Russia, China Preparing Offensive--On Financial Front

We've argued on numerous occasions that the American Empire's war on Russia must be viewed as a multi-front war. This is true geographically--Ukraine, Syria, diplomatic jockeying around the world, ramped up tensions targeting China--but also in a subject matter way. The war is being prosecuted militarily but also on a monetary front. That's hardly surprising. Many wars have followed a similar pattern in which financial pressure is brought to bear on an opponent. However, in this case the monetary and financial front is of exceptional importance for two related reasons:

• First, the American Empire has maintained its global hegemony largely through maintaining the status of the Petro-Dollar--based on a sort of protection racket for major Middle East oil producers--as the world's sole reserve currency.

• Second, the effort of Russia and China to get out from under US hegemony has now taken on a global momentum. If Russia and China (and others) are successful we will see a major reshuffling of the power dynamics around the world. It's impossible to over estimate the stakes.

We have followed Alasdair Macleod's thinking on these matters in the past. He has a new article out that is well worth the effort required to study it:

The bell tolls for fiat

Of course, by "fiat" Macleod means the US dollar as it has become since it came off the gold standard.

The article is long and, for many of us, somewhat arcane. I'll be focusing largely on the geopolitical issues that are raised by the coming Russo-Chinese offensive against the dollar, but Macleod also gets into the mechanics of how the proposed new BRICS currency will work. Some of what Macleod says may appear at first glance to be at variance with what I've termed Tom Luongo's Theory of Everything--particularly as regards the purpose of US interest rate hikes. I'm no economist, but my view is that such a take is not necessarily the case. In any event, I'll defer to others on that, since I believe that Macleod's geopolitical views largely coincide with Luongo's. Further, we should stress up front that Macleod is, for much of the article, presenting what he believes to be Russian and Chinese thinking--the thinking that he believes will drive their actions. Whether Russian and Chinese thinking is entirely accurate is a separate issue, although my impression is that Macleod believes that their thinking is largely accurate.

Macleod begins by noting that few in the West appear to appreciate the importance of Russia's announcement that the agenda at the late August BRICS meeting in Johannesburg will include a proposal for "a new gold-backed trade currency." He attributes this failure on the part of the West to intellectual inertia. Just as it took months after the US closed the gold window for the financial world to appreciate the significance of what had just happened, so too the current inhabitants of the financial world fail to understand what a new BRICS currency could mean for them. Not so Russia and China, who are going into this with eyes wide open. They know that the war they're in is an existential one:

China and Russia know that if they are to succeed in removing the dollar from their sphere of influence, they have to come up with a better alternative. They also know they have to consolidate their trade partners into a formidable bloc, so plans are afoot to consolidate BRICS, the Shanghai Cooperation Organisation, and the Eurasian Economic Union along with those nations who wish to join in. It will be a super-group embracing most of Asia (including the Middle East), Africa, and Latin America.

The groundwork for the new currency has been going on for some time, but Russia's announcement appears to signify that Russia and China--the two major players, without whom this couldn't come to fruition--have committed to the new currency.

For Russia, it is also now imperative to destabilise the dollar as a deliberate escalation of the financial war against America and NATO. China’s priority is no longer to protect her export trade, but to ensure that her African and Latin American suppliers are not destabilised by higher dollar interest rates.

Part of the reason that little attention was paid to the announcement is that it came via RT--which is heavily censored in the West. Reaction of those who were aware of the development, says Macleod, tended in the direction of such a venture needing years for its implementation and thus being irrelevant at this point in time:

But there are good reasons to believe that this complacency will turn out to be wrong, and that events are likely to evolve considerably more rapidly than expected.

Macleod's point seems valid. Few would have imagined the rapidity with which major oil producing nations have moved to diversify their payment settlement arrangements. Clearly, as it seems to me, something is afoot, and we won't be left waiting for years to find out the shape of it. For one reason, Russia and China know they don't have years to waste. Russia may be taking a cautious approach on the military front, but that doesn't mean that it will take a go-slow approach on the monetary front--which is likely more important for the long term. Russia is in the driver's seat for the time being in a military sense--the demilitarization of NATO is proceeding apace. But steps need to be taken on the monetary front to make that stick. Behind the scenes preparations have been taking place:

Those tracking developments in gold bullion markets in recent decades have noted the drift of bullion from west to east, and the rise in gold mine output in China and more recently in Russia. Central banks, predominantly in Asia, have been accumulating bullion reserves and adding to declared and undeclared state funds in record quantities. Ultimately, this activity can only be to use gold to secure currency values as the dollar dies or is done away with.

All this has been taking place for decades, but what sparked the current global determination to take drastic action against the dollar was the Western sanction war against Russia.

[The sanctions] set off a train of actions that has unified Asia and many of its supplier nations into a rebellion against American hegemony, stoked up by Putin and led by Saudi Arabia and the Gulf Cooperation Council. And since the western alliance turned its back on fossil fuels, the low-cost producers throughout Asia have banded together representing nearly half global oil output, and a third of natural gas. As a cartel, OPEC is now just an appendix to the Asian mega-energy producers.

The new cartel is dominated by President Putin, whose degree from Leningrad University was in energy economics and well qualified to be energy ringmaster. Not only has he demonstrated an understanding of the importance of controlling global energy supplies, but he also has a clear understanding of the importance of monetary gold.

... It now turns out that this project is almost certainly a Trojan horse for something far larger. It was obvious that other members of the Shanghai Cooperation Organisation should be able to join in, and now it turns out that the invitation is being extended to members of the BRICS club as well. But that’s not all. The entire membership of the SCO, its dialog partners, and associate members will be attending the BRICS conference in Johannesburg on 22—24 August.

This could well be the starting point for a major global trading bloc. Is this what Yellen's trip to China was about?

The US Treasury would almost certainly have known about the BRIC proposals when the agenda was first circulated, which probably explains why at short notice Janet Yellen, US Treasury Secretary flew to Beijing. From her department’s point of view, if the new currency proposal was to be adopted its financing of the [US] budget deficit would be adversely affected, not to mention the threat to the dollar’s hegemony. The principal card up her sleeve was to threaten greater sanctions against China’s exports, not just to America, but to her allies as well, but we don’t know if it was actually discussed in these terms.

In other words--and we've seen indications of this for months--the US is pressuring Europe to join in a sanctions war against China. That, of course, will deepen the developing economic disaster in Europe that was brought about by the sanctions war on Russia.

Having set the stage, Macleod moves on to how he believes China views the current situation:

For too long and too often China has been threatened over access to markets by the Americans. ... One suspects that other than signalling to the Chinese and Russians that there is an increasing level of alarm in Washington, Yellen’s mission will have achieved little. And an important factor for the Chinese attitude is their experience of the US’s attempts to destabilise Hong Kong, which led to it being taken directly under Beijing’s control. It is therefore important to understand China’s analysis of America’s objectives and methods in order to define her own position.

In April 2015, Qiao Liang, the People’s Liberation Army Major-General in charge of intelligence ... concluded that the U.S. would try everything, including war, to maintain the dollar’s dominance in global trading.

Qiao made the case that both the Latin American crisis in 1978—1982, and the Asian crisis in 1996—1998 were engineered by America.

By deliberate manipulation of interest rates.

The relevance of Qiao’s analysis is that today, the same conditions appear to be targeted not against China, which does not borrow dollars, but at the dollar indebted nations around the world with which China trades — the BRICS nations. Informed by Qiao’s analysis, it must appear to China that America’s persistent strategy is to continue to raise interest rates even after the inflation dragon is slain, and by bankrupting them the US will attempt to bring the nations seeking to join BRICS back under her control.

This last paragraph regarding the purpose of Jay Powell's maintaining high interest rates is probably the clear area of disagreement between Macleod and Luongo--maybe. Macleod does qualify his presentation by stating that he is giving what he believes is the Chinese view. One might not blame the Chinese for believing that the Fed is simply following the policy set out by the Zhou regime. The Luongo view, which I share, is that that isn't the case.

That being the case, China will have weighed up the consequences for her export trade against the likely sanctions America and her allies could threaten and decided that the real threat is against the emerging economies in Africa, Latin America, and elsewhere which have received substantial Chinese investment. In financial terms, it is therefore imperative that this threat be addressed in a pre-emptive attack on the dollar, ...

Did the Neocons give serious thought to this possibility before pressuring Russia into a war for its survival? Somehow I doubt that. All or nothing wars against adversaries that are by no means without credible defenses should never be undertaken lightly, with the type of euphoria that Alexander Mercouris has described as prevailing at the Munich Security Conference immediately before the war began. Based on these views, China has developed a defensive strategy:

the New Development Bank, which is headquartered in Shanghai, will be able to provide credit either in yuan or the new BRICS currency at lower interest rates to offset the undoubted strains imposed on BRICS members as a result of rising US interest rates. Therefore, China is fully prepared to counter what General Qiao Liang described as the American strategy of “harvesting” assets in foreign countries.

It is important to understand what China believes and motivates her, not whether Qiao is right or wrong. But given that his view is inculcated in the Chinese government, China is ready with Russia to mount an attack on America’s fiat currency by returning to a gold standard for trade, and ultimately for their own currencies.

Macleod next presents what he considers to be the Russian view, and here I will disagree with a fair amount of Macleod's assessment. The first paragraph, however, explicitly continues with the Chinese view:

It should be clear that the current plans for a trade currency originated in Russia, and not China. Indeed, until now China will have been reluctant to destabilise the currencies of the western alliance, because of her export interests. But not only has the relationship with America deteriorated over Taiwan, not only is it clear (in China’s view) that America plans to bankrupt the BRICS members and all those seeking to migrate away from the dollar’s hegemony by raising interest rates, but it is now also clear that neither Russia nor America can back down over Ukraine. Consequently, unless China and Russia together take the initiative, shortly Russia will be directly at war with America and her NATO allies and China will almost certainly be dragged into the conflict over Taiwan. World War 3 must be forestalled.

I can agree that China has had these concerns. At the same time, China has been in close consultation and cooperation with Russia on defense matters and has been speaking and acting with increasing confidence vis a vis the US. Further, it is no longer clear that "America cannot back down over Ukraine." America may simply have no other choice at this point, and that appears to be the thrust of political developments in the US--per, for example, Seymour Hersh. The Deep State realizes that it has a disaster on its hands. It's attempting to maneuver for a "frozen conflict", but that negotiating position is likely to devolve into a climb-down, given Putin's intransigence. Putin undertook this war because he believed he had his ducks in a row. Events will have only strengthened that belief, giving Putin no incentive to make such a foolish deal. Now, on to Russia:

It is clear that NATO, under the thumb of America, is determined to defeat Russia, remove Putin, and gain control of its massive natural resources. The proxy war being fought in the Ukraine appears to be failing with Zelensky’s summer offensive having ground to a halt. And following the Wagner debacle, Russia is now in a strong position to counterattack. This has led to President Biden being prepared to send the Ukrainians cluster bombs, increasing the urgency for a Russian counter-offensive.

No doubt Putin fully understood NATO's plan. But events have shown that Russia is winning, and cluster munitions won't change that.

Furthermore, with Ukraine’s summer offensive failing, NATO’s theatre of operational strategy is moving to Poland and the Baltics (Biden was in Vilnius this week for a NATO summit), with Poland particularly becoming a client state of America through NATO. The build-up of military personnel and missiles in Poland will become increasingly obvious in the coming weeks and is already anticipated by Moscow. We await Putin’s reaction, but he is unlikely to just sit on his hands and let NATO build its forces in Poland and the Baltics.

Compromise is out of the question, because it is plain to Putin that America cannot back down. ... Furthermore, the neo-cons are firmly in charge of policy, determined to defeat Putin, add Russian territory to their sphere of influence, and leave China isolated.

Here I'll go with what I take to be the consensus of military experts. The US, much less NATO, is in no position to launch an offensive out of Poland. Putin has already put military resources in place to forestall any such threat, which remains unlikely. The staging of the NATO meeting in Vilnius amounted to little more than hubristic theater. Moreover, it seems clear that the Neocons are, in fact, no longer in firm control of policy. The US is undoubtedly seeking to maintain its position, but the idea of an offensive war on Russia seems, to me, to be receding.

Now, Macleod goes on to recognize the other option. Russia knows it's winning, so maybe it could simply declare victory in Ukraine. However, he asserts that Russia's finances are coming under pressure--something I'm not in a position to confirm and have not seen credibly argued elsewhere. He further asserts that as long as America is financially able, it will continue its war of aggression on Russia--a conflict which is drifting toward nuclear war. To which I respond: Yes, no. However, I do agree with Macleods argument that the current situation dictates that Russia and China must follow through with their war on the dollar--that, as Macleod says, must be a priority for Putin.

At this point Macleod goes into great detail on the workings of the proposed BRICS currency for trade. I'll skip that and summarize what Macleod sees as the wider consequences of a BRICS currency gold standard.

Not surprisingly, Macleod believes this will bring major benefits for Russia: stable export values, stable--and lower--interest rates, lower inflation. All this will foster economic growth for Russia.

The purchasing power of fiat currencies will decline--based on the fundamentals behind each currency. The overall result will likely be higher price inflation in the West.

A major effect for the US will be significant funding hurdles for deficit spending.

In the EU Macleod sees the consequences as "divisive":

If it were not for political constraints, Germany would naturally drift towards cooperation with the sound money regimes emerging to her east, particularly as the finances of the Mediterranean club deteriorate. With rising bond yields, the entire euro system comprised of the ECB and its national central banks would need to be recapitalised, being already deeply in negative equity. The eurozone’s global systemically important banks (G-SIBs) are extremely highly leveraged and unlikely to survive the combination of falling asset values and bad debts that would be the certain consequences of the euro’s declining purchasing power. ... The consequences for the UK pound will also be significant. In a similar debt trap to that of the US Government, the British have the further disadvantage of an economy suffering under increasing taxes. Furthermore, with London being the international financial centre, the UK will be at the epicentre of a fiat currency crisis. For the size of her economy, the UK has little in the way of gold reserves, hampering any future escape from the fiat currency trap.