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People who live in glass houses

Imagine what it would be like if you had a secret benefactor.  Someone who arranges to cover half of the cost of everything you buy, without you ever realising it.  A few people would probably put aside some of the savings for a rainy day.  But most of us would simply live our lives at that level of spending.  And as time went on, we would simply assume that this standard of living was normal.

Now imagine what would happen to a person living like this when their unknown benefactor dies.  Suddenly, the purchases they were enjoying at half-price would have to double.  And the standard of living they had been enjoying would have to be dramatically reduced.  This would require some very tough decisions about what constitutes essential spending.

For an individual in these circumstances, this would be pretty tough.  But now imagine an entire country living in this way.  Indeed, imagine an entire empire with a population of around a billion people, suddenly discovering that its benefactor had passed on and that it had been living beyond its means for decades.

This, in effect, is what is currently happening to the Western Empire – the USA and its European, Asian and Australasian vassal states.  The benefactor was the Eurodollar system which allowed the Western banks to create dollars out of thin air, while the remaining three quarters of the world had to generate a dollar’s worth of value for each dollar they needed to exchange…  and it wasn’t as if they had a choice.  To obtain the energy they needed to maintain and grow their economies, they had to pay in dollars for oil, gas, and coal.  The same went for the various minerals and raw materials they needed to import.  Worst still for some, the only way of accessing dollars was to borrow at rates of interest which more or less guaranteed they would go broke.  And when this happened, they would fall back on an International Monetary Fund which would force them to sell their resources on the cheap, while driving their people into poverty.

We – the “golden billion” living within the empire – meanwhile, would periodically call for debt forgiveness along with relief efforts not tied to the dollar… but never to the point that it endangered our own bloated living standards.  Except that, over the long-term, that is precisely what it did.  The mechanism – which I refer to as the wealth pump – in which an empire exchanges currency for commodities and goods of real value, has been around for as long as people have organised into states.  It is precisely why America fought a war of independence against Great Britain, and why as it was incorporated into the British Empire, India went from being one of the richest places on Earth to one of the poorest.  And while the USA has done it differently – deploying military bases and threatening regime change, rather than seeking to administer countries directly – the same wealth pump has resulted in most of the resource-rich states also becoming the poorest.

Empires though, are like men… they grow old, flabby and soft.  As the generations pass, the pioneering spirit and self-sacrifice which allowed the empire to emerge in the first place, is replaced by selfishness and petty-mindedness.  As G. Michael Hopf famously put it:

“Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times.”

In the case of the Western Empire, we simply deluded ourselves into assuming that the dollar had value independently of the economy behind it.  We decided to test the assumption attributed to Henry Kissinger (although he didn’t say it) that “control the food supply and you control a country, control commodities and you control continents, but control the currency and you control the world.”  Based on this erroneous thinking, it was easier to allow the economic base of the western states to be offshored to Asian states which offered cheap labour and few regulations, than to do the hard work required to maintain the profitability of our own economies.

The trick – and it was spectacularly successful – was for one of the emerging Asian states to subvert the dollar monopoly on trade in oil, by turning instead to an older fossil fuel which the western states were rejecting due to its impact on the environment.  We cannot talk about China without talking about coal.  Although inferior to oil as a fuel, with the western states switching to gas, coal was a cheap energy source which, after it was admitted to the OECD, China used to power its explosive two decades of economic growth:

In the last decade, China has released more carbon emissions – the bulk from coal – than the UK has since the dawn of the industrial revolution.  But it wasn’t just China whose economy was beginning to take off in the first years of the new century.  Russia was emerging from the severe depression which followed the collapse of the Soviet Union.  India and Brazil (the second and seventh biggest populations on Earth) were also emerging as rising economic powers.  And so, US journalists began talking about the BRIC countries (South Africa was added later so as to include an African state).

At the time, the BRICS existed only as media shorthand for the handful of states whose economies might challenge western economies in the new century.  But almost as a self-fulfilling prophesy, the BRICS leaders got together and discovered that they had a lot in common… not least because they were at a disadvantage in a dollar-based system which favours the United States and its vassals.

In the course of the last two decades, the BRICS countries have set out to reverse this western privilege by creating international organisations which mirror those of the western empire.  The Eurasian Economic Union and the Shanghai Cooperation Organization are similar in aims to the pre-1992 European Economic Community, establishing favourable internal economic and trading relationships and encouraging closer political, cultural and scientific ties.  The New Development Bank is a BRICS equivalent to the western World Bank, while the Contingent Reserve Arrangement mirrors the International Monetary Fund, but without the stringent neoliberal conditions which drive recipients of western “support” into poverty.  There are even plans to establish a fibreoptic network to act as a discrete BRICS digital payment network similar to the western swift system.  And today, on the agenda for the BRICS leaders’ meeting next week, is the proposal to launch the much feared and much misunderstood BRICS currency.

