Category Archives: Economics

Russia’s intentions are clarifying, by Alasdair Macleod

The Russians have a not-so-secret weapon that would devastate the U.S.: back the ruble with gold. From Alasdair Macleod at goldmoney.com:

We have confirmation from the highest sources that Russia and the Shanghai Cooperation Organisation (SCO) are considering using gold for pan-Asian trade settlements, fully replacing dollars and euros.

In an article written for Vedomosti, a Moscow-based Russian newspaper published on 27 December, Sergey Glazyev, a prominent economic adviser to Vladimir Putin who is heading up the Eurasian Economic Union committee charged with devising a replacement for dollars in trade settlements sent a very clear signal to that effect. It appears he will drop earlier plans to design a new commodity-linked trade currency because it has been superseded.

Furthermore, increasing numbers of nations have joined or have applied to join the SCO as dialog members, including Saudi Arabia and other important Gulf Cooperation Organisation members. The economic benefits of discounted energy, China’s investment capital, and sound money are the ingredients for a new, Asia-wide industrial revolution, while the economies of the western alliance sink under rising prices, rising interest rates, collapsing financial markets, and collapsing currencies.

While it will mark the end of the road for the western alliance and its fiat currencies, Putin must be careful not to take the blame. Now that the alliance is racking up tanks and other equipment for the Ukrainians, they are actively promoting a new battle, with NATO getting almost directly involved. It is that action which will drive up commodity prices, undermine western financial markets, undermine government finances, and ultimately collapse their currencies. 

Putin is likely to use NATO’s impetuous action in defence of Ukraine as cover for securing Russia’s future as an Asian superstate, which will be the west’s undoing.

Introduction

We forget, perhaps, that from 1 March 1950 the Soviet rouble was on a gold standard at 4 roubles 45 kopecks for 1 gram of pure gold until 1961, when Khrushchev devalued it and refixed it to the dollar. Stalin had been a signatory to the Bretton Woods agreement but refused to join it and make the rouble subservient to the dollar as its intermediary for a gold standard.

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The Most Egregious Mistake, by Alastair Crooke

Without the reserve currency, U.S. power will be greatly diminished and the government will have to come to terms with a multipolar world. From Alastair Crooke at strategic-culture.org:

The U.S. government is hostage to its financial hegemony in a way that is rarely fully understood.

It is the miscalculation of this era – one that may begin the collapse of dollar primacy, and therefore, global compliance with U.S. political demands, too. But its most grievous content is that it corners the U.S. into promoting dangerous Ukrainian escalation against Russia directly (i.e. Crimea).

Washington dares not – indeed cannot – yield on dollar primacy, the ultimate signifier for ‘American decline’. And so the U.S. government is hostage to its financial hegemony in a way that is rarely fully understood.

The Biden Team cannot withdraw its fantastical narrative of Russia’s imminent humiliation; they have bet the House on it. Yet it has become an existential issue for the U.S. precisely because of this egregious initial miscalculation that has been subsequently levered-up into a preposterous narrative of a floundering, at any moment ‘collapsing’ Russia.

What then is this ‘Great Surprise’ – the almost completely unforeseen event of recent geo-politics that has so shaken U.S. expectations, and which takes the world to the precipice?

It is, in a word, Resilience. The Resilience displayed by the Russian economy after the West had committed the entire weight of its financial resources to crushing Russia. The West bore down on Russia in every conceivable way – via financial, cultural and psychological war – and with real military war as the follow-through.

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Don’t Call It Capitalism: The Fed’s $8 Trillion Hoard of Financial Assets, by Ryan McMaken

There’s not an important area of the economy into which the government does not meddle, which means those areas are mixed economy, not capitalist. Nowhere is this more evident than in banking. From Ryan McMaken at mises.org:

It’s a sure bet that as the economy worsens, unemployment surges, foreclosures rise, defaults climb, and economic misery ensues, we’ll be told it’s all capitalism’s fault. The question one must ask, however, is, “What capitalism?”

The claim that “too much” capitalism drives every economic calamity is standard among anticapitalists on both the left and the right. They have many bullet points claiming government programs and government spending are everywhere retreating while free-market capitalism is experiencing a resurgence. This can be easily shown to be empirically false. Evidence can be found in everything from the continual flood of government regulations to rising per capita taxation and spending to the growing army of government employees. That’s all in the United States, mind you, the supposed headquarters of “free-market capitalism.” We might also point to how the US welfare state, including the immense amounts of government spending on healthcare and pensions, is on a par with European welfare states in terms of size. The supposed lack of social benefits programs in the US has long been a myth. The trend in spending, taxation, and regulation is unambiguously upward.

