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Geopolitical Update : Watch UK-Japan cooperation – What the fall of Johnson and death of Abe could unleash

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By Christian Takushi, Macro Economist, 15 July 2022 (delayed truncated public release on 19 July 2022).

Dear reader

Before I dive into the main topic of this research report, I want to address a very present issue: Inflation in the USA has just hit a new 40 year record as consumer prices surprised on the upside.

The USA may be in a recession right now, but many experts underestimate that the USA and Western Europe are still flooded with cash and that our economies are postponing a day of reckoning for many years now. A major recession is over due, but all stakeholders are also willing to close an eye for whatever could help postpone the reality check.

Many economists also seem unable to analyze beneath the headline numbers – the USA seems capable of producing a large number of jobs, but if you look under the surface you’d see millions of struggling Americans needing to work a second or even third job on the side to make ends meet. Thus, is not a typical strong labor market nor a typical recession: while economic stress builds up, economic activity is not declining yet as fast as inflation or weak consumer sentiment would normally suggest. While oil and commodities are been “brought” down by all means, persistent core inflation and labor markets might keep the FED hawkish at the margin and probably for longer than investors would wish. If inflation decelerates from 10% to 5% in 2023, financial markets and politicians will celebrate it, but not consumers (voters). The latter will have to pay prices that are yet 5% higher than in 2022. The massive gap between Wall Street and Main Street could get wider yet. I will not go further into this topic today, because inflation is in line with our outlook and we haven’t changed our macroeconomic-monetary assessment.

Let’s be discerning with facts presented to us – they may be real, but still misleading. Why? Sadly, facts are being very selectively chosen these days by activist journalists and activist experts, producing a picture with a systematic bias. The search for the truth often requires a balanced view of the big picture and “all” relevant facts. In today’s industrialized nations and China powerful inflationary and structural deflationary processes are pervading through structurally deflation-prone economies – simultaneously. I will again address inflation, deflation and the economy from a strategic perspective.

As you know we only release reports that have strategic significance and when our analysis deviates from consensus significantly. We have committed not to be part of the information warfare and the “repetitive news overload” out there that are plaguing the world.

Rethinking alliances ..

I want to release today an analysis that kept us busy over the past eight days. It concerns a possible course correction at two important powers (Britain and Japan) and a specific realm of the global geopolitical-political process that is being greatly overlooked. The way the old troubled alliances (NATO) are giving rise to bilateral and trilateral alliances.

Since the USA turned inwardly and de facto downgraded some of its allies, bilateral and trilateral alliances have begun to experience a powerful revival, especially those that have worked well in the past. With oversized alliances (i.e. NATO) suffering from serious asymmetries, bilateral and trilateral alliances are de facto delivering the much needed certainty and transparency. We have entered a period when everybody wants to be protected, but few nations can provide protection, fewer nations yet can fully trust their allies – as many nations are compromised and simply unable or unwilling to go to war to defend or avenge them. Against this backdrop, bilateral and trilateral partnerships are superior, because they tend to be specific, symmetric, complementary and with high levels of reciprocity. No great military power enters a serious alliance with a nation that has no proper army – to bet your life on such an alliance is wishful thinking. Many alliances are thus diplomatic “window dressing”.

Watch the UK and Japan

Two events last week have shaken the global geopolitical-economic landscape more than the inflation reports. On July 7th UK Prime Minister Boris Johnson gave in to mounting pressure and announced he would be stepping down in due course. On July 8th the former Prime Minister of Japan, Shinzo Abe, was assassinated.

These two events could reset the policy course in both nations. Within the Group of G7 nations the United Kingdom and Japan are the only two industrialized powers (apart from the USA) that have taken their military defense seriously over the past two decades. Although several UK governments have shrunk the UK military, Britain kept its military forces well trained and had the right strategic foresight to see through the costly but necessary renewal of its nuclear submarine fleet to maintain the Continuous At Sea Deterrent (CASD). The 40th anniversary of the Falklands War showed how grateful and proud many Britons still are about their service men and women. You would not see this kind of support for the military on the continent.