We should be afraid… but not for the reasons offered in western media when they deign to notice that there is a world beyond the borders of the empire.  The BRICS (let’s call it that until it is officially named) is not about to end the US dollar’s reserve currency status.  Nor is it likely to be a gold-backed currency in the way that, for example, the British pound was in the nineteenth century.  Even though, as Alasdair Macleod at GoldMoney argues, China and Russia have more than enough gold reserves to back their currencies and to support the emerging BRICS:

“All the vibes coming out of the Russian and Chinese axis strongly point to a new gold-linked trade settlement currency being proposed at the BRICS summit in Johannesburg later this month. Until the details are revealed, we won’t know what this proposal actually is, whether it will fly, whether it will be simply imposed on BRICS members, or if they will have a say about its introduction and if so its form…

“Not only are there clear advantages to the Russian and Chinese axis from supporting a new trade settlement and commodity purchasing gold-backed currency, but the rapidity of its introduction could take the world by surprise. There is now little doubt that the fiat currency regime based on the dollar has run its course, leaving multiple debt traps to be sprung in the western alliance and an outlook of stagflation or worse… These range from government debt traps, and the bank credit cycle turning down, to the ability of the major central banks to rescue failing commercial banks, given they themselves are in negative equity. The gross values of many derivatives should also be recorded on bank balance sheets, to properly reflect counterparty risks.

“At the very least, if China and Russia’s grand project is to proceed, the renminbi and rouble must be protected from a fiat currency crisis. This is the moment for which the Chinese have been preparing since 1983, and the Russians more recently sparked by western sanctions. They at least have sufficient bullion available to cover their narrow money supply with ample margins and are the two largest nations by goldmine output…”

This though, may also be a misunderstanding of what the BRICS is going to be.  As I noted last month, the new BRICS is going to be akin to the rejected Bancor proposed by John Maynard Keynes at the Bretton Woods conference in 1944.  As Jim Rickards explains:

“In all likelihood, the new BRICS+ currency would not be available in the form of paper notes for use in everyday transactions. It would be a digital currency on a permissioned ledger maintained by a new BRICS+ financial institution with encrypted message traffic to record payments due or owing by participating parties. (This is not a cryptocurrency because it is not decentralized, not maintained on a blockchain and not open to all parties without approval.)

 “The latest information from the BRICS working groups is that this basket valuation methodology is encountering the same problems that John Maynard Keynes encountered at the Bretton Woods meetings in 1944.  Keynes initially suggested a basket of commodities approach for a world currency he called the bancor. The difficulty is that global commodities included in any basket are not entirely fungible (there are over 70 grades of crude oil distinguished by viscosity and sulfur content among other attributes).

“In the end, Keynes saw that a basket of commodities is not necessary and that a single commodity — gold — would better serve the purpose of anchoring a currency for reasons of convenience and uniformity.

“Based on the impracticality of commodity baskets as uniform stores of value, it appears likely that the new BRICS+ currency will be linked to a weight of gold.”

The final three words of that quote are the piece of the jigsaw that most western commentators miss.  By linking the new BRICS to a weight of gold rather than its price, they escape the speculation and price fixing which has bedevilled the western gold market.  But this is also a longer-term bet that the various debt-traps identified by Alasdair Macleod are going to bite western central banks sooner rather than later.  Traditionally, in such currency crises, central banks buy gold to shore up their currency.  This time around though, doing so will serve to increase the value of the BRICS while lowering the value of the US dollar and the vassal currencies attached to it… as Rickards puts it:

[The BRICS] win by doing nothing.  They just do nothing. They let the dollar destroy itself, and they let the dollar price of gold go up.”

And, of course, the most damaging way in which the USA and its vassals have undermined the US dollar in recent times is via the abuse of sanctions, as Rickards once explained to US treasury officials:

“The world actually could not destroy the dollar, but the US could. And that’s the key point — the US is destroying the dollar, and they’re doing it through sanctions.”

As I pointed out eighteen months ago, the sanctions diarrhoea directed at Russia in the wake of the invasion of Ukraine carried huge risks for economies like the UK – which is following a similar trajectory to every other failed oil state we have ever seen:

“Britain famously became the place where dictators, Soviet era officials, Arab oil Sheiks, Chinese bureaucrats and Russian oligarchs came to invest their ill-gotten gains – crucially, keeping them away from the USA where they might be sanctioned and impounded.

