The Sanctions Mess, In A Nutshell

I spent hours, earlier today, reading about gold and economics and—I won’t lie—mostly all that did was give me a headache. Then this evening reader Mark sent me an interview with French economist Charles Gave. It was so straightforward, so lucid, that I decided to copy out all the English subtitles. I ended up making a few corrections, but basically that’s it, down below. The bottom line is simply that Russia is in the driver’s seat, they’re behind the wheel. Our masters in the ruling class are being exposed as buffoons. One can only imagine that Putin is having a helluva good laugh at the antics that Gave describes. I only wish I could join in, but the joke’s on us. Reality will have its revenge.

Q: Hello, Charles Gave.

A: Hello.

Q: So, Charles Gave, for a week now we have been observing this conflict, this invasion ... It can be called in many ways. As a financier, as a connoiseur of finance, you are between America, China, France, Europe. First of all, we hear a lot that since we are attacking currencies, freezing assets of Russian oligarchs, censoring as with RT France--Some speak of a return to the gold standard. What does this mean?

A: It's quite simple. About fifteen years ago the United States decided to extraterritorialize its rights over the dollar. In the past, if France sold something to Sudan in dollars (since international trade is conducted in dollars), well, the transaction was done and that was it. But Sudan became a country under American embargo and, since France was selling to Sudan in dollars, American law was applied and BNP was fined eight or nine billion Euros. Then they seized Iran's foreign exchange reserves, for example. And now they have just seized Russia's dollar and euro reserves. So, this sort of Pax Americana that reigned since 1946, where if I had dollars I owned them, and could do what I want with--it's over. American law now applies to all dollar assets, which means that, for any dollar transaction in the world today, there are three people who will know about it: You and me--that is, the people involved in the transaction--and the CIA.

Q: And everything goes through the dollar.

A: Yes. If it's transacted in dollars, that's how it goes. But if we did our business in gold, the CIA wouldn't know about it. So you can imagine that the role of the dollar as a reserve currency is finished. Nobody believes in it anymore. It's over. It's an unimaginable loss of sovereignty!

Q: Yes. But then, the recent freezing of Russian assets--does that sanction them very seriously?

A: It's about half of their reserves. They had quite a lot in Euros. It was the ECB that decided to freeze their Euro reserves, because they only had 4% of the reserves in dollars.

Q: So they have all their reserves frozen today?

A: No, about 50%. They have a lot of Yuan. A lot of Yen. And between 25 and 30% in gold.

Q: OK. And is it conceivable that there could be a financial alliance between India, China, and Russia?

A: It's quite simple. Russia is a very big exporter of raw materials--we'll talk about that later--but especially energy: oil. So they just need to invoice their oil to China in Yuan, and then they won't need to use the dollar anymore. So, it's a great incentive for people, who basically don't want to be under the control of the CIA, to use the currency of the importer or the exporter.

Q: The last time you were on the show, you said: "I don't understand they they are pushing Russia so hard into the arms of China." That was a week ago.

A: They're still going at it--it's quite extraordinary. That's one of the huge mistakes. But what needs to be said here very quickly is that Russia is a big exporter of raw materials, but the big consumer of Russian raw materials is Europe. There's about 40% of Russian gas, of Russian oil, on which Europe depends ... I don't know if you've noticed, but in the last ten days coal has more than doubled. In the last twelve months it has increased fivefold. Russia is the world's third largest producer of coal, and the largest exporter of wheat.

Q: But if the situation continues, can Europe do without Russian wheat, coal, and gas?

A: No way!

Q: It's impossible?

A: If the Russians decide to turn off the tap, Germany will stop. Completely.

Q: There's the American shale gas?

A: If they manage to produce the equivalent of, say, one million barrels, that'll be the maximum. That will be enough to supply Germany for a few days.

Q: That's it?

A: We're in a crazy story, where the guy--Europe--isn't shooting himself in the foot, but in the head!

Q: Ah, straight up?

A: I don't know, if all your energy …, The economy is just transformed energy. If you cut off your energy the economy stops. It's about as simple as that.

Q: But doesn't somebody have a bit of a medium term perspective?

A: But that's not even the worst part. It sounds dumb, but there's worse. It's the collateral effects.

Q: The collateral damage, yep.

A: You bomb a target and someone walking nearby gets killed. That the idea. I'll give you a few examples that seem extraordinary to me. The biggest owner of planes in the world ...

Q: Planes?

A: Planes. It's an Irish company that buys planes and leases them to airlines. It's convenient. They have about 550 planes in Russia. So now, the Russians can't get their planes out, so they're not paying anymore. So the Irish company is going to blow up.

Q: A bankruptcy, of course.

A: A bankruptcy. And so we'll be left with 550 planes, which were made by whom? By Airbus. [Laughs.] So you're going to have monstrous unemployment in Toulouse, since 550 planes are going to show up on the market. Is this something we could think about for a moment?

Q: You say that Europe is 40% dependent on Russian energy, etc.?

A: Energy. The price of wheat is going up like a rocket. Of course, Russia is a big exporter of wheat--but so is Ukraine. This summer's harvest will surely not be fantastic in Ukraine, and they export half as much as Russia. And so the price of wheat is going up, up, up. Every time in history the price of wheat has gone up there have been revolutions in North Africa. Because people have nothing to eat! They eat couscous. What's it made of? Wheat!

Q: So it's a game of falling dominoes?

A: It is. And right now Russia has a current account surplus--that is to say, a trade balance surplus. A surplus budget. It has foreign exchange reserves that allow it to import everything it needs for at least two years, even if it doesn't sell anything abroad! It has no internal debt. No external debt. So they are perfectly prepared for this war. They can live in an autarky.

Q: In an autarky for two years?

A: And we can't go on for two months. So here we are running around, shouting: "Democracy, democracy," while jumping on our chairs, as de Gaulle said. I don't think people are aware of the balance of power.

Q: So we told the Russians that SWIFT was over for them. Won't they be very annoyed with that?

A: They will, but that's where it becomes almost laughable. Last Sunday morning they proudly announced that Russians won't have access to SWIFT.

Q: Yes.

A: There must have been a few phone calls from Deutsche Bank and BNP: "Say, guys, if Russians can't use SWIFT anymore they can't pay us for energy and oil. So, if you don't mind, we'd like SWIFT to be stopped for lollipops and cars, but not for energy."

Q: And exception, right away?

A: Right away! In the evening there was another communique: "We cut SWIFT, except for energy." That's where the Russian money is, so it's like they didn't cut SWIFT at all! [Laughs.] So they made a decision in the morning, and by the end of the day there were people telling them, "Hey, guys, you're causing a financial crisis like we've never had before--you don't know what you're doing!" And that's true--they don't know what they're doing. They're incompetent! [Laughs.]

Q: Charles Gave, we're running out of time, but can we fix it? This isn't Apocalypse Now?

A: You should keep an eye on the European financial system. Because if the system implodes, it'll be in Europe. The US is basically covered, so is Asia. So it's Europe that's ...

Q: In the front line?

A: In the front line. We're the best at shooting ourselves in the foot, the head, anywhere. That's remarkable. At that point you're going to have considerable problems with the cure. In the first place because of skyrocketing inflation--and the Germans are not amused by inflation. But that's currently where it's the highest in Europe. And we can't raise rates. The ECB said it: "We're not raising rates." But then inflation will keep rising, the Euro will crash, and the Germans will be pissed. And at some point people will say: "I'm done with this Euro--what a piece of crap!"

Q: That's why they invested a hundred billion Euros in their defense budget.

A: The fact that people think rearming Germany is a good idea leaves me flabbergasted! [Laughter.]