Russia isn't attacking Ukraine. They (and China) are attacking the US$
The US is already in an economic war with Russia and China. Did we already lose?
I continue to put pieces together post the Putin/Xi meeting from before the Olympics. What I think is happening is that Russia and China have been rapidly accelerating their plans to take down the United States as the world’s leading hegemonic state without firing a single shot. They are engaged in economic warfare with the US, through their control of gold, energy prices, and the global supply chain, and along with their selling of US Treasuries, they are weakening the US$ and attempting to remove its status as the world’s reserve currency. This would force the US to further its retreat from global affairs while being forced to get its own domestic house in order by making it more difficult for the US to print money to pay its bills. This would then allow Russia and China to more freely pursue their own “domestic issues” in the Ukraine/Taiwan/etc. as they see fit. The war has already begun. The Putin/Xi meeting launched the attack. The end of $ as the world’s reserve currency is their goal. Unfortunately, it’s not clear the US actually recognizes yet that it’s under assault, judging by many of its own foolish decisions which only seem to be accelerating us down the path toward Russia/China’s preferred outcome.
The Putin/Xi Bromance is attempting to create a New World Order right before our eyes and the heart of their focus is the elimination of the United State as a hegemonic state. As I mentioned in my post earlier in the week, “Something is Brewing,” I was starting to sniff out something large happening under the hood in markets over the last couple of weeks as Gold, Oil and Bitcoin prices had been rallying aggressively while USTs were selling off and I couldn’t help but think all of this was connected. This week’s pricing action only exacerbated those trends and has confirmed my belief that what is actually going on here is a speculative attack by Russia/China against the US$ to force the US into major strategic decisions that are likely going to force it to further retreat from global affairs and probably lose the $ as the global reserve currency.
The Bretton Woods monetary order which gave way to the post 1971 petrodollar system placing the US$ as the world’s reserve currency was based on the premise that the US military would enforce peace on global trade lanes and that the US government would run massive trade deficits in exchange for creditor nations reinvesting that capital back into USTs. However, the US government has abused its exorbitant privilege, running up debts in such a way during Covid that has created a global inflationary environment which is paying back its creditors in deflated dollars, much to the chagrin of the rest of the world’s exporters. While historically the rest of the world, tired of being paid back in deflated US$, would have little real alternative but to take these dollars because of the “deal” with the US military abroad and the lack of a real alternative to place reserves in, the current environment is different in both regards, creating the first real challenge to the dollar’s reserve status in decades.
The US military is in retreat, a trend that started under Trump but has continued under Biden with the removal of troops from Afghanistan. If the US military is in retreat, can the petrodollar monetary reserve system still be enforced? Why would countries voluntarily settle transactions in US$ if they felt that the value of their goods being sold was continually being debased? Here is where things gets interesting. Our enemies have noticed the US military retreat as well and are actively pushing an agenda to further push the US back. This is being done through the exacerbation of inflation, which is being pushed more aggressively onto the American public. This dynamic is significantly weakening the Biden administration’s ability to govern domestically but also to pursue any foreign policy agenda. There is simply no appetite in the US for its military to engage overseas while inflation is raging at home. There is no real desire for the US to export its own precious energy resources to our allies abroad if that will lead to much higher pricing at the pump and in utility bills. Biden’s polling data is plummeting and UMich survey data out this week showed that over 50% of those surveyed (a multi-year high) said that the government is doing a “poor job” handling the economy to fight inflation and unemployment. Clearly part of the polling data is tied to inflation in America which is hitting 40 year highs with no clear signs yet of slowing down. This week’s CPI print at 7.5% is taking us back to levels last seen nearly 40 years ago. While this inflation is being driven by several factors including our money printing fiscal and monetary policies, key to this inflation trend is the behavior of both Russia and China. Russia is amongst the world’s largest energy exporters and its hawkish political tone toward Ukraine over the last several months has helped create a very tight energy market, particularly in Europe, but also for oil prices globally, which is further pressuring inflationary trends in America. On the other hand, China, as the world’s factory, has been hiding behind the Covid lockdown smokescreen in order to slow down global supply supply chains, hoard critical goods via export restrictions and push global prices for all goods higher. Both Russia and China are actively imposing inflation on the rest of the world, which is having deleterious effects on global growth but in particular, is creating a challenging environment in America which serves their own agenda. A weakened America, suffering from inflation, creates a weak America abroad, with less ability to engage its enemies.
