developing Eurorouble market we must delve into the world of credit creation.
There are two ways in which foreigners can hold dollar balances. The way commonly understood is through the correspondent banking system.
Your bank, say in Europe, will run deposit accounts with their correspondent banks in New York (JPMorgan, Citi etc.).
So, if you make a deposit in dollars, the credit to your account will reconcile with the change in your bank’s correspondent account in New York.
Now let us assume that you approach your European bank for a dollar loan. If the loan is agreed, it appears as a dollar asset on your bank’s balance sheet, which through double-entry bookkeeping is matched by a dollar liability in favour of you, the borrower.
It cannot be otherwise and is the basis of all bank credit creation. But note that in the creation of these balances the American banking system is not involved in any way, which is how and why Eurodollars circulate, being fungible with but separate in origin from dollars in the US.
By the same method, we could see the birth and rapid expansion of a Eurorouble market. All that’s required is for a bank to create a loan in roubles, matched under double-entry bookkeeping with a deposit which can be used for payments.
It doesn’t matter which currency the bank runs its balance sheet in, only that it has balance sheet space, access to rouble liquidity and is a credible counterparty.
This suggests that Eurozone and Japanese banks can only have limited participation because they are already very highly leveraged.
The banks best able to run Eurorouble balances are the Americans and Chinese because they have more conservative asset to equity ratios.
Furthermore, the large Chinese banks are majority state-owned, and already have business and currency interests with Russia giving them a head start with respect to rouble liquidity.
We have noticed that the large American banks are not shy of dealing with the Chinese despite the politics, so presumably would like the opportunity to participate in Euroroubles.
But only this week, the US Government prohibited them from paying holders of Russia’s sovereign debt more than $600 million.
So, we should assume the US banks cannot participate which leaves the field open to the Chinese mega-banks.
And any attempt to increase sanctions on Russia, perhaps by adding Gazprombank to the sanctioned list, achieves nothing, definitely cuts out American banks from the action, and enhances the financial integration between Russia and China.
The gulf between commodity-backed currencies and yesteryear’s financial fiat simply widens.
For now, further sanctions are a matter for speculation. But Gazprombank with the assistance of the Russian central bank will have a key role in providing the international market for roubles with wholesale liquidity, at least until the market acquires depth in liquidity.
In return, Gazprombank can act as a recycler of dollars and euros gained through trade surpluses without them entering the official reserves. Dollars, euros yen and sterling are the unfriendlies’ currencies, so the only retentions are likely to be renminbi and gold.
In this manner we might expect roubles, gold and commodities to tend to rise in tandem.
We can see the process by which, as Zoltan Pozsar put it, Bretton Woods III, a global currency regime based on commodities, can take over from Bretton Woods II, which has been characterised by the financialisation of currencies.
And it’s not just Russia and her roubles. It’s a direction of travel shared by China.
The economic effects of a strong currency backed by commodities defy monetary and economic beliefs prevalent in the West.
But the consequences that flow from a stronger currency are desirable: falling interest rates, wealth remaining in the private sector and an escape route from the inevitable failure of Western currencies and their capital markets.
The arguments in favour of decoupling from the dollar-dominated monetary system have suddenly become compelling.
The Commodity-Currency Revolution Begins @zerohedge cont
World Of Finance
The consequences for the West
Most Western commentary is gung-ho for further sanctions against Russia.
Relatively few independent commentators have pointed out that by sanctioning Russia and freezing her foreign exchange reserves, America is destroying her own hegemony.
The benefits of gold reserves have also been pointedly made to those that have them.
Furthermore, central banks leaving their gold reserves vaulted at Western central banks exposes them to sanctions, should a nation fall foul of America.
Doubtless, the issue is being discussed around the world and some requests for repatriation of bullion are bound to follow.
There is also the problem of gold leases and swaps, vital for providing liquidity in bullion markets, but leads to false counting of reserves.
This is because under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts.
No one knows the extent of swaps and leases, but it is likely to be significant, given the evidence of gold price interventions over the last fifty years.
Countries which have been happy to earn fees and interest to cover storage costs and turn gold bullion storage into a profitable activity (measured in fiat) are at the margin now likely to not renew swap and lease agreements and demand reallocation of bullion into earmarked accounts, which would drain liquidity from bullion markets.
A rising gold price will then be bound to ensue.