“This is why the confiscation of everything from yachts to football clubs which your Russophobic social media friend has been whooping with joy about, is about to have some seriously negative consequences for millions of people here in the UK.  The problem is not so much that the UK government has confiscated the wealth of billionaires – there is a good moral case for broadening the approach to include western billionaires too.  Rather, it is because the City of London Ponzi scheme depends ultimately on trust.  And while it is currently Russian billionaires who are suffering, foreign investors from around the world now understand that London is no longer a safe place to park wealth.

“This has two immediate effects.  First, and very quietly for now, foreign investors with assets in the UK are selling or swapping them.  Second – and more worryingly – people who would otherwise have bought assets in the UK – exchanging dollars for pounds in the process – have been chastened, and may well follow Saudi Arabia, Russia, India and Brazil into a new, gold-backed Yuan system instead.”

Just as has happened domestically in recent times, the western elites acted as if nobody was watching on an international level too.  So that, when they stole the Russian central bank’s US treasury bond holdings, it wasn’t just the Russian government which sat up and took notice.

Treasury bonds are at the heart of the US dollar’s global reserve currency status.  As Rickards explains:

“When analysts say the dollar is the leading reserve currency, what they actually mean is that countries hold their reserves in securities denominated in a specific currency. For 60% of global reserves, those holdings are U.S. Treasury securities denominated in dollars. The reserves are not actually in dollars; they’re in securities.

“As a result, you cannot be a reserve currency without a large, well-developed sovereign bond market. No country in the world comes close to the U.S. Treasury market in terms of size, variety of maturities, liquidity, settlement, derivatives and other necessary features.”

However, what the decision to steal Russia’s dollar-denominated securities did was to turn them into an unsafe reserve for countries outside the western empire, which might easily face a similar theft in the event that a US administration took issue with their domestic policies.  And so, it is not just Russia which has a newfound urgency to develop an alternative currency system… also looking seriously at joining the new BRICS system are: Afghanistan, Algeria, Argentina, Bahrain, Bangladesh, Belarus, Egypt, Indonesia, Iran, Kazakhstan, Mexico, Nicaragua, Nigeria, Pakistan, Saudi Arabia, Senegal, Sudan, Syria, Thailand, Tunisia, Turkey, United Arab Emirates, Uruguay, Venezuela, and Zimbabwe.  That’s around half of the world’s PPP GDP in a bloc which includes two of the top three oil producers, more than half of the world’s grain, and most of the world’s mineral resources.

What the BRICS don’t have – at least not yet – is a viable bond market with which to challenge the US bond market.  However, according to Rickards, the means by which states financed warfare in the twentieth century might provide a greatly expanded BRICS bloc with a means of quickly developing a viable bond market:

“From 1790–1917, the U.S. bond market was for professionals only. There was no retail market. That changed during World War I when Woodrow Wilson authorized Liberty Bonds to help finance the war.

“There were bond rallies and Liberty Bond parades in every major city. It became a patriotic duty to buy Liberty Bonds. The effort worked, and it also transformed finance. It was the beginning of a world where everyday Americans began to buy stocks, bonds and securities as retail investors.

“If the BRICS+ use a kind of Liberty Bond patriotic model, they may well be able to create international reserve assets denominated in the BRICS+ currency even in the absence of developed market support.”

Given the choice between putting your savings in a BRICS bond or in Zimbabwe Dollars, Sudanese Pounds, Venezuelan Bolivar or even Russian Roubles, the BRICS might well emerge with an instant market of several billion people.  After which, even western traders are going to get involved.  At which point, would you rather invest in a BRICS Bond or a British Gilt?

What the Western political class has never understood is that the collapse of the Soviet Union did not usher-in a new American century any more than fracking created a century of energy-independence.  Rather, a country – and, indeed, a western empire – which was at its height in the immediate aftermath of the Second World War, was already well into its dotage before those two events provided it with one final burst of energy before its collapse.  And given its underlying weakness – which was revealed in the energy crises of the 1970s, the depression of the 1980s, and the financial boom-and-bust of the 1990s and early 2000s – it was incumbent upon the western elites not to do anything which might destabilise an already creaky economic edifice.  Indeed, at all costs, that elite needed to avoid tit-for-tat trade tariffs, unnecessary and unplanned economic lockdowns, and especially sanctions salads against the world’s biggest resource and manufacturing states.

To paraphrase the old saying, people who live in glass houses should avoid throwing sanctions… in case they find that BRICS are flying back at them.

As you made it to the end…

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