Geopolitical Update : Geopolitical Update: pressures are building at several fronts (Germany, Gold, Israel ..)
By Christian Takushi, Macro Economist – 19 Jul 2022 – Switzerland (delayed & truncated on 15 Aug 2022).
During this quiet part of the summer, not many people are expecting an update from me at this moment. But sometimes the pressures brewing under the surface make more lasting impact than the public announcements of our politicians. What you can read here may lead to more change this 2nd half than all the recent official talk.
As many world leaders in the Northern hemisphere are currently taking a summer break, there is a lack of major policy moves and announcements. Interestingly, it is during this quiet summer period that I am monitoring several areas where pressure is building up under the surface.
Going around the world – A geopolitical roundup
- The USA and the EU are under growing pressure as they deal with the aftermath of their response to the invasion of Ukraine.
Neither Washington nor Brussels envisioned to be in such a vulnerable position when they decided to launch a total economic war on Russia to punish it for its invasion. The sanctions regime reached in March this year is indeed the toughest set of sanctions imposed since WW2. The EU and the USA weaponised their currencies and banking system. They also seized Russia’s reserves. While Washington expected Russia to retaliate in kind and to weaponise its gas, the EU Commission was very confident it could either force Russia to stick to the energy contracts or set price caps on energy prices – just as it has controlled asset prices and bond yields in the EURO ZONE since the Great Financial Crisis. Nevertheless, there is a sense of desperation in Berlin and growing tensions between the EU Commission and Berlin. German industry leaders are warning that an array of industries could implode in the coming months and that consumers have so far being spared the brunt of the price increases and shortages.
A reason for concern: My interaction with decision makers within core NATO states has over the past four months continually pointed to a high level of confidence and emotions coupled with a lack of understanding of what a brutal increase in the price of energy or electricity would do to our European economies.
Military and political leaders are only now really waking up to what they have gotten themselves into. Until ten days ago they said, well, we can put a cap on prices and we can buy up whatever is out there in the market.As I have shared in March, our Western sanctions were well-intended, but they were not thought through – they were simply not smart enough. They would hurt Europe more than they will hurt Russia. In part because the rest of the world is no longer bowing to our threats. Our leaders totally missed this when they announced the sanctions and called India, Brazil etc. to threaten them with severe retaliation if they don’t follow our course or circumvent our sanctions. That was out of touch with a reality. In other words, some 29 nations out there, with more than half of world population, are deciding about the success of our sanctions against Russia.
The EU Commission still believes it can decree her way out of the crisis or force its members to fall in line. Although all parties involved in this proxy-war are suffering, I am sensing a higher level of desperation in Western Europe than in Russia.I see also pressure building in Washington as the FED keeps rising rates and the approval ratings of President Biden hover on record low levels. Those levels foretell a disastrous Mid Term Election for the Democrats. The DNC has decided that keeping control of Congress is vital, because the future of democracy in America is at stake. They also talk about “all means are feasible now” to avert a loss of Congress. What could the White House do to avert disaster in November?
- Germany may have to face a tough decision soon: continuing support for Ukraine in its war efforts or protect the EURO Zone from a potential implosion. While in previous EU crises Germany was able to save the situation by de facto bailing out a EURO ZONE member or the whole system thanks to its credibility, markets are rightfully questioning the ability of a highly vulnerable and weakened Germany to bail out the EURO ZONE in case it falls into a severe recession. Germany has indeed lost much of its lustre – it is being seen as an economic giant but a geopolitical dwarf – and we are living in geopolitical times. Something we have warned about for years is now public domain.
This time, rising interest rates around the world and growing recession fears are putting pressure on the EURO ZONE financial system. Markets want protection against rising default risks in Italy, Spain, Portugal etc. There is hectic apprehension in Frankfurt and Berlin these days, because insiders know that Berlin may be forced to choose between continuing to support the war effort or saving the EURO ZONE financial system. Germany’s monetary ammunition and credibility is limited. Once markets see an active risk, they tend to test it. Markets looked to the ECB, but Mrs Lagarde has been ambiguous, which has not helped the German case.