In recent years, though, one additional indictor of just how little capitalism is actually going on has surfaced: central banks around the world are buying up huge amounts of financial assets in order to subsidize certain industries, inflate prices, and generally manipulate the economy. This is certainly true of the American central bank, the Federal Reserve.

How the Federal Reserve Came to Dominate Financial Asset Markets

While the Fed has long bought government debt in its so-called open-market operations to manipulate the interest rate, wholesale buying of financial assets began in 2008. This included both US government Treasurys and—in a new development—private-sector mortgage-backed securities (MBSs). This was done to prop up banks and other firms that had bet on the lie that “home prices always go up.” The value of mortgage-backed securities was falling fast, so beginning in 2008, the Fed bought up MBSs to the tune of $1.7 trillion. That was all before covid.

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Contrarian Thoughts on the Petro-Yuan and Gold-Backed Currencies, by Charles Hugh Smith

Charles Hugh Smith has a pretty good handle on how currencies work. From Smith at oftwominds.com:

Rather than cheer the concept of a new currency, we’re better served to look at the velocity of that currency and the cycles of investing that currency in assets denominated in that currency for a low-risk return.

Longtime readers know not to expect me to rubber-stamp anything, be it the status quo or proposed alternatives. Our interests are best served by screening everything through the mesh of independent analysis, a.k.a. contrarianism. Which brings us to the two sources of alt-media excitement in the currency space, the petro-yuan and another wave of proposed gold-backed currencies.

I’m all for competing currencies. The more transparent and open the market for currencies, the better. In my view, everyone should be able to buy and trade whatever currencies they feel best suits their goals and purposes.

In all the excitement over de-dollarization, some basics tend to get overlooked.

1. The yuan remains pegged to the US dollar, so it remains a proxy for the USD. It will only become a true reserve currency when China lets the yuan float freely on the global FX market and yuan-denominated bonds also float freely on global bond markets. In other words, a currency can only be a reserve currency rather than a proxy if the price and risk of the currency is discovered by global markets, not centralized monetary/state authorities.

2. Most commentators stop on first base of the oil-currency cycle: China buys oil from exporting nations by exchanging yuan for oil. So far so good. But what can the oil exporters do with the yuan? That’s the tricky part: the petro-yuan has to work not just for China but for the oil exporters who will be accumulating billions of yuan.

The oil exporters can hold some yuan as reserves, but the global market for yuan is not very large. What assets can they buy with yuan? Again, the global market of assets denominated in yuan is limited. The oil exporters can buy assets in China, of course, but with China’s property bubble finally popping, deglobalization sapping its export sector and Xi’s widespread disruption of private capital, the bloom is off the China Story in fundamental ways.

Why would oil exporters invest billions of yuan while Chinese wealth is leaving China?

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Say’s law and macroeconomic ignorance, by Alasdair Macleod

Marx and Keynes both ignored French economist Jean-Baptiste Say, and their economic theories are both fatally flawed because of it. From Alasdair Macleod at goldmoney.com:

Probably the greatest error in modern economics was the abandonment of Say’s law, otherwise known as the law of the markets. In a nutshell, it demonstrated that through the division of labour, production is firmly linked to consumption, and the former is tied to the latter through the medium of money and credit.

While there are variations in production outputs of individual goods, in free markets there can never be a general glut. It was this that Keynes had to disprove in order to create a role for the state, intervening to make up for the supposed deficiencies of free markets. While reasoned analysis shows that Keynes failed to disprove Say’s law, he managed to convince the mainstream establishment that he had actually succeeded.

This article traces the history of Say’s law, from Jean-Baptiste Say’s original work on the subject to the present day. It shows how Keynes bent the truth about free markets, that an understanding of Say’s law explains why state intervention fails, and why prices will continue to rise in the imminent economic recession.

Introduction

Back in the 1930s, forward looking economists trying to justify an economic role for the state had a hurdle in classical economics to mount: the self-evident truth in what was described as Say’s law. Otherwise known as the law of the markets, Say’s law pointed out that we turn up at the factory or office to do a day’s work, so that we can afford all the things other people produce that make life tolerable, and even pleasurable.

It refers to the writings of Jean-Baptist Say, a French economist who in his A Treatise of Political Economy, originally published in 1803, described the relationship between production, consumption, and the role of the division of labour in how humans organise themselves economically-speaking. It was a remarkable achievement, defining the science of economics and the roles of money and credit in great detail, when the science was yet young.

