Putin waited till the West was vulnerable to a rug pull. The US and the West have a formidable debt burden that cannot be balanced, interest rates that are hard to raise without terrible consequences, with fragile markets and now facing waning confidence in fiat money. The timing for a philosophical rug pull was perfect. You believe in free markets and rule of law? Try this!
Putin has set events in motion that are causing markets to close altogether. Witness the events on the London Metal Exchange. The price of nickel doubled in two days. Russia is the third-largest nickel producer in the world. The violent and out of ordinary price movement seems to have been caused by a Chinese short seller. There have always been grave doubts about all these sorts of metals in China. Do people really have the collateral or did the piles of metal disappear in the middle of the night most of the time? The Ponzi schemes behind metal trading in China have long been favorite speculation by the Zerohedge crowd. But, what matters now is that the exchange did not want to face the problem, so they simply closed the market and canceled some £4b worth of trades. The FT put is nicely, “Some market participants say that in effectively scrubbing the day from the record books, the exchange crossed a line. Not only did the LME fail to manage the risks, but it also picked aside when it should be neutral, they say.” Of course, the LME is owned by the Chinese. Then, when they tried to re-open the LME it went limit down and they shut it again. The question is not “what is your position in the market?” The question is how will you deal with a world in which there is no market?”
The LME may be a harbinger of what is to come. Many firms sold China a stake because they wanted the capital. But, when push comes to shove, they, and the Russians, seem happy to do what suits the interests of the nation, rather than those of mere traders. Money is going to gravitate to the US and UK as a result of all this. Investors will begin to shun Chinese-owned exchanges. The aptly named Alex Gerko (related to Gordon Gecko?), the co-Chief Executive of the XTX, an electronic market maker, started calling the LMR the “Soviet Metal Exchange”.
Might investors shun US assets, especially US Treasuries, as a result of these events? Could this cause markets to not just become volatile but to close altogether?
Consider this possibility. The West’s decision to expropriate assets is also the result of Putin’s “Go Ahead and Hit Me” provocation. Has the West has been baited into abandoning its commitment to rule of law? By refusing to honor Russia’s central bank reserves, the West has weaponized money again. Now, it seems perfectly reasonable to say that you cannot expect your reserves to be honored if you are going to roll tanks across an internationally recognized boundary and start a genocide (the International Court of Justice has just green-lighted the use of that word (genocide) in the context of Ukraine). That is certainly the message China will have gotten. Could an action in Taiwan or with regard to the Uighurs result in China losing $1t in reserves? Yes. But, does the West still depend on China and other emerging markets to continue circulating their savings into US Treasuries? Yes. The US continues to spend more than it earns and needs foreigners to buy Treasuries to finance this. Will China keep putting its money into the US Treasury market? Well, they had already decided some years ago to shift that capital into the real economy. That was the whole point of the Belt and Road Initiative. It replaced US Treasury purchases. But, the Chinese still hold about $1T of Treasuries, which is no small shakes. You can’t say “you are bad guys but we still want your money” very easily. The US and Europe will have to engage in austerity too now as a result of the decision to not recognize Russia’s central bank reserve positions. Is it the right decision? Yes. But, is it an injury the West must now contend with? Yes.
It is worth listening to Grant Williams’s powerful podcast with Luke Gromen. Luke explains how the West became so vulnerable. In short, Putin’s actions will compel America to default on its own citizens. There are two ways. Either we are all forgoing retirement and accepting that Social Security payments are never coming, or we force the government to print, which means inflation on a scale that dwarfs what happened to the Weimar Republic. Gromen rightly says, “We’ve got 90 trillion dollars owed in social security and entitlements”. Whether we abandon pensions or print the end result is the same. The US will have defaulted on its citizens. Was Putin aware of this possibility? Is China aware as they wonder whether they will ever get their money back? I think yes. In my experience, it’s only Americans who have no idea that they owe anybody anything.
Or, consider the possibility that the whole world is now shifting to US Dollars. America’s moral victory and Russia’s moral failure will cause the world to run to the old safe haven the USD. The fact that pretty much every single emerging market has dollar-denominated debt and faces a USD shortage further ensures that the demand for dollars is far from waning.
So, which is it? The victor is mortally wounded (see Gromen) or the victor wins the spoils. Which is it? Can it be both? We will see America default on its citizens and lenders through inflation. Yes, we will pay the lenders back the $100 we borrowed but it is going to be worth a lot less. Will America default on its own citizens by breaking the promises and failing to deliver government payments? Yes. Will Americans simply have to work longer? Yes. Will that fix the problem? Actually, yes, it will but at what cost to public trust? A huge loss of trust and faith in government is bound to ensue, and that’s starting from the already depressed levels of trust.