Ever since the suspension of Bretton Woods in 1971, the US Government has tried to suppress gold relative to the dollar, encouraging the growth of gold derivatives to absorb demand.
That gold has moved from $35 to $1920 today demonstrates the futility of these policies. But emotionally at least, the US establishment is still virulently anti-gold.
As Figure 2 above clearly shows, the link between commodity prices and gold has endured through it all.
It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone.
The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.
The truth behind prices measured in unbacked currencies is demonstrated by the cost of oil priced in gold having declined about 30% since the 1960s.
That is reasonable given new extraction technologies and is consistent with prices tending to ease over time under a gold standard.
It is only in fiat currencies that prices have soared. Clearly, gold is considerably more objective for transaction purposes than fiat currencies, which are definitely not.
Therefore, if, as the chart in the tweet below suggests, the dollar price of oil doubles from here, it will only be because at the margin people prefer oil to dollars — not because they want oil beyond their immediate needs, but because they want dollars less.
China recognised these dynamics following the Fed’s monetary policies of March 2020, when it reduced its funds rate to the zero bound and instituted QE at $120bn every month.
The signal concerning the dollar’s future debasement was clear, and China began to stockpile oil, commodities, and food — just to get rid of dollars.
This contributed to the rise in dollar commodity prices, which commenced from that moment, despite falling demand due to covid and supply chain problems.
The effect of dollar debasement is reflected in Figure 3, which is of a popular commodity tracking ETF.
A better understanding would be to regard the increase in the value of this commodity basket not as a near doubling since March 2020, but as a near halving of the dollar’s purchasing power with respect to it.
Furthermore, the Chinese have been prescient enough to accumulate stocks of grains.
The result is that 20% of the world’s population has access to 70% of the word’s maize stocks, 60% of rice, 50% of wheat and 35% of soybeans.
The other 80% of the world’s population will almost certainly face acute shortages this year as exports of grain and fertiliser from Ukraine/Russia effectively cease.
China’s actions show that she has to a degree already tied her currency to commodities, recognising the dollar would lose purchasing power.
And this is partially reflected in the yuan’s exchange rate against the US dollar, which since May 2020 has gained over 11%.
The Commodity-Currency Revolution Begins @zerohedge further
World Of Finance
Implications for the dollar, euro and yen
In this article the close relationship between gold, oil, and wider commodities has been shown.
It appears that Russia has found a way of tying her currency not to the dollar, but to commodities through gold, and that China has effectively been doing the same thing for two years without the gold link.
The logic is to escape the consequences of currency and credit expansion for the dollar and other Western currencies as their purchasing power is undermined. And the use of a gold peg is an interesting development in this context.
We should bear in mind that according to the US Treasury TIC system foreigners own $33.24 trillion of financial securities and short-term assets including bank deposits.
That is in addition to a few trillion, perhaps, in Eurodollars not recorded in the TIC statistics.
These funds are only there in such quantities because of the financialisation of Western currencies, a situation we now expect to end.
A change in the world’s currency order towards Pozsar’s Bretton Woods III can be expected to a substantial impact on these funds.
To prevent foreign selling of the $6.97 trillion of short-term securities and cash, interest rates would have to be raised not just to tackle rising consumer prices (a Keynesian misunderstanding about the economic role of interest rates, disproved by Gibson’s paradox) but to protect the currency on the foreign exchanges, particularly relative to the rouble and the yuan.
Unfortunately, sufficiently high interest rates to encourage short-term money and deposits to stay would destabilise the values of the foreign owned $26.27 trillion in long-term securities — bonds and equities.
As the manager of US dollar interest rates, the dilemma for the Fed is made more acute by sanctions against Russia exposing the weakness of the dollar’s position.
The fall in its purchasing power is magnified by soaring dollar prices for commodities, and the rise in consumer prices will be greater and sooner as a result.
It is becoming possible to argue convincingly that interest rates for one-year dollar deposits should soon be in double figures, rather than the three per cent or so argued by monetary policy hawks.
Whatever the numbers turn out to be, the consequences are bound to be catastrophic for financial assets and for the future of financially oriented currencies where financial assets are the principal form of collateral.
It appears that Bretton Woods II is indeed over. That being the case, America will find it virtually impossible to retain the international capital flows which have allowed it to finance the twin deficits — the budget and trade gaps.
