The Shape of Eurasia

Western journalists might denounce it as stump rhetoric. But I don’t think Vladimir Putin is beating a drum or rattling a sabre. I think he is deadly serious: what’s more, I think he is in a position of strength, not weakness.

From Bloomberg:

Russian Prime Minister Vladimir Putin is stepping up rhetoric against the U.S. as his campaign for the March 4 presidential election intensifies after the biggest protests against his rule.

The U.S. “wants to control everything” and takes decisions unilaterally on key questions, Putin said on a campaign stop yesterday in the Siberian city of Tomsk, 3,100 kilometers (1,900 miles) east of Moscow. “Sometimes I get the impression the U.S. doesn’t need allies, it needs vassals.”

Putin, 59, is seeking a new term in the Kremlin amid the biggest challenge to his 12-year rule after fraud allegations at parliamentary polls sparked mass protests. The Russian leader, who has repeatedly accused the U.S. of interfering in other countries’ affairs, said last week that reports by a state-owned Moscow radio station supported American interests.

“The No. 1 reason Putin is doing this is elections,” Jan Techau, director of the European Center of the Carnegie Endowment for International Peace in Brussels, said yesterday in a phone interview. ‘‘It’s pre-election saber-rattling. This is vintage Putin.’’

Alas, it is all about context. This isn’t 1992; the end of history is finished. America is not an invincible hegemon, but instead has been taxed and weakened by two big wars and a myriad of small ones, a huge financial blowup, and the fallout of losing a huge hunk of its manufacturing sector to Asia. America’s monopoly over the global oil trade — and its ability to acquire oil and components with newly-printed dollars — is threatened by the current shape of Eurasia, where a coterie of authoritarian leaders, united by their shared anti-Americanism is moving to displace the dollar as the global reserve currency.

Vladimir Putin was very explicit about this.

From Rianovosti:

Russian Prime Minister Vladimir Putin accused the US of hooliganism on Monday [July 2011] over the US government’s efforts to ease its financial problems by injecting hundreds of billions of dollars into the economy.

“Thank God, or unfortunately, we do not print a reserve currency but what are they doing? They are behaving like hooligans, switching on the printing press and tossing them around the whole world, forgetting their main obligations,” Putin told a meeting of economic experts at the Russian Academy of Sciences.

The Russian authorities have said they would like to see a basket of currencies including the ruble replacing the dollar as the main reserve currency, although most analysts have said a more realistic target for Russia would be if the ruble became a regional reserve currency for the CIS.

Regular readers will know that this is not just rhetoric. These Eurasian leaders are taking direct action to displace the dollar.

From Zero Hedge:

Yuan bonds have spread across the planet, China has dropped the dollar in bilateral trade with Russia, the ASEAN trading bloc has formed into a tight shell of export partners, and that is just the beginning. Two major announcements in 2011 have solidified my belief that a complete dump of the dollar by eastern interests is near…

First was the announcement that China was actively and openly pursuing the establishment of a central bank for the whole of ASEAN, with the Yuan utilized as the reserve currency instead of the dollar:

http://www.reuters.com/article/2011/10/27/us-china-asean-financial-idUST…

This news, of course, has barely been reported on in the mainstream. As I discussed at the beginning of this article, the terminology surrounding economic developments has been diluted and twisted. When China states that an ASEAN central bank is in the works, we need to point out what this really means; the ASEAN trading bloc is about to become the Asian Union. The only missing piece of the puzzle is something that I have been warning about for at least a couple years, ever since my days at Neithercorp (see “Migration Of The Black Swans” as a recent example). This key catalyst is the inclusion of Japan in ASEAN, something which many said would take five to ten years to unfold. News released this Christmas speaks otherwise:

http://www.bloomberg.com/news/2011-12-25/china-japan-to-promote-direct-trading-of-currencies-to-cut-company-costs.html

Japan has indeed entered into an agreement to drop the dollar in currency exchange with China and has expressed interest in melting into ASEAN. Japan has also struck somewhat similar though slightly more limited deals with India, South Korea, Indonesia, and the Philippines almost simultaneously:

http://www.bloomberg.com/news/2011-12-28/japan-india-seal-15-billion-currency-swap-arrangement-to-shore-up-rupee.html

This means that the two largest foreign holders of U.S. debt and Greenbacks will soon be in a position to tap into an export market far more profitable than that of America, and that all of this trade will be facilitated by currencies OTHER THAN THE DOLLAR. It means the end of the dollar as the world reserve and probably the end of the dollar as we know it.

America might well be expected to throw a wrench into the changing chape of the global system. A (messy, prolonged and expensive) war with Iran — to disrupt Eurasian co-operation and re-assert American hegemony — might suffice in the minds of hawks, but will in reality do more harm than good, perhaps driving Russia and China into explicitly and directly defending their ideological ally. Even if this was not the case, American military power runs thin on manpower, and is  funded not by American productivity, but by debt acquisition. More debt will just strain the status of the dollar as reserve currency even more.

29 thoughts on “The Shape of Eurasia

  1. Obamas speech will be the game change. I was awestruck.

    USA Game on. Putin Knows it.

    Basically the USA is tuning inward. Obama said to all the multinationals. get out, come home, we’ll help you.

    The Eurasians know this. The USA will default and look after itself.

    • Have Obama’s people been reading my blog?

      I hope not. Anyway, as I wrote last week, Obama’s strategy is closing the stable door after the horse has bolted. It would have been a great strategy twenty years ago. Today calls for something more radical and bolder. He’s horribly ineffectual.

  2. It is interesting, we all tend to think and speak as if the nation-state is still the basic unit of analysis in ‘inter-national relations’. Capital was freed from the shackles of the nation-state in the 1980s, it flows across national borders without restrictions. The owners of the discrete ‘bit’ of Capital might be based in a particular nation-state but they have no loyalty to it, they might live in the US and be American but they own many factories in China for example. They are not loyal to America or have any responsibility towards other Americans. It is these Capitalists who rule and make the rules, not politicians. They do not care if the dollar goes, they only care if it leads to instability and they lose their own ‘foreign’ and ‘domestic’ assets. So called trans national corporations and their owners rule the world. And we know that these corporations have been assessed to be sociopaths, they display the perfect sociopathic attributes as embodied within the organizational form:

    see corporations are sociopaths here:

    http://attempter.wordpress.com/2011/03/09/corporations-are-sociopaths/

    • They are not loyal to America or have any responsibility towards other Americans. It is these Capitalists who rule and make the rules, not politicians. They do not care if the dollar goes, they only care if it leads to instability and they lose their own ‘foreign’ and ‘domestic’ assets.

      Yeah, well, the coalition of Eurasian autocracies threatens Big Capital. These autocracies are founded on nationalism. They have merely used the internationalism inherent in Big Capital for their own end: the weakening of the West, and the rise of Eurasia.

      Big Capital has been terribly foolish, putting its assets into jurisdictions fundamentally hostile to it.

  3. To me, a currency trader, all of this has already happened. The future has long overlaid the present in global cash flows. Our last open war of monetary hegemony was waged in 2003 (not counting the recent Libyan skirmish which successfully de-nationalized their oil and handed it over to the few remaining independent Dollar-based oil exploiters). But nothing can change the fact that the first decade of the 21st century was the last decade of Empire America, as it morphed into an out-of-control rogue nation.

    Geopolitically speaking, it is significant to note that China paid America to do what it did to itself. China — and to a lesser degree — Japan funded the very expensive rope that the US has sucessfully used to hamstring itself. And Afghanistan, as it has for hundreds of years, played the role of petard upon which this declining empire would hoist itself.

    Was this deliberate? By 2003, many of my fellow traders believed that to be the case — and from that perspective it was a strategy masterfully played by China. The money from Asia dried up months ago in terms of foreign treasury inflows (beyond receipts from trade deficits) — to the point where the Fed is forced to don dark glasses and pretend to be foreign buyers, bidding for Treasuries with the money they print at our so-called auctions, The blatant monetizing of our debt is pathetic, really. QE2 and 1/2.

    America might well be expected to throw a wrench into the changing shape of the global system. A (messy, prolonged and expensive) war with Iran — to disrupt Eurasian co-operation and re-assert American hegemony — might suffice in the minds of hawks….

    It’s possible. But it would be our first war effort this century that China doesn’t entirely fund. Who will? Even Zimbabwe has now adopted a gold standard. Somehow, I don’t see NATO’s RSVP showing up anytime soon. And with oil instantly pushing past $150 as a result the pointless folly (since Iran is likely already weaponized) America’s fragile domestic economy will hurtle toward collapse within a matter of months.

    Even if this was not the case, American military power runs thin on manpower, and is funded not by American productivity, but by debt acquisition.

    Check.

    America’s only hope is that another one of its fumbling, bumbling attacks on yet another sovereign nation will cause a global monetary flight to safety in the form of US Treasuries. But someday, they are going to throw a war, and nobody is going to come.

    And mate.

    I believe that the IMF is now ready to step in where currency swaps are not in place. And perhaps Putin is right, the basket will contain Rubles rather than Dollars. (I hadn’t heard that one before.) Watching at listening at Davos over the past three days has signaled nothing to the contrary.

    The best role for the US is one of rent-a-cop security-guards on the trade waters. Like a flock of black swans. Perhaps that’s why China lent us the money to build all those carrier fleets. Like I said — a strategy masterfully played.

    • I believe that the IMF is now ready to step in where currency swaps are not in place. And perhaps Putin is right, the basket will contain Rubles rather than Dollars. (I hadn’t heard that one before.) Watching at listening at Davos over the past three days has signaled nothing to the contrary.

      Have you been at Davos itself, or just watching over the net? I’ve been roundly ignoring it. I’ve been mainly watching nature documentaries (BBC) and ignoring financial news (I’m not a trader) though metals are trending up, which is a nice sign. We’re locked in a death spiral and have been since 2008 and it’s not going to magically unwind. It will have to be unwound with the blood, sweat, tears and spit of humanity. Creditors may end up taking the big hit. That is the last thing the establishment wants, but it is the Christian way, though Jesus’ role in championing debt forgiveness is mostly forgotten in the modernist interpretation of Christianity.

      Taleb seems to have been doing much the same thing; he’s finishing his new book, focussing on philosophy, epistemology, heuristics. He refuses to talk about finance these days. I am not so unflustered, though I know there will be little worth talking about in much depth until the system breaks and we see the new horizons forming. I don’t know how the financial press pumps out so much, though it is mostly sound and fury, signifying nothing. I’ve been guilty of it myself sometimes.

      One thing we need to keep in mind is how quickly the entire paradigm might change after the Greek default. We could hit a credit collapse in microseconds or minutes, not days or weeks after such an event.

      The best role for the US is one of rent-a-cop security-guards on the trade waters. Like a flock of black swans. Perhaps that’s why China lent us the money to build all those carrier fleets. Like I said — a strategy masterfully played.

      I’m cautious against giving China too much credit. They played a textