Geopolitical Update : Economic warfare means Higher Rates bias at FED/ECB (Part 1)
By Christian Takushi, Macro Economist. Switzerland – Sat 9 Sep 2023. (Public release delayed to 15 Sep 2023)
I trust you are well. I hope that those of you in the Northern hemisphere had a good summer break and those in the Southern hemisphere have not had too cold a winter so far.
Today we are releasing the first part of our analysis of the BRICS summit and how their adapted strategy will challenge the West. The 2nd part will look closer at the impact on Oil prices, the USD and risk assets – it is already in the pipeline and its release is imminent.
In the following weeks developments we are monitoring are set to intensify on several fronts.
The overwhelming focus of consensus is on Inflation and not on the trade-bifurcation and supply constrains that geopolitical tensions are creating.
To some extent financial markets are behaving as if all these sanctions and their counter-measures were just “mere talk”. Unfortunately, it’s not.
BRICS Summit: Shift to Bilateral Trade and Oil
The tone of China at their BRICS Summit has been underwhelming and cautious. Having been hit hard by Washington’s preemptive measures, the BRICS changed their strategy: Away from rolling out their new currency this August and away from provoking the USA. China is spreading the implementation of their new Monetary & Currency Strategy over many months to diffuse our counter measures and sanctions. Beijing is also spreading contradicting and misleading plans to create ambiguity.
The BRICS postponed 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.
As of 1 Jan 2024 the BRICS want to be 11 nations. These six nations applied and were invited to join: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and UAE. The extended BRICS will be the world’s biggest Oil Exporters and also the biggest Oil Importers. Given their massive current account surpluses, they could move to hurt the USD or to launch a new reserve currency at a time of their own choosing.
Emerging Markets fight back
Many people are so happy about the delay in the roll-out of a gold-backed reserve currency and the USD strength, they overlook the challenge that the new BRICS Alliance poses to the West. The following chart speaks for itself. In a geopolitical map we have highlighted with “red”
- BRICS members (new members have a + sign)
- Russia and China allies in the Middle East and Africa
- In dark red the Sahel states under military rule (now aligned with Russia)
Although I think Argentina will fail (read decline) to join, the new BRICS and its aligned states in the MENA region pose a formidable challenge to the West and Europe in particular.Having been hurt and humiliated by America and its European allies, China is eyeing the fragile state of our over-stimulated economies and at how American, European and British families are suffering under two-three years of inflation. The cumulated increase in the cost of living (i.e. decline in the standard of living) is Biden’s Achilles heel. Not only his – it is the domestic political disaster that London and Berlin are facing. With the BRICS as biggest exporters wanting to reduce the supply of OIL to drive up the price of Oil, the best timing to do it is over the next 12 months.
Having learnt from Biden’s assertive policy moves in 2022, Beijing is bracing for a possible escalation (read military clash) with the USA and proactively slowing down its economy, just as Russia did before the war in Ukraine – Thus, China is slowing down credit growth and cutting down on non-essential consumption. Thus, unlike most economists out there, I don’t fully trust the “timing” of a credit crunch in China. Those bad debt problems are known since 2014 and every time they resurfaced, massive stimulus was activated.
Rather than taking on the USA head on, China is increasing the pressure on the US allies that have suffered the most under Biden’s assertive policies and moves: Western European NATO members.
Going forward the BRICS will be able to choke Europe’s vital Trading Routes and Energy Supply Routes. The new BRICS thus poses a threat to Europe’s economic and energy security. China’s allies can now completely shut down the Suez Canal and disrupt energy exports to Europe. In case of further hostilities or war, this is China’s card.
China aims for resilience instead of growth
There are several reasons for the weak economic growth in China. Part of what we see is in our independent view a smokescreen: Beijing wants the West to think it is mere domestic economic weakness. In the past Beijing stimulated every time its economy hit a wall or the construction sector got in trouble. Unlike the West Beijing now wants to curb speculation and move the economy to a lower growth path – It is not just a more sustainable path with less vulnerabilities, it is a leaner economy – more capable at surviving open hostilities or war with the West.
China is increasingly focused on GDP per capita rather than simply a higher level of GDP. In the West we focus almost exclusively on growing GDP even if our population is shrinking. There are political, geopolitical and security reasons for this as well.
The proactive reduction of non-essential credit and consumption by Russian authorities allowed the economy to shrink into a more crisis-fit and slender shape. This is one important reason why our experts and economists got Russia so wrong. They predicted that Russia’s economy would be wiped out by our massive sanctions. It is in some ways doing better than the EU and Britain.
