Sanction Me HARDER!!
Daddy....
Hello again, my friends, and greetings. If you remember a few weeks ago, I wrote on the Russian invasion of the Ukraine and tried to explain that the situation was more nuanced and much less black-and-white than the media was letting on. It wasn’t my best work because I was sick and the meds made me a little loopy, but the facts were all there. Anyway, in that missive I also examined what the results of the west’s sanctions might be, and my conclusions were the sanctions would probably hurt the west far more than they hurt Russia (here).
It seems my letter is proving to be prophetic, as I wrote it on 3/4/22 and by 3/31/22 reports were the Ruble was recovering and by 4/5/22 that the Ruble had fully recovered (here, here, and here). One might ask, in the face of all the sanctions, how could this be. You must first understand that energy in the form of natural gas, oil, and coal are Russia’s biggest exports and they were completely excluded from all the sanctions (Like I said, much of Europe would die cold and in the dark without Russian energy). This was reported as an effective strategy, and that much of Europe was shunning Russian oil anyway as of 3/3/22 (here). This was a premise that was partially false to begin with, as even in the short-term Europe is unable to survive without the Russian energy sector and Putin knows it. I am sure the original thinking was the west would buy Russian oil in USD or local currency and the sanctions would make that money useless to Russia since they would be restricted from using it for international trade. Putin is a lot of things, but stupid isn’t one of them. Russia responded by demanding all energy purchases be made in Rubles (here, here, and here). This does a couple of things. First, it transacts in a currency that the Russian government can use, at least internally. Second, it precipitates the need for European governments to sell goods into Russia (against the sanctions) to obtain the Rubles to buy the energy.
At first, the G7 Nations flatly refused Russian demands for payment in Rubles (here). Yet as of 4/8/22, the European Energy Commission Chief announced publicly that they are “considering paying for Russian gas in Rubles” (here). They are not just considering it. I assure you they will, because they don’t have any choice but to pay in Rubles or let their people die in the dark. This is especially true because energy hungry China has dramatically increased its purchases of Russian energy, agricultural products, and other manufactured goods (here, here, and here). China then refines the fuels and either uses them or sells them on through its own trade organization, completely circumventing the west’s sanctions. The same goes for food and components. Russia is able to export parts, ingredients, and other goods that China then uses in manufacturing or food production and either uses domestically or sells on as Chinese (unsanctioned) goods to the global market. This leaves Europe in the position of having a populous cold and in the dark, without energy, in an unsuccessful attempt to punish Russia, or back down and buy from Russia on Russia’s terms. I honestly don’t think Putin cares, as he uses this opportunity to make Europe irrelevant to Russian trade.
It is also interesting to look at Russia’s immediate response to sanctions while the Ruble and Russian markets were crashing. Rather than go into hand-out mode and print a bunch of new Rubles (The Russian Ruble is fiat like all other major nations currencies.) or slash rates from the 10% they were at, Russia actually did the best thing, economically, it could have. At that point, Russia elevated core interest to 20% (here). This discouraged spending and encouraged investment. While I am sure it temporarily deepened the crash, it also almost instantly cleared whatever mal-investment there was, encouraged savings, and tightened the financial base of the Russian economy. In doing this, Russia set the stage for growth and provided the funds for sound investment as soon as they were able to switch their trade from west to east. This resulted in a total recovery in less than a month and created conditions to lower rates to 17% less than two months later (here).