The second part of the dynamic here at play is that increasingly, global commodity transactions are being conducted away from the US$. In particularly, China has been working tirelessly to begin purchasing commodities, particularly oil, in RMB and uses gold as a neutral settlement reserve asset for those countries that wanted. This dynamic has been in play for a few years now but increasingly, as China and Russia have become more tied in together, more and more purchases of energy and other commodities are taking place away from US$ and settling in gold. Last week’s meeting saw the announcement of another sizable natural gas deal that will send more flows toward China and away from Europe and will be transacted not in US$. As this trend continues, the rest of the world’s governments are finding there is an increased ability for them to transact away from the US$ as well and settle in different currencies. And with a weakened US military, this activity is picking up more momentum. And if there is less need to use US$, there is less need to hold USTs in reserves. And that helps raise borrowing costs for the US government. See where this is all going, right?
So, it appears to me that Xi and Putin had a meeting and decided that it’s now time to accelerate their agenda to remove the $ as the world’s currency. They see a weakened American state suffering from massive inflation and retreating militarily abroad and figure now is the time to attack. So over the course of the past couple weeks, they have further engaged in their selling of USTs, of which China is the largest holder. This is starting to weaken the US$ and is raising borrowing costs for the US government. Both of them continue to buy gold which will be part of the shift toward a multi-lateral currency regime of the future and both are already significant gold holders so will further benefit from gold’s sizable revaluation. Gold has traded great over the last few weeks despite a massive move higher in real rates, something that should have hit the gold price but hasn’t, indicative that there is a large trend in place.
These actions have helped kick start a run on the US$ made even worse by the Fed’s decision to slow play its response to inflation. A central bank that cannot control its inflation sees its currency weaker. That’s how an Emerging Market would trade. The more the US$ continues to lose its share of global transactions and thus its hegemony status, especially in the pricing of commodities (particularly oil), the quicker this change will happen. Historically, there was not an off ramp for other countries to transact in while the US military was protecting the $. But that is no longer the case, as gold can act as global settlement asset for countries (and Bitcoin can act as currency alternative for citizens who don’t want their savings debased in a depleting US$).
The Fed and the Biden administration are running out of time. Our geopolitical actions, by antagonizing the world’s largest energy exporter (Russia) and the world’s factory (China), are making our domestic inflation situation worse, which is threatening the strength of the administration and its ability to use the military abroad the protect the $ hegemony. In the meantime, more global commodity transactions are being settled away from the US$, which means less need to hold US$ and USTs as reserves, which then leads to a selling of USTs and drives up interest rates in the US. Since the US is acting like an emerging market by not getting its inflation under control and it no longer has hegemonic access to an exclusive money printing press, it is seeing both its currency and its bonds weaken, which is exactly the EM playbook as capital flight continues (via equity market and bond selling) until they raise interest rates enough to stem the tide. However, the process of raising interest rates in the US is likely going to lead to a domestic recession and possible US debt crisis as tax receipts growth come to a screeching halt which interest costs for the government rise.
The Fed, who normally is in the business of buying time, suppressing volatility and attempting to elongate the business cycle to achieve maximum employment with low inflation, needs to now make a choice. They can either engineer a slowdown by tightening to prevent runaway inflation in order to save the US$ but likely at the expense of a massive market correction and recession which threatens our debt or they can let the US$ go, continue to inflate our debts away but run the risk that inflation spirals out of control as the $ weakens, all while losing our status and position as the world’s superpower. The clock is ticking. It’s time to choose. And Putin and Xi are sitting back, eating their proverbial popcorn, watching it all unfold as they have kicked off the possible end game for the US$ and the US hegemonic status without ever having to fire a single shot.
As we are reminded by Lenin: “There are decades where nothing happens; and there are weeks where decades happen.” Between Fed minutes this week, OPEX on Friday, continued strength in energy prices which exacerbates inflation fears, the eventual Fed decision in mid-March and the end of the Olympics which figures to bring back the drumbeats of war both in Russia/Ukraine but also with China/Taiwan, this is all coming to a head right now. We are positioned long gold, long bitcoin, long energy and short equities (largely through index puts). Big things are happening. Tread and trade carefully.
*Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do you own due diligence.