Should we really celebrate?
Western leaders and investors are celebrating the current USD strength in the face of a cautious BRICS summit. I have my concerns about this condescending mood given the magnitude of our deficits, vulnerable fronts and the fragility of our G7 monetary system. Our economies have been kept growing over 40 years with ever bigger bubbles in all asset classes.
The reason I am more concerned than the consensus is that the Biden Administration has already made extensive concerted use of America’s formidable arsenal of ambiguous geopolitical-economic tools (ranging from higher rates, a strong USD, reducing access to USD liquidity for Emerging Markets, sanctions, threats .. to deploying the US Oil strategic reserve).
Having imposed economic sanctions and an high tech embargo on China, the effective options that remain to the Biden Administration are few. The most affective ones belong mostly to a rather dangerous category: amongst them .. to proactively seize the assets of all BRICS members or to launch a decisive military strike against them or else. They would lead to a war scenario though. Five years ago Washington may have caught them by surprise, but since the war in Ukraine, the seizure of Russian assets and the extensive use of threats by Washington and Brussels, the nuclear Emerging Powers are kind of expecting the worst from us – all smiles aside they are now on war mindset and they have terrible weapons of mass destruction.
Most importantly, they will no longer signal their next big move and they no longer give us the benefit of the doubt either. Even a major accident or incident affecting the security of an emerging power is most likely to be seen as “another strike” by the Biden administration (as non Western leaders increasingly call it in private) and carry the potential to unleash a military hostilities against the USA and Europe. The risk of pre-emptive strikes with tactical or nuclear weapons has never been this high since 1962.
There are also lots of calculated smiles, hugs and handshakes in the seven years that led to WW2 in Europe and the Pacific ..
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Post Summit – Why BRICS will target a 30% replacement of USD in bilateral trade
You can’t easily copy-paste North-East Asia elsewhere
Yes, we can re-shore, but it will be at much higher prices
Damage at the macro level will trickle down
Some personal thoughts
In the short term many Western leaders and investors are enjoying a moment of strength versus the Emerging World, but we may have only emboldened them in their resolve to break free from our financial system and to strike back at the West at an hour of their choosing.
The fact that so many emerging democracies are aligning themselves with China to reduce their dependence on the West – despite the pain we have inflicted on them – should be a warning to us all. To call this a movement of dictators is very popular, but superficial and to some extent misleading.
I am also concerned for the Transatlantic relations: Everywhere I look, important US allies and US foes alike have been hurt – if not decimated – by policy & actions of the current US administration. Somehow I wished Washington could see how devastating the landmark Inflation Reduction Act (IRA) was on US allies. The timing of IRA could have not been worse – it was a time of maximum pain, chaos, skyrocketing energy prices and risk of war escalation in Europe. IRA did raise the ire of US allies like nothing before.
It is somehow understandable that President Biden wanted to show maximum American strength to foes and allies alike in August-October last year to win the Mid Term elections, but I think he was ill-advised.
Around the Pacific Rim US allies, led by Tokyo, are worried about becoming too close an US ally – they have seen what has happened to the most loyal of US allies, Britain. There is off the record talk about “close, yet not too close“. Moreover Asian allies are talking about following France‘s example: being a dependable US friend, but zealously staying an independent course that puts national interest first. France is fairing much better than Britain and Germany, they say.
Like in the 1930’s ambiguity and disinformation is used to protect national interests, thus everybody wants to sign treaties with somebody else and exchange handshakes, but behind closed doors I can tell that Washington, London and Brussels have lost many friends lately.
We need to pray for our political leaders and for God’s wisdom and peace to be on them. The times are complex and challenging, because once nations start putting threats, sanctions and specific embargoes on others .. aggressive calculated actions are more likely. Japan’s expansion led to the US embargo, which in turn led Japan to attack the US Fleet at Pearl Harbor.
In a nutshell: The impact of Geopolitics-driven economic warfare on interest rates is not fully appreciated nor discounted by markets. Higher interest rates are the most likely outcome if we can avoid worst case scenarios (destructive events can have deflationary first effects and inflationary aftermaths).
By Christian Takushi MA UZH, Independent Macro Economist and Geopolitical Strategist. Switzerland – Sat 9 Sep 2023. (Public release delayed to 15 Sep 2023)
Research made in Switzerland
Geopolitical and economic conditions need close monitoring, because they can change suddenly.
No part of this analysis should be taken or construed as an investment recommendation.
Honouring the men that fought at Midway – Their bravery should be remembered