Japan has also been renewing and growing its Self Defense Forces over the past two decades. No other G7 nation can match the political continuity of Japan. The conservative LDP has been ruling Japan for most of its post WW2 history, but with Mr. Shinzo Abe Japan begun to seriously strengthen its defense forces. Abe san bet on both trade and military deterrent: he allowed Japanese firms to continue building production facilities in China, but at the same time he begun to prepare for the unavoidable military clash that lies ahead. By contrast EU powers dismantled their armed forces believing the naïve concept that more trade peace will guarantee peace, something I have fought all these years. Sadly, all decision makers I tried to warn in this regard told me their hands were tied since the consensus among economists, business executives, investors and politicians was too overwhelming and absolute in favour of that view.

Source: Japan’s Self Defense Forces – Japanese attack submarine 

 

Britain’s potential

With the political trends in Washington, Beijing and Moscow – characterized by either isolation or assertive expansion – many nations around the world are welcoming the comeback of a sovereign Britain on the global geopolitical-military scene.

Britain and Japan have rediscovered each other recently – but the relationship is far away from its true potential. Simply put, both Prime Ministers had other priorities. But the recent events on both island nations could allow for adjustments and open the door to accelerate the buildup of a mutually beneficial geopolitical-military alliance.

For decades one of Britain’s most powerful and unique assets, its formidable military, was constrained one way or another by the EU. The UK armed forces served increasingly as a junior partner of the US military – But post Brexit the UK is poised to increase its global geopolitical influence – this is due to the confluence of domestic and international forces.

I’d argue that Britain has the potential to leverage its unique geopolitical-military influence in order to improve its economic performance. So far .. to host one of the most formidable armed forces, financial centres and education systems in the world has not produced the economic prosperity that could have been possible. Trains in Britain are as unreliable and expensive as in many developing nations. I have always believed that London erred when it completely privatized essential public services. Capitalistic countries like Switzerland balance control and quality of essential public services with good results: The Swiss Railway Company is run pretty much like a private company, but it is owned by the federal government. Excellent and affordable public transport ensures prosperity reaches all regions. The main telephone company is even listed on the stock exchange, but the state has the controlling stake. Ownership helps provide high quality services at the lowest possible prices.

With the current shake-up of the world security order, the likely isolationist shift in the USA this November and the rise of so many emerging economies with vibrant consumer demand, healthy fiscal balances and sustainable debt levels .. a unique opportunity is arising that Britain could seize. What could Britain offer them? Very simply .. the most wanted asset in the world today: Military Security. Ideally with an effective nuclear shield. The UK could offer them military security in conjunction with the geopolitical-diplomatic-financial cloud of a member of the G7, of NATO and a veto-member of the UN Security Council. While UK voters are upset about the scandals of their current Prime Minister, the world around sees it as a minor crisis. In their eyes, Britain would be the only Western power capable to credibly project order & security apart from the USA. France of course has an unchallenged role in West-Central Africa.

Currently many administrations outside the West see the USA as a dysfunctional superpower that is drifting towards an abyss of unpleasant scenarios of potentially systemic proportions. Among the possible scenarios: unlikely, but no longer far fetched .. a divided chain of command in Washington could invite a surprise attack, a First Strike. A simple 4 Kiloton electromagnetic device could decimate 2/3 of the US economy.

Two old allies could benefit from a stronger cooperation

In my analysis I see that Japan fits almost perfectly in Britain’s post-Brexit geopolitical-economic-military strategy of reengaging with the wider world and seizing opportunities outside a stagnant EU.

A stronger Britain-Japan security cooperation or alliance would entail little immediate financial costs, but could significantly boost security in the Indo-Pacific and at the margin also global peace. With Japan as an ally, Britain could leverage on existing strengths and increase its geopolitical footprint in the Pacific. A vibrant London-Tokyo relationship could complement AUKUS and NATO while dynamizing the US-Japan relationship as well.

With the straining of US-Japan relations under the Trump and Biden administrations, Washington is currently benefitting from a closer Tokyo-London relationship. It is possible, because Britain doesn’t pose a threat to America’s superpower status. In fact Washington is benefitting from a more self-confident Britain, because it is helping stabilize some relationships that had gone sour for Washington.

