Posted on 04/09/2022 3:55:04 PM PDT by delta7
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.
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.
Russia hast vast resources in every category, ….and Vlad says “ Checkmate”.
But being King of the Hill was certainly FUN, while it lasted.
Now it’s time to pay up...
Good article.
I have one question, why is gold valuable?
Other than the obvious industrial uses what
tangible value does it have?
I’d bet that if you were starving,
a humble flock of chickens would mean
more than all the gold in the world.
Just asking.
Good question, but realize many sovereign nation Central Banks are buying gold in unprecedented amounts, namely China and Russia. Why?Paper currencies are backed only by promises to pay ( USD) and have huge debt.
China will do as Russia has done, backed their paper with not only gold, but commodities. The day Vlad linked gold to oil and the Ruble, the Ruble increased overnight. Read what finance ministers across the globe recently stated….1) the USD was weaponized against its enemies, they want no part of it, wondering when they get sanctioned. 2) the USD is backed by nothing but a promise to pay, Russia has oil, commodities, grain, and little debt.
Vlad and Xi says : Checkmate. 60 percent of the world has had enough of the USD hegemony, and a western banking system mired in debt.
Bump for later
According to preliminary data, in the first half of 2021, the state debt of the Russian Federation increased by 1,483,105.4 million rubles, or 7.8%, and as of July 1, 2021 amounted to 20,423,507.6 million rubles (17, 7% of the projected GDP), ”the report says.
Keep in mind the figure is in Rubles. US debt is unsustainable at $30 trillion USD. Our debt is over 100 percent GDP.
When I worked in Moscow I had many conversations with Russian nationals. What stuck in my mind: an American finances everything, boat, home, credit cards, cars….a Russian saves his money and buys cash, ownership.
Who is better off? The American who has a 30 year house mortgage, two car payments, huge CC payments or a Russian who owns a small flat, a car, and a dacha- all paid for?
“Who is better off? “
Gee lets figure that out by how people vote with their feet.
How many Russians move to the EU, UK, and the US vs the other way around. My neighbor across the street moved here two years ago from Russia. I call him the mini oligarch because he has some serious money. I know others who moved from Russia to the US. I know of no one who has moved from the US to Russia.
“Good question, but realize many sovereign nation Central Banks are buying gold in unprecedented amounts, namely China and Russia. Why?Paper currencies are backed only by promises to pay ( USD) and have huge debt.”
BLAH, BLAH, BLAH. All the gold shills said all of that back in 2009 to 2011. How much gold did Russia have on hand when the war started? ONLY 132 billion, a piss in the ocean. 10 years of having gold bug sites yap about gold back currencies to dethrone the dollar and it was all complete garbage, fiction.
Seems I hit a nerve. Get back with us in a year or so, when Biden’s sanctions have been fully realized.
Nice dodge and evasion to avoid explaining why your kook sites were dead wrong the last 12 years.
Nice dodge and evasion to avoid explaining why your kook sites were dead wrong the last 12 years
———-
Fact: Many goldbugs are quite happy buying Gold Eagles in 2001 for $275 an ounce, today about $2000 an ounce ( if you can find sellers). If you don’t hold it, you don’t own it, think paper.
Gold in private ownership is USD insurance, much like death insurance, car insurance, house insurance. Why not have some US currency insurance?
Get back with us in a year or so.
Fiat (world wide) is being taken down. China is next up (Ukraine fades, and Taiwan takes over the news feeds).
After the dust settles, NESARA/GESARA takes over.
NCSWIC. Nothing!
Don’t bob and weave and evade again. They were dead wrong about Russia and China and gold backed currencies.
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