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‘Fragmented world’ sleepwalks into World War III, by Pepe Escobar

When political figures talk about “cooperation,” it’s code for, “Do as I say or else.” From Pepe Escobar at presstv.ir:

US Rep. Ilhan Omar (D-MN) (L) talks with Speaker of the House Nancy Pelosi (D-CA) during a rally with fellow Democrats before voting on H.R. 1, or the People Act, on the East Steps of the US Capitol on March 08, 2019 in Washington, DC. (AFP photo)

The self-appointed Davos “elites” are afraid. So afraid. At this week’s World Economic Forum meetings, mastermind Klaus Schwab – displaying his trademark Bond villain act – carped over and over again about a categorical imperative: we need “Cooperation in a Fragmented World”.

While his diagnosis of “the most critical fragmentation” the world is now mired in is predictably somber, Herr Schwab maintains that “the spirit of Davos is positive” and in the end we may all live happily in a “green sustainable economy.”

What Davos has been good at this week is showering public opinion with new mantras. There’s “The New System” which, considering the abject failure of the much ballyhooed Great Reset, now looks like a matter of hastily updating the current – rattled – operating system.

Davos needs new hardware, new programming skills, even a new virus. Yet for the moment all that’s available is a “polycrisis”: or, in Davos speak, a “cluster of related global risks with compounding effects.”

In plain English: a perfect storm.

Insufferable bores from that Divide and Rule island in northern Europe have just found out that “geopolitics”, alas, never really entered the tawdry “end of history” tunnel: much to their amazement it’s now centered – again – across the Heartland, as it’s been for most of recorded history.

They complain about “threatening” geopolitics, which is code for Russia-China, with Iran attached.

But the icing on the Alpine cake is arrogance/stupidity actually giving away the game: the City of London and its vassals are  livid because the “world Davos made” is fast collapsing.

Davos did not “make” any world apart from its own simulacrum.

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Technocratic Dystopia Is Impossible, by Robert Blumen

It won’t work, for billions of reasons. From Robert Blumen at brownstone.org:

dystopia

In the coming technocratic dystopia, life will be grim for most of us. For those who survive the preliminary depopulation, a technological control grid run by AI and robots will keep tabs on our every movement. You notice that your pantry cube is running a bit low on freeze-dried bug burgers, fake meat, and cockroach milk.

You time your break to fall outside of your three daily hours of wind-powered internet. Forbidden by the World Economic Forum from owning your own car, you flag down a quick ride share from your leased living quarters in a stacked shipping container on the near side of your 15-minute city. After dropping off the seven other people in your ride share, you arrive at the fake meat distribution point, where you wait in a long queue, hoping to trade in a few of your remaining carbon ration credits for more provisions.

You worry that your transaction might be rejected by the central bank digital currency network. After all, there was that one moment where your wrinkled brow showed slight unhappiness. You wonder if the facial recognition AI picked it up during one of your masked Zoom calls.

But for the elites, things will be better than ever. Private jets, cars, ultra wagyu beef tenderloin (for their dogs), and large estates. Life-extension drugs will make them nearly immortal. They will vacation at 5-star hotels, a short limo trip from the Louvre, but without the crowds.

The WEF – an infinite source of technocratic malapropisms – says that you will “own nothing” and be happy (the happiness perhaps will be a drug-induced state as Yuval Hariri suggests). Many independent researchers who have looked into the WEF’s plans have reported similar findings. For example – see James Corbett, Patrick Wood, Whitney Webb 2, Tessa Lena 2, Jay Dyer, and Catherine Austin Fitts. 

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Japan Is Perhaps the Most Important Risk in the World, an Interview with Jim Grant and Christoph Gisiger

The Japanese bond market is a financial time bomb whose fuse has been lit. From Christoph Gisiger and Jim Grant at themarket.ch:

Speculation is mounting that the Bank of Japan is losing control of the bond market. Jim Grant, editor of «Grant’s Interest Rate Observer», believes this could trigger a shock to the global financial system. He also explains why he expects further surges in inflation and why gold should be part of your portfolio.

The news caught markets off guard: On December 20th, the Bank of Japan surprisingly extended the target range for the yield on ten-year government bonds to plus/minus 0.5%. A move that not a single economist had expected.

This week, the Bank of Japan could announce a major policy shift amid rising government bond yields and a strengthening yen. Although barely a month has passed since the BoJ’s last meeting, the bond market is already testing the new upper limit of the yield curve control regime.

«To us, Japanese interest rate policy resembles the Berlin Wall of the late Cold War era, a stale anachronism that must sooner or later fall,» says Jim Grant. For the editor of the iconic investment bulletin «Grants’ Interest Rate Observer,» recent developments in Japan pose an underestimated risk to global financial markets. Not least because virtually no one is talking about it.

In an in-depth interview with The Market NZZ, which has been slightly edited for clarity, Mr. Grant explains what it means for financial markets if the Bank of Japan is forced to scrap its yield curve control policy. But first, he says why he doesn’t believe inflation will end soon, why bonds may be at the start of a long bear market, and why he believes gold is the best choice as a store of value.

«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.

«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.

What do you observe when you look at the financial world today?

Well, it’s always the same, and – here’s the catch – it’s always a little different. The trick is to identify the unique or unusual feature of a familiar cycle. In this regard, it helps to know a little bit of financial history, and to just that extent it helps to be a little old. But what is not helpful is to mistake the past for a certain roadmap to the future.

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Explaining Multipolarity, Decline of US Hegemony, by Michael Hudson

The U.S. is going to be less important, the rest of the world more important. From an interview between Radhika Desai and Michael Hudson at unz.com:

Transcript

RADHIKA DESAI: Hi everyone, and welcome to this Geopolitical Economy Hour. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: Every fortnight we are going to meet for an hour to discuss major development in the fast-changing geopolitical economy of our 21st-century world.

We’ll discuss international developments. We’ll discuss their roots in individual countries and regions. We will try to uncover the reality beneath the usually distorting representation of these developments in the dominant Western media.

We plan to discuss many subjects: inflation, oil prices, de-dollarization, the outcome of the war over Ukraine which is going to determine so many things, the threats the U.S. is making against China about Taiwan, China’s increasingly prominent role in the world, how China’s Belt and Road Initiative is going to reshape it, how Western alliances and the Western-dominated world that was built over the past couple of centuries is so rapidly fracturing.

We’ll discuss financialization, the West’s productive decline. Many important things. Michael, am I leaving any important things out?

MICHAEL HUDSON: Well we have been talking about this for many decades. Already in 1978 I wrote a book, Global Fracture, about how the world is dividing into two parts. But that time, other countries were trying to break free so they could follow their own developments.

And today it’s the United States that is isolating other countries – not only China, Russia, Iran, Venezuela, but now the Global South – so the United States has ended up isolating itself from the rest.

What we’re going to talk about is how this is not only a geographic split, but a split of economic systems and economic philosophies. We’re going to talk about what the characteristics and the policies [are] that are shaping this new global fracture.

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Davos Men, by Bill Bonner and Joel Bowman

It should be Davos poor-excuse-for-men. From Bill Bonner and Joel Bowman at bonnerprivateresearch.com:

Your moral betters prepare for their annual, world improving confabulation

Bill Bonner, reckoning today from Paris, France…

Paris is gray. But not grim. People are out and about. Face masks have almost disappeared.

But everybody grumbles…and in France, as in America, elite deciders are making everyday life harder. One thing: they’ve banned the use of outdoor heaters, which were ubiquitous in sidewalk cafes. You used to be able to sit outside near the gas heater and enjoy the street life. No more…

Meanwhile, we are working our way through a list of things that can go wrong. The World Economic Forum (WEF) calls it a “polycrisis.” We prefer the half-word “cluster” as it is more descriptive of the disaster to come.

Inflation, for example. The WEF’s Global Risks survey signals higher living costs as one of its near-term flash points. And here’s the latest. CNBC reports:

Inflation just dropped to 6.5%—but the ‘most important’ factor in predicting if it will keep falling is up 0.4%

In Thursday’s CPI report, “services less rent of shelter” showed a 0.4% increase in December. …since wages are “the largest cost in delivering these services,” [Powell] said, that might indicate out-of-control wage growth…

There is “sticky” inflation…and inflation of the Teflon variety. The non-sticky inflation includes things that go up and down readily – such as oil and commodities. The ‘sticky’ inflation comes from things such as wages and shelter, that don’t get marked-to-market on a daily basis.

Yesterday’s numbers tell us that the sticky part may become a tar baby – hard to get rid of. In the ‘services including rents’ category, for example, prices are up more than 7%. Much of that is wages. And nobody takes a wage cut to fight inflation.

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