Then there is the more existential problem of “Texas Hold’Em”. The financial conflicts mean nothing if they are reset by nuclear conflicts. This nuclear dagger is a risk to the heart of the world economy. To remind, Russian strategy calls for escalation to nuclear in order to achieve a de-escalation that allows Russia to win its policy goals. See: “Escalate to De-Escalate”. Putin has threatened nuclear, though most observers are too stunned by this possibility to properly absorb the real probabilities. While the West reels in either disbelief or overconfidence that he would never dare, we see Putin confirming intent by launching three new weapons systems at the same time. He launched a Kh-47M2 Kinzhal in Ukraine. If anyone doubted the seriousness of his threat to go nuclear, they cannot doubt it now. This is the first time Russia has admitted to using these hypersonic missiles in combat. The Kinzhal, which means “dagger”, is a hypersonic missile against which there are no known defenses due to its speed (12,350 k per hour) and ability to change course mid-air. It can carry a nuclear payload of 480 kg. That is “33 times the yield of the Fat Man bomb dropped on Hiroshima”. In this instance, it was not carrying a nuclear payload and was used to hit a weapons cache. But, it can carry a nuclear payload, which was the key point in deploying it. Putin’s threat to go nuclear has to be taken far more seriously as a result of this event.
Note that the Kinzhal hit happened in Ivano-Frankivsk, which is in the far West of Ukraine, not very far from the borders of Poland, Hungary, Slovakia and Romania - all NATO countries. The missile has a reach of 2000 miles. So, the message is clear. The nuclear threat is now aimed squarely at NATO. Take a look at the location of NATO bases in Romania.
In February, Kinzhals were deployed to Kaliningrad. Here is a 500-mile radius map. These things go 2000km! This means all of Western Europe is within easy range.
Consider that Russia already has a foothold in Transnistria, a location that is hardly mentioned by the press. The Council of Europe just designated Transnistria as “Russian Occupied Territory”. It was only two weeks ago that The President of Belarus intimated that Russia’s next objective was to invade Moldova, which means operating from the Russian foothold in Transnistria. Moldova is a target. The US advised US citizens to leave Moldova on February 15th. Until now Moldovans have neem welcoming Ukrainian refugees. Going forward, Moldovans may become fleeing refugees themselves. There is nothing like the threat of a possible nuclear event in your neighborhood to get people moving. An exodus in Moldova would make Putin’s efforts to control the West of Ukraine much easier.
There are also rumors that Putin also just deployed a K300 Bastion-P missile in Odessa. In this case, it seems to have been used to destroy the Ukrainian radio and radar intelligence centers in Veliky Dalnik and Velikodolinskoye. These are anti-ship missiles generally used for defending coastal locations. The Russians have deployed them in Asia, in the Kuril Islands which are disputed by Japan, and in the Arctic. These missiles are all about dominating sea lanes. If Putin is aiming for Odessa or the southern coastline of Ukraine, it makes sense that he is putting missiles into place that can fend off any NATO naval efforts.
Putin also used a 9A52-4 Tornado for the first time in action near Kyiv. This is an MLRS system, which means multiple rocket launchers. Bellingcat recently mentioned that these launch cluster bombs. The Russian news agency described the weapon in 2018 as “Russian Tornado-S Rocket Systems Deliver Blow That Rivals Nuclear Blast”.
These are all signals that many in the West are missing. Yes, the West is winning. But, the victor remains at risk of existential threat. The question is, what else might Putin be planning that would get the West to take actions that actually hurt itself more than him? The wounded victor needs to wake up to these possibilities.
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Borrow a little you are a borrower. Borrow a lot and you are a partner. I believe having countries hold their reserves in US treasuries builds interdependence, provided the loans are denominated in dollars (a fiat currency).
2nd article this week claiming the "US is winning", while illustrating the opposite, except for the claim that money will flow to the USD. Historically, yes. However, that was all based upon the faith in the USD & US debt. Is the faltering of that faith not the central "reveal" of these events?
India, China & Saudi all moving to trade directly with Russia & China, without the USD (see the Luke Gromen interview linked here). That advances the end of the Petrodollar - see above. IMO, these last 2 articles aren't logically consistent. They're more like clickbait.
Example after example... https://twitter.com/JavierGoya7/status/1504511599247249414?s=20