WW3 Endgame In Sight?

I’m going to try to tie together three presentations, all of which point toward the endgame to the war on Russia—and China. The emphasis will be very much, but not totally, on economics and monetary policy, which is largely what the war is all about.

The first presentation dates from about a year ago, and I owe this to a reader—thanks! I found it to be a remarkable lucid presentation of the basic economic issues. While the presenter, Vincent Louis Gave, misses on some of his predictions for an energy disaster over the winter of 2023 (but not entirely by any means) he hits a home run with his contention that the Russia - China combine would enable China to draw major non-Western world economic players into the combine’s sphere of action against King Dollar. I’ve prepared a summary below the video. Direct quotes are, you guessed it, contained within quotation marks. Non-quoted sections may include my own comments, which draw on the presentation. I highly recommend listening to the entire 38 minutes, which is brilliantly clear. Obviously “economic disaster” points toward defeat in this war, and possibly sooner than appears at the moment.

Sanctions + Lockdowns = Net Zero

How the West brought economic disaster on itself

The starting point of any economic system is that "economic activity is energy transformed. Without energy, producing anything basically becomes impossible."

"If you constrain energy you constrain growth."

The net effect of sanctions? Europe still uses plenty of Russian energy, it's just much more expensive--and it's also much less secure. Europe ditched low priced long term contracts in Euros for spot purchases from Russia and wildly expensive LNG in dollars. Russia's incentive is to demand payment in something other than dollars or Euros. We may be seeing the crackup approaching with France’s decision to purchase oil using the Chinese yuan for payment.

The West weaponized its financial system, so Russia weaponized its energy. Who wins that one? And Russia's balance sheet was actually in much better shape than the West's. Russia has "very little government debt, very limited budget deficits, and massive current account surpluses."

"Pick any commodity in the world and Russia is one of the top three exporters." We picked a war with Russia without regard to the fact that Russia is such a major player in commodities of all sorts, and the fact that "for ten years we have under-invested in energy." "Russia is the second energy producer marginally lower than the US," "in a world where energy is massively scarce"--due to China's shift away from coal toward cleaner gas and oil.

China's weakness is its relative lack of commodities, Russia's weakness is in finished consumer production. We have pushed China and Russia together into a dream match--each making up for the weaknesses of the other. Direct Chinese trade with Russia for energy makes China less dependent on US dollars and allows China to leverage its position in negotiations with other energy and commodity producers to get them to deal in Chinese currency rather than dollars--Saudi Arabia, Brazil, etc. All of this makes China far more powerful than it would otherwise be.

The US is in a basically good fundamental energy situation and even has "easy short term solutions"--Keystone. The problem in the US is bad policy decisions that negate its natural advantages.

The two Covid years of wild spending and debt put the US in a weakened financial position from which to start a war on Russia and China. The massive spending on Ukraine only makes that worse. We're printing money, debasing the dollar further, and will end up having difficulty servicing debt in the end.

"Look, if you could get rich through government spending, why wouldn't we have done this before? Why should we have waited for Covid to all of a sudden open up this magic tree that prints free money with no consequences? The reality is we are seeing the consequences today, and the consequence is the inflation genie is out of the bottle." Increasing interest rates won't put the inflation genie back in the bottle when we're in the middle of an energy crisis. "Our currencies will continue to fall. They'll fall against commodities, and they'll fall against the currencies of countries that haven't followed crazy fiscal and monetary policies during Covid."

"Capital is like water. It flows downhill to where it's best treated. Right now, everything is being done to destroy the savings of people who are trying to live on a fixed income. If you have any sense you move to places where your capital is better treated."

"We're seeing the draining of power away from the West toward other parts of the world, and we're seeing it in living time."

"We followed for at least a decade crazy energy policies based on wishful thinking rather than physical reality, based on virtue signalling, rather than cold geopolitical and geostrategic thinking. So that's the first problem. We followed crazy fiscal and monetary policies based on the premise that inflation can never come back, which was as hubristic as could be. So if you follow crazy fiscal policies, if you follow crazy monetary policies, and if you follow crazy energy policies, I don't think you should look anywhere else but yourself if you end up with a really pretty poor outcome. And that's where we are."

"And then you try and tackle Russia in a war situation at the same time ... That's the straw that breaks the camel's back."

IMO, that analysis holds up pretty well. Now, almost a year later, Alasdair Macleod focuses on the money question. While this may appear to be quite an extensive excerpt, there’s actually nearly twice as much more at the link. The basic idea is easily stated: The decline of the dollar over time could escalate rapidly. The importance of this, beyond the obvious ramifications for our life in America, is that such a development would seriously impinge on the war effort. It would also make a very bad joke of DoD demands for a 100% increase in their budget. So …

How quickly will the dollar collapse?

This article looks at the factors behind the growing rejection of the dollar for trade settlement purposes by non-aligned nations around the world. They no longer fear political or economic reprisals from America.

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But rising interest rates have destabilised western banking systems, which have added to the attractions of payment in China’s renminbi relative to maintaining bank deposits and investments in the currencies of the western alliance — particularly of the dollar. Foreigners hold $7 trillion of deposits and short-term bills and $24.5 trillion in bonds and equities. These balances are becoming surplus to their needs.

The outlook is for US bank credit to contract further, which will drive interest rates even higher. ... Foreigners are bound to become increasingly reluctant to hold dollars, which they will sell. Therefore, the question now is not how much will the dollar decline, but how rapidly.

Introduction

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When the US was the world’s policeman, very few countries would have dared to challenge the mighty dollar. ... But for the ruling elites around the world, America created distrust and resentment. These are the world policeman’s legacy.

A seminal event, which westerners have mostly forgotten about, was the Asian crisis of 1998. China believes it was planned by the Americans for their own benefit. Here is an extract from an important speech by Major General Qiao Liang, strategist for the Peoples’ Liberation Army, to the Chinese Communist Party’s Central Committee in April 2016, when he laid down what has become China’s version of events:

“What was the hottest investment concept in 1980s? It was the “Asian Tigers.” Many people thought it was due to Asians’ hard work and how smart they were. Actually, the big reason was the ample investment of U.S. dollars.

“When the Asian economy started to prosper, the Americans felt it was time to harvest. Thus, in 1997, after ten years of a weak dollar, the Americans reduced the money supply to Asia and created a strong dollar. Many Asian companies and industries faced an insufficient money supply. The area showed signs of being on the verge of a recession and a financial crisis.

“A last straw was needed to break the camel’s back. What was that straw? It was a regional crisis. Should there be a war like the Argentines had? Not necessarily. War is not the only way to create a regional crisis.

“Thus, we saw that a financial investor called “Soros” took his Quantum Fund, as well as over one hundred other hedge funds in the world, and started a wolf attack on Asia’s weakest economy, Thailand. They attacked Thailand’s currency Thai Baht for a week. This created the Baht crisis. Then it spread south to Malaysia, Singapore, Indonesia, and the Philippines. Then it moved north to Taiwan, Hong Kong, Japan, South Korea, and even Russia. Thus, the East Asia financial crisis fully exploded.

“The camel fell to the ground. The world’s investors concluded that the Asian investment environment had gone south and withdrew their money. The U.S. Federal Reserve promptly blew the horn and increased the dollar’s interest rate. The capital coming out of Asia flew to the U.S.’s three big markets, creating the second big bull market in the U.S.

“When the Americans made ample money, they followed the same approach they did in Latin America: they took the money that they made from the Asian financial crisis back to Asia to buy Asia’s good assets which, by then, were at their bottom price. The Asian economy had no capacity to fight back.

“The only lucky survivor in this crisis was China.”

Whether Qiao was right in his assessment is not the point: this is what the Chinese leadership believes. And in early 2014, they became aware of US plans to stoke up dissent in Hong Kong, which led to student riots later that year. ...

There actually is another possibility, namely, that this is a Chinese “narrative.” But Soros’ involvement seems to me to be a red flag.

...

But China’s economic tentacles are not confined to Asia. It trades everywhere, and its business and investment plans offer better prospects for all Africa, South America, and even Mexico. If it wasn’t for fear of American reprisals, their support for China and willingness to take its currency in payment would have already happened. But then America took a step too far in sanctioning Russia and leaning on Brussels-based SWIFT to cut Russia out of the dollar-based global payments system.

NATO and the EU fell in line with the Americans, while Asia, numerically far larger in population, backed Russia. The Americans had miscalculated, ...

Not only has America now demonstrated to every non-aligned nation that its dollar’s power is overrated, but by imposing sanctions on Russia it ended up destabilising its own financial system. ...

..., for the longer-term China offers something which America, its World Bank, and regional network cannot. ... Because her commercial interests align with those of her trading partners, China invests in infrastructure directly on its own or in partnership, building railways, highways, and communications. China can afford to do this because she has a savings driven economy. ...

Arguably, a shaky banking system is proving to be the dollar’s final undoing. Nations who hesitated before settling trade in renminbi are no longer doing so, understanding that their dollar reserves and balances are now at risk. ...

..., central banks are also re-evaluating their reserve policies. We have seen them add to their gold reserves, which is the same thing as selling dollars. ...

But is there really a need for currency reserves? ...

They only need credit liquidity to settle their trade in other currencies. Therefore, a large proportion of dollar reserves held by central banks, which the IMF puts at $6.471 trillion, is becoming available for sale. ...

The end of the petrodollar’s monopoly

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The alternative is China and renminbi

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Assessing the impact of dollar liquidation

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Assuming that foreign holders reduce their dollar exposure and at the margin buy renminbi, the fall in the dollar relative to the renminbi could be unexpectedly sudden and substantial. ...

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We must therefore conclude that with the evidence [Macleod cites IMF stats on the drop in foreign reserve holdings] pointing to foreign selling of the dollar, that this selling could quickly escalate. Consequently, dollar liquidation by foreigners will lead to significantly higher interest rates which can only be lessened by the expansion of central bank credit. And that expansion can only come from the Fed because commercial banks are tapped out, seeking to contain their losses and reduce their balance sheet leverage. And if the Fed resorts to the printing press through currency swaps or by other means, the dollar will have had it anyway.

...

The third presentation is by Alastair Crooke, a former British diplomat. The entire video, 22 minutes, is worthwhile, but below the video I present a pretty close paraphrase of the final two minutes or so. It is in those last minutes that Crooke argues for what he believes is the real endgame that Putin has in view. This is a topic we’ve discussed in the past, but I find Crooke’s presentation to be very cogent.

20:09 [paraphrased]

Crooke has been talking about how the Western intel services persuaded the leadership class that the sanctions would break Russia within a matter of weeks. Instead, we see that total failure of the war on Russia, while we hear increasing nervous chatter about 'finding an off ramp'. Napolitano asks whether there actually is an off ramp for the American Empire from its war on Russia?

Crooke responds:

America has no off ramp because--like the European leadership class--it's still laboring under a complete delusion. America imagines that an off ramp could somehow consist of talking Russia into security guarantees for the existing regime in Ukraine--a demilitarized Crimea with a militarized Ukraine. Russia, of course, understands that this would be followed by a NATO-ization of Ukraine and a new demand that Russia leave Ukraine. That would clearly invite an attempted invasion of Crimea by the West.

Moscow will not accept this. This is all Western fantasy, all delusional when you understand the politics in Moscow. This is why you have to pay attention to the politics in Moscow. If there has been a change in Russian popular opinion, it has been in the direction of: 'Why are we still going slow? Why don't we just finish this off?'

The reason why Russia doesn't just finish this war off is as follows.

Russia and Putin are playing a slow game. Putin wants to go to the threshold of war with the West, because he wants to push the West to negotiations. NOT negotiations about Ukraine. He wants to push the West to negotiations about the original draft treaty he presented to the Americans in December, 2021, in which Russia demanded a completely new security architecture in Europe. In that draft treaty Russia demanded that NATO be rolled back--instead of which we've seen NATO rolled forward into Sweden and Finland. So we're nowhere near the point of entering such negotiations.

Crooke theorizes that Macron's statements on his China trip may have been intended to spark a discussion of all this.

My view, in line with Crooke's views, is that Russia is seeking the further demilitarization of NATO through destruction of both Ukraine and NATO military capabilities. This, along with the deteriorating financial situation, is what will push the West into the negotiations for a new security architecture that Putin is demanding. We may actually reach that point in 2023, or even this summer. Bear in mind that this is a multi-front war, with military, economic, monetary, and financial fronts. The non-military fronts may get Putin to his goal faster than the military.

It's possible to see in all this a reversal of strategies, from the Western standpoint. The West initially believed they could achieve a quick and decisive victory through the strategy of a sanctions Blitzkrieg that would force regime change in Russia--and then move on the subjugation of China. The sanctions Blitzkrieg failed, of course, and the West then conceived of a longer term war to achieve the same goal by "damaging" Russia--suckering Russia into a massive frontal assault on the well prepared Donbass fortifications and inflicting unsustainable casualties that would, again, lead to the downfall of Putin. That strategy, too, has failed, in a sort of boomerang effect--it is Ukraine and NATO that are being ground down. The ultimate goal of subjugating China appears to be disappearing over the time scale horizon. What to do? What seems to be at least under discussion is a scheme to sucker China into a war over Taiwan for which China is not prepared, opening the way for a decisive defeat of China while Russia remains tied down in Ukraine.

The difficulty is that Russia is not cooperating. Russia refuses to 'over commit' in Ukraine and instead continues to 'go slow' in Ukraine--one hand behind the back. Meanwhile, Russia is gearing up its industry for the long haul, continuing to build a global network of alliances that ties the US down, and--by keeping 'the other hand' free--increasing military coordination with China to forestall any US attack on China, with the threat of possible transfer of hypersonic missiles to China. All this with the background of the grinding down not only of NATO but also of the Western monetary system.