And as securities’ values fall with rising interest rates, unless the US Government takes a very sharp knife to its spending at a time of stagnating or falling economic activity, the Fed will have to step up with enhanced QE.
The excuse that QE stimulates the economy will have been worn out and exposed for what it is: the debasement of the currency as a means of hidden taxation.
And the foreign capital that manages to escape from a dollar crisis is likely to seek a home elsewhere. But the other two major currencies in the dollar’s camp, the euro and yen, start from an even worse position.
These are shown in Figure 4. With their purchasing power visibly collapsing the ECB and the Bank of Japan still have negative interest rates, seemingly trapped under the zero bound.
Policy makers find themselves torn between the Scylla of consumer price inflation and the Charybdis of declining economic activity.
A further problem is that these central banks have become substantial investors in government and other bonds (the BOJ even has equity ETFs on board) and rising bond yields are playing havoc with their balance sheets, wiping out their equity requiring a systemic recapitalisation.
Not only are the ECB and BOJ technically bankrupt without massive capital injections, but their commercial banking networks are hugely overleveraged with their global systemically important banks — their G-SIBs — having assets relative to equity averaging over twenty times.
And unlike the Brazilian real, the Mexican peso and even the South African rand, the yen and the euro are sliding against the dollar.
The response from the BOJ is one of desperately hanging on to current policies. It is rigging the market by capping the yield on the 10-year JGB at 0.25%, which is where it is now.
These currency developments are indicative of great upheavals and an approaching crisis.
Financial bubbles are undoubtedly about to burst sinking fiat financial values and all that sail with them.
Government bonds will be yesterday’s story because neither China nor Russia, whose currencies can be expected to survive the transition from financial to commodity orientation, run large budget deficits. That, indeed, will be part of their strength.
The financial war, so long predicted and described in my essays for Goldmoney, appears to be reaching its climax.
At the end it has boiled down to who understands money and currencies best.
Led by America, the West has ignored the legal definition of money, substituting fiat dollars for it instead.
Monetary policy lost its anchor in realism, drifting on a sea of crackpot inflationary beliefs instead.
But Russia and China have not made the same mistake. China played along with the Keynesian game while it suited them.
Consequently, while Russia may be struggling militarily, unless a miracle occurs the West seems bound to lose the financial war and we are, indeed, transiting into Pozsar’s Bretton Woods III.
29-NOV-2021 Regime Change
World Of Finance
A REGIME CHANGE IS UNDERWAY [in the markets]
There is no training – classroom or otherwise.. that can prepare for trading the last third of a move, whether it's the end of a bull market or the end of a bear market.
There's typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. Paul Tudor-Jones
Its a Wizard of Oz moment
World Of Finance
We have reached the point when the curtain was lifted in the Wizard of Oz and the Wizard revealed to be ‘’an ordinary conman from Omaha who has been using elaborate magic tricks and props to make himself seem “great and powerful”’’
The Curtain has been lifted and Mr. Powell has now arrived at his Volcker moment
Deutsche Bank's Jim Reid notes that yesterday's surge in the 2-year US Treasury yield was, by one measure, "the biggest "shock" since October 1979 when Volcker announced his intentions on the world @ReutersJamie
The last time inflation was here, February 1982 - the Fed Funds Rate was 15%. @Convertbond
Dartmouth economist and former Fed adviser Andrew Levin says the Fed needs to get rates to a neutral setting within a year or so, and that the means getting the Fed Funds rates up to 4% or 5%
Whoever Controls The Narrative Controls The World
Law & Politics
Donald Rumsfeld "The scenes of free Iraqis celebrating in the streets, riding American tanks, tearing down the statues of Saddam Hussein in the center of Baghdad are breathtaking. Watching them, one cannot help but think of the fall of the Berlin Wall and the collapse of the Iron Curtain."
Propaganda has been a staple of warfare for ages, but the notion of creating events on the battlefield, as opposed to repackaging real ones after the fact, is a modern development.
It expresses a media theory developed by, among others, Walter Lippmann, who after the First World War identified the components of wartime mythmaking as "the casual fact, the creative imagination, the will to believe, and out of these three elements, a counterfeit of reality."
As he put it, "Men respond as powerfully to fictions as they do to realities [and] in many cases they help to create the very fictions to which they respond."
In the 1960s, Daniel J. Boorstin identified a new category of media spectacle that he called "pseudo-events," which were created to be reported on.