Britain and Japan face similar headwinds: An assertive Russia-China alliance, high levels of domestic debt, fiscal constraints and distrustful immediate neighbours. Most importantly they worked well together 120 years ago to contain Russia. Today a strong UK-Japan alliance could help contain both Russia and China.

A steady ally: Compared to the political drama of key Western nations over the past 15 years, Japan has had a remarkable political continuity and stability. Its population is highly homogenous and its large cities are among the safest in the world. In a nutshell, Japan is likely to be a reliable stable ally for the foreseeable future. Japan did also a better job than Germany in keeping its superb military heavy industries alive even when they were not profitable. Both island nations, UK and Japan, are poor in key resources and have therefore also a shared interest in keeping global maritime routes safe.

Hedging against an increasingly unpredictable Washington, Japan needs Britain, because Japan has no credible nuclear deterrent of her own – Britain possesses arguably probably the most modern nuclear submarine deterrent on earth. It is practically “invisible”, credible and feared. Britain is widely recognized as a nation of great military tradition that has seldom shied away from military conflict – some thought leaders in former colonies even say half-jokingly “Britain is always looking for a fight to keep its fighting men in shape”. Fact is that probably no nation has been involved in so many wars as Britain. Given the converging trends of our time, Britain is the most sought after military ally out there in the world. Simply put, many countries bluff with war, Britain goes to war. That makes UK deterrence remarkably effective and credible.

Wanted: A credible nuclear submarine deterrent

Several countries have land-based and air-capable nuclear weapons, but these are easily tracked and offer a limited capacity to retaliate in case of a surprise attack. In the period we have entered, nations with a very credible & modern submarine nuclear deterrent have a decisive advantage and could have the upper hand: That is what sets the USA, Britain and Russia apart from all other nuclear powers. Stealth nuclear attack submarines can travel undetected for long periods of time and strike with nuclear ballistic missiles. They are ideal first and second strike capabilities.

China may have the submarines, but they have a somewhat constrained access to the open Pacific Ocean – They have to transit through the waters of Okinawa and Japan has prepared to effectively “block” those submarine routes. That is the military reason why China wants full control of the Taiwan Strait. Japan’s submarines are an ideal addition to Britain’s: The Japanese subs can keep Chinese subs in check in the South China Sea. Japanese subs are superbly reliable, compact and versatile enough to operate in the shallow narrow water ways of the South China Sea.

Release of Structure of rising US-led Global Military Alliance 

The global military landscape is in a massive transition away from NATO. The shape and structure of the new US-led Global Military Alliance is something I am monitoring. Today I am showing for the first time the summary of the current structure of the new alliance. The new US-led Global Military Alliance is much more cohesive and flexible than NATO – it is concentric and high levels of symmetry at every level. As you can see The USA, UK and Australia are at the core. With the exception of France, Poland and Romania all other EU nations are on the Defense Ring no 7.  This reflects their low commitment levels, limited capability to defend the USA-UK-AUS and the fact that they are compromised allies

The following chart summarizes the position of all US allies and the level of US-commitment (i.e. ambiguity) to their defence.

My independent research points to the rise of an additional level of US-protection to accommodate potential or quasi enemies with complex multiple alliances involving the USA, UK, but also Russia and ..

TEXT TRUNCATED HERE 

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Flawed alliances are dangerous and invite aggression. Let’s hope that future European leaders will be wiser than their predecessors.

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. Switzerland – 15 July 2022  (delayed truncated public release on 19 July 2022).

Geopolitical and economic conditions need close monitoring, because conditions can change quickly. 

No part of this analysis should be taken or construed as an investment recommendation. 

Remembering Midway: only four of these bomber squadron made it back. The first three major US attack waves were obliterated. They were poorly equipped, but their courage used up the Japanese fighter planes .. which proved vital when by almost divine appointment the final squadrons converged simultaneously over the Japanese fleet just as it was refueling. Like in the Battle of Britain, America and the free world owes much to a few brave pilots .. that sacrificed themselves in those first three waves and those that proved their skills on the SBD’s.

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