Behind closed doors leading government party bosses in Berlin suggested that Germany may be forced to pull out of the war in Ukraine to somehow salvage the relationship with Russia and secure gas supplies in the short to medium term. The collapse of several crucial industries was not mentioned as the top reason, but the signs of brewing discontent in the population leading to mass unrest in German cities. Because of its past, the German government would not be able to use harsh force to stop social unrest as other Western countries can.Having totally underestimated the side effects of its flawed mix of sanctions, Berlin may have to reverse its famous animosity against nuclear power or beg Teheran for energy (circumventing US embargo) or purchase energy from Russia – eventually all of the above. Otherwise the police will have to suppress massive discontent (possibly revolt). People won’t accept freezing this winter, because of incompetence and lack of strategic foresight in Berlin and Brussels.
- The Isolation of the West gathers pace. More large non-aligned nations follow the BRICS in defying the West. The powerful block of South East Asian nations is accelerating its plans for their growing internal trade to reduce the use of the USD and the European banking/payment system. Important economies like Indonesia, Malaysia, Philippines, Vietnam and Singapore are members of ASEAN. Interestingly other big nations like Mexico and Nigeria are voicing their desire to conduct a more independent economic and foreign policy in order to look after their own interests. These nations are not cutting off with the West, but after having been threatened by the West with severe consequences in March and April in the aftermath of the invasion, they are demonstratively reducing their dependence on the USD, Euro and our banking system.
A number of African nations are also very eager to become more multi-aligned. They are quiet, as they are currently being warned by Washington and Paris not to do so. But unfortunately for the West, our efforts are confirming to these administrations what they see as our neo-colonialist attitude towards Africa, Latin America and Asia. The influence of the West could decline faster than expected.
Our leaders and media are still refusing to change the way they think: If they organize a summit they think that all the nations that attend are our allies. They don’t worry that those nations also attend the summit organised by China, and the one organised by Russia, and the one organised by BRICS, ASEAN, MERCOSUR etc. where they take advantage of all those relationships to advance their interests. The world has become de facto more multi-polar. Many countries used to be forced to be aligned with us, now they are multi-aligned.
- Political turmoil is coming as perceptions about inflation divert powerfully. There is growing confusion in the media and different political circles about inflation, price levels and the rate of change of prices. Price levels are elevated and people are hurting – But if the situation can somehow stabilise, price levels could rise another 3% to 5% in 2023. In that case our governments would celebrate having brought inflation down from 10% in 2022 to just 3% or 5% in 2023 – even if that would add more pain to already hurting households.
Thus, it is possible that if consumers have to stomach an additional increase of prices (in the range of 5%) next year, this would be celebrated by financial markets – Such a celebration by politics and financial markets while normal people are in a desperate spot could be the last drop in a full bucket of collective discontent. There could be political .. Truncation
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As we have discussed during the Covid pandemic and even at the start of the war in Ukraine, this is likely to be used as a “smoke-screen” with at least two powerful purposes: to deviate the public’s opinion from what is really going on (the gravity of the G7’s fiscal and monetary condition) and the rising overall crisis level around the world .. providing our administrations with the extraordinary executive powers to enforce the long overdue Monetary Reset. Things are coming together for the next act. While many see evil intent, some experts argue there is simply no other choice for policy makers. I am in the latter albeit smaller camp.
The next geopolitical update will be released as usual as soon as I detect a significant deviation of my analysis from consensus at a strategic level or if I change my assessment.
By Christian Takushi MA UZH , Macro Economist & Geopolitical Strategist, 19 Jul 2022 – Switzerland (delayed & truncated public release on 15 Aug 2022).
Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
Russian nuclear attack submarine Prince Vladimir before it went “silent “
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