Geopolitical Update: China de-escalates briefly .. first take on Summit

By Christian Takushi, Macro Economist. Switzerland – Fri Sat 25 Aug 2023 (Public release delayed to 5 Sep 2023)

Dear friend

This is our first provisory take of the BRICS Summit and its implications for the world economy.

Underwhelming BRICS Summit – as expected

I really believe that China’s tone at their BRICS Summit has been underwhelming and cautious. BRICS are advancing their agenda without making any provocative statements. As expected, they are postponing the roll-out of their new gold-backed reserve currency, focusing instead on the use of local currencies to gradually replace the USD,  but also on the embrace of Saudi Arabia and UAE into the BRICS.
China also paused their previous efforts to push up US Treasury yields ahead of their summit to calm tensions. President Xi chose de-escalation and this means that the FED has now more leeway in the short term than expected.
Western leaders and investors are celebrating the current USD strength in the face of a cautious BRICS summit. I have my concerns about this celebratory mood given the magnitude of our Western vulnerable fronts and the fragility of our monetary system. Our economies have been kept growing over 40 years with ever bigger bubbles in all asset classes. We can keep printing money and growing thanks to bigger deficits and debts, because our bond markets have surrendered their “oversight duties over fiscal health”. Thus, no domestic stakeholder has the power or guts to stop these excesses. They are all in the same boat. Nobody can afford for asset prices to correct 40% (in the overshooting phase -60%). In the absence of domestic corrective forces (discipline), only an external factor can put and end to our excesses.  Amongst the factors that could hurt us is this:  a reduction of the use of USD in global trading and as reserve currency will bring an end to this.
If the BRICS and their aligned Emerging Markets (future members) would replace the USD with their local currencies in 1/3 of their bilateral trading, the mathematics and investor psychology would tip against the USD-based financial system. I don’t quite understand the condescending attitude of Western leaders versus Beijing of recent weeks. 

China aims for resilience instead of growth 

Beijing needs to support the real economy in the short term, but as much as markets expect. Unlike the West Beijing wants to curb speculation and move the economy to a lower growth path – a more sustainable path with less vulnerabilities.
China is clearly focused on GDP per capita rather than simply a higher level of GDP.  The West focuses almost exclusively on growing GDP even if their population is shrinking. There are political, geopolitical and security reasons for this as well.  
In that sense China and the USA are diverging. While Washington is betting on more growth no matter what, Beijing is prioritising economic resilience. China is clearly preparing for more geopolitical and economic confrontation with the West, and that means a lower trend for debt growth and more investments in economic self-reliance.
Our Western financial media and investment industry are celebrating the latest US growth and somewhat mocking China’s lacklustre growth (and credit woes). But maybe we are being a bit short-sighted and premature in our victory laps.
We may need to learn some lessons: Russia’s economy has so far handled the war far better than expected (despite our massive sanctions), because it proactively reduced debt, credit and growth in recent years. It shrunk its economy in advance – probably in expectation of growing tensions with the West!
Many say Moscow prepared for the current war, but  the lack of defence spending in the five years prior doesn’t quite support that hypothesis.
One thing is clear, the proactive reduction of non-essential credit and unnecessary consumption by Russian authorities allowed the economy to shrink into a more crisis-fit and slender shape.
I have been writing about this since 2016, but for some reason our financial media never covered this deliberate shrinkage policy (German: Gesundschrumpfung) . Our independent analysis suggests that China seems to be embracing a similar policy, but of course – unlike Moscow – Beijing has to cater for global demand, which may “seem” to us like an undecided zig-zag course.  This leads me to say we may be overestimating China’s troubles.
Finally, the disappointing progress of Ukraine’s counter offensive means Moscow’s eventual need to use its tactical nuclear weapons in the face of a conventional defeat is decreasing. For now at least. Thus, short term we see lower geopolitical pressure from China and Russia on US policy makers.
What does it mean for the much expected speech by Fed chair Jerome Powell?
From the global geopolitical macro perspective chair Powell can afford to stay hawkish, “focused on data” and sparse with commitments. No need to raise the inflation target. He has to keep the tough line for now in order to be able to lower rates in case the economy needs stimulus.
Powell sees that risks in America seem to be shifting to the downside. Markets have discounted a lot of good news recently.
All that because in the coming weeks the USA faces a Fiscal Debate. The conservative GOP representatives say they were lied to earlier this year, when they were asked to support the higher debt ceiling in return for spending cuts by the Biden administration until September. President Biden has done just the opposite. The spending by G7 governments has been massive and it has compensated the higher interest rates.
Please, beware that as we move forward .. US Treasury, Monetary and Foreign Policy will increasingly be driven by the domestic US Political Process!

Macro upside – Long term not necessarily negative for stocks 

Without neglecting the fact that there are deflationary forces under the surface, the positive or upside of elevated interest rates (as opposed to the decade of zero interest rates) is that it will support the push for more innovation and more investments – with less speculation by companies. This period of gradual and steady loss of purchasing power could help G7 states with their massive debt while unleashing an era of high capex investments and support savings. All this may lead to 3-5% inflation. Among some Western politicians what they increasingly see as a good kind of inflation. Thus, in G7 government circles the notion is growing that higher inflation is necessary and not all inflation above 2% is bad.

The above notion also helps explain why the FED is hesitant to guide rates lower. It would lose credibility if it needs to back up with rates.

The US backyard is back in focus? All the above also would help Washington increase its influence in Brazil and Argentina, a region that it had neglected. Remember that Argentina may start using the USD in the near future. That would be a welcome additional demand for the USD. The cash-driven Argentine economy is not small.

Things can still shift, thus we will continue to closely monitor these developments.

Forward looking investors are bracing for a possible sell-off, but they are also looking to position themselves for opportunities, innovation, government-led demand and capex-led growth. There is not much room for a buy & hold strategy currently.

Much could happen in the next few weeks and months – so let’s be open and flexible. Contingency plans on the desk, not a drawer.


By Christian Takushi MA UZH, Independent Macro Economist and Geopolitical Strategist. Switzerland – Fri Sat 25 Aug 2023 (Public release delayed to 5 Sep 2023)

Research made in Switzerland 

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