At this point, the sanctions leveled against Russia have only hurt Europe and inflicted little, if any, pain on Russia. But, they have driven China and Russia closer together and strengthened both countries’ global economic positions. They have done this by creating an environment where neither country is as dependent on the west as they once were and have caused both to accelerate plans for independent trade outside of western institutional control by way of the International Monetary Fund (IMF), World Bank, or other NGOs that act as political proxies for western governance of trade and create dependence on the west in developing countries. Also, it is interesting to note that over the last decade Russia has been the second largest purchaser of gold in the world (second only to China) and neither country has been much for export of the precious metal. This also allowed Russia to back off fiat status of the Ruble and peg it to a fixed value and fineness of gold, and it appears to be preparing for that, a near future where Russian banks are willing and able to exchange them interchangeably (here, here, and here). This move makes even more sense when we look at how Russia and China have been forced closer than ever by the west’s attempt to sanction Russia. A move to a gold Ruble makes more sense in light of the fact that China announced its goal to challenge the Dollar as the reserve currency in 2009 (here), and since that time they have been seriously working toward that goal. In 2015, China launched Cross-Border Interbank Payment System. This allows them to clear international transactions outside of the U.S. Dollar or the influence of the IMF or World Bank (here and here). Even before that, China has been working on their new silk road trade organization (that has used their clearance system since 2015). The goal of the new trade organization is specifically to bypass the west’s ability to affect the members’ trade (here, here, and here). China’s organization encompasses countries in Europe, Africa, South America, and Asia, totaling 139 members (here). China has also moved to back its trade currency with gold (here, here, and here). In this environment, Russia moving to back its currency with gold makes a huge amount of sense, as it would allow for Russia to trade seamlessly in China’s belt and road organization. Who cares if the trade is x Rubles or y Yuan because ultimately it is z oz of gold.
We are re-entering a multipolar world and one where we will not enjoy the power of Bretton Woods I or II, as we did the last time. After 51 years of being fully fiat and 109 years of debasement, the U.S. Dollar isn’t what it used to be and thanks in large part to a crony globalist agenda parading as capitalism, it will be a very long painful road back, if it is even possible. The worst part, as I pointed out before in my paper on economics, is we did it to ourselves (here). Our first step back, that we lack the moral fortitude or political will as a nation to take, would be to channel Volker and raise rates to 20 or 30%, sell off and zero out the Fed’s balance sheet of everything not a government bond, and then do nothing as every bubble crashes and burns. This would be painful, but hangovers always are. Let anyone steeped in mal-investment go down in flames and let all those dollars evaporate back into the ether from whence they came. This will kill all the billion-dollar zombie companies that exist only due to zero percent credit and loose monetary policy. It will cause valuations of profitable companies to normalize and erase all the false stock buy-back gains as companies are forced to sell stocks to cover the bonds they floated to buy them (artificially elevating the price). Banks that are bankrupt except for Fed policy keeping them artificially afloat will crumble. In the short term, Americans will be poorer, but that is due, as we have over-consumed for fifty years or more. Then, when the dust settles and the markets have shrunk to real value (the value of production into the economy) leaving the DOW under 5000 and the lesser markets in the low hundreds or double digits, we need to audit and unwind the Fed, ending its reign of terror on our economy. Lastly, after that is done, figure out how many dollars are really out there printed or digital and how much gold we actually have. At that point, even if it is a micro-gram to the dollar, we return to real money and will be in a place to return to prosperity. Of course, these changes would lead to massive deflation taking the weight off the consumer and raising their standard of living as they also force the removal of layers of useless regulations, as a matter of survival. It is our only hope. Unfortunately, our leadership has no courage. So, they will kick the can until it implodes of its own rot, creating much the same negative situation without as many options to soften the landing or control the unwind (make sure assets are sold back out at current lesser market value to healthy firms) that will ultimately plunge us into chaos and may result in the dissolution of the country.
It is interesting to me that America has such double standards, where it courts favor with the worst kind of tyrants and abusers namely Saudi Arabia and China, while trying to maintain some semblance of moral high ground by trying to act as human rights watch for the world against, if not lesser, no worse evils than ones we actively embrace. Just more proof the Bible is spot on in Proverbs 22:7 “The rich rule over the poor, and the borrower is a slave to the lender.” We have strayed as a nation and chosen our masters poorly. Pray for our country my friends.
God Bless you,
-Sam
Excellent Work!