However, it was later learned that the scene was closely managed by a US Colonel and PSYOP (Psychological Operations) team who cordoned off the square, allowed a relatively small group of Iraqi émigrés to gather around the statue, and then used armored vehicles and steel cables to pull the statue down for the cheering Iraqi group (Fahmy, 2007; Griffin, 2008)
Paul Virilio in his Book City of Panic wrote
The Pentagon is eager to exploit the audiovisual impact of real-time mass communication (remember Saddam's statue being toppled?) City of Panic by Paul Virilio
Our minds are literally besieged by these Weapons of Mass Communication (as he calls them), creating a "panic-driven tele-reality" and resulting in an odd kind of "emotional synchronisation ... in which terror must be instantaneously felt by all ... on the scale of a global terrorism"
Virilio maintains that the global village has created hyperterrorism as its "integral accident" (just as derailment is the integral accident of a train).
The Pentagon is (remember Saddam's statue being toppled?), but unfortunately so are the terrorists.
The same impulse drives contemporary art, says Virilio, and he often returns to Stockhausen's incendiary remark that 9/11 was "the greatest work of art ever".
"It was the first non-linear war," writes Surkov in a new short story, "Without Sky," published under his pseudonym and set in a dystopian future after the "fifth world war":
You ain’t seen nothing yet.
World Of Finance
In chaos theory, the butterfly effect is the sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state.
"At one point I decided to repeat some of the computations in order to examine what was happening in greater detail. I stopped the computer, typed in a line of numbers that it had printed out a while earlier, and set it running again. I went down the hall for a cup of coffee and returned after about an hour, during which time the computer had simulated about two months of weather. The numbers being printed were nothing like the old ones. I immediately suspected a weak vacuum tube or some other computer trouble, which was not uncommon, but before calling for service I decided to see just where the mistake had occurred, knowing that this could speed up the servicing process. Instead of a sudden break, I found that the new values at first repeated the old ones, but soon afterward differed by one and then several units in the last decimal place, and then began to differ in the next to the last place and then in the place before that. In fact, the differences more or less steadily doubled in size every four days or so, until all resemblance with the original output disappeared somewhere in the second month. This was enough to tell me what had happened: the numbers that I had typed in were not the exact original numbers, but were the rounded-off values that had appeared in the original printout. The initial round-off errors were the culprits; they were steadily amplifying until they dominated the solution." (E. N. Lorenz, The Essence of Chaos, U. Washington Press, Seattle (1993), page 134)
Elsewhere he stated:
One meteorologist remarked that if the theory were correct, one flap of a sea gull's wings would be enough to alter the course of the weather forever. The controversy has not yet been settled, but the most recent evidence seems to favor the sea gulls.
Renaissance Capital measures regimes on a Polity V scale, with higher scores meaning more democracy. As is readily apparent from this chart, the odds of regime change rise noticeably once inflation gets above 20%. @bopinion @johnauthers
Encouragingly, it is often autocratic countries that let inflation get out of control, so the change tends to be toward democracy:
Tunisia, it turns out, was an unusual outlier.
The Renaissance Capital research is fascinating. As I understand it, the bottom lines are that rising inflation does indeed endanger regimes in the developing world, and it’s important to watch for signs of pressure.
They’ve been visible recently in Peru and Sri Lanka.
In the short term, regime change and turbulence ratchets up uncertainty and is bad for growth.
In the medium term, economic strains might just be the catalyst for moving some authoritarian countries toward democracy.
We hear a lot about the dangers to democracy in the developed world, but there are chances of movement in the other direction.
Paul Virilio Speed and Politics
“The revolutionary contingent attains its ideal form not in the place of production, but in the street, where for a moment it stops being a cog in the technical machine and itself becomes a motor (machine of attack), in other words, a producer of speed.’’
From Russia with Love
Russia was going to be a different kind of superpower, one that does not engage in “pressure, intimidation and blackmail” to “exploit” sovereign African governments.
“Our African agenda is positive and future-oriented. We do not ally with someone against someone else, and we strongly oppose any geopolitical games involving Africa.”
“Russia regards Africa as an important and active participant in the emerging polycentric architecture of the world order and an ally in protecting international law against attempts to undermine it,” said Russian deputy foreign minister Mikhail Bogdanov back in November 2018.
‘A certain amount of madness’ The life and legacy of Thomas Sankara @thecontinent_
On 4 August 1983, a 33-year-old army officer seized power in what is now known as Burkina Faso, and embarked on a plan to reinvent his country outside the bounds of foreign domination.
What Captain Thomas Sankara inherited, 23 years after his country’s independence, was a fragile neocolonial state which was overwhelmed by foreign interests and the bitter legacy of French imperialism.
But his revolutionary project was denied the opportunity to reach its potential: just four years later, Sankara was assassinated by his comrades.
Born on 21 December 1949, in Yako, Upper Volta, Sankara’s Roman Catholic parents had wanted him to be a priest. Instead, he entered the military.
In 1970, at the age of 20, Sankara was sent for officer training in Madagascar, where he witnessed a popular uprising of students and workers that successfully toppled Madagascar’s government.
Before returning home in 1972, Sankara attended a parachutist course in France, where he was further exposed to left-wing political ideologies.
In 1974, he earned much public admiration for his exploits in the border war with Mali. Years later, he would describe the war as unnecessary and unjust.
In the early 1980s, Burkina Faso was in the grip of labour union strikes and military coups.
Sankara’s military achievements and charismatic leadership made him an obvious and popular choice for political appointment, but his integrity drove a wedge between him and the leadership of the successive military governments that came to power, leading to his arrest on several occasions.
In January 1983, Sankara was made prime minister of the newly formed Council for the Salvation of the People, led by Jean-Baptiste Ouédraogo.
This position gained him entry to international politics and gave him access to leaders that would shape his thinking, from Cuba’s Fidel Castro and Samora Machel of Mozambique to Maurice Bishop of Grenada.
Sankara’s increasingly vocal anti-imperialist stance and grassroots popularity earned him enemies among the more conservative elements of the ruling elite – including President Ouédraogo.
In May 1983, Sankara was removed as prime minister and arrested once again. Three months later, Blaise Compaoré, Sankara’s close friend and military comrade, led a group that freed Sankara, overthrew the Ouédraogo regime, and formed the National Council of the Revolution. They made Sankara president.
As president, Sankara promoted a “democratic and popular revolution” focused on getting rid of corruption, fighting environmental degradation, empowering women, increasing access to education and healthcare and doing away with imperial domination.
During his brief presidency, Sankara successfully implemented programmes that vastly reduced infant mortality, increased literacy rates and school attendance, and boosted the number of women holding governmental posts.
Ahead of his time, in just his first year in power some 10-million trees were planted in an effort to slow desertification.
A lively orator, through his speeches Sankara outlined the shape of his revolution.
It was grounded in the need for concrete decolonisation — a process that Sankara understood to be long overdue, continuous and, in his own words, would require a “certain amount of madness”.
At the heart of this revolution was the idea that Africans should be responsible for their own empowerment.
On 4 August 1984, the first anniversary of his accession, he renamed the country Burkina Faso – “the land of upright people”
in Moré and Dyula, the two major languages. He also gave it a new flag and, being a jazz guitarist in his spare time, even wrote the new national anthem.
A staunch advocate for unity and joint prosperity of African countries, Sankara is credited with orchestrating policies of self-sufficiency and independence, as well as foreign policies discouraging imperialism and neocolonialism.
He was not without his critics. Despite his administration’s achievements, there was growing dissent in the country, partly because of economic problems, and opposition to some of Sankara’s more progressive social policies from traditional quarters.
Gradually, Sankara and his government lost popular support, and internal politicking grew rife.
On 15 October 1987, Sankara, along with 12 colleagues, was murdered in a coup.
The defence minister, none other than his one-time comrade at arms and trusted friend Compaoré, was installed as head of state.
After Sankara’s death, the United States embassy supported Compaoré, who was considered more open to French and US neoliberal policies during the Ronald Reagan administration.
This helped him remain in power for 27 years, until mass protests forced him from office in 2014.
This week, Compaoré was found guilty of Sankara’s murder. But Compaoré
Superhighway set to link Abidjan to Lagos @thecontinent_
The African Development Bank recently announced that it secured $15.6-billion in funding for a 1,081km highway that will run from Abidjan in Côte d’Ivoire, to Lagos in Nigeria, via Benin, Togo and Ghana.
Expected to reach completion by 2025, the project by Ecowas is one of several ambitious undertakings by regional blocs to connect their member states.
The West African community has six cross-border road projects, covering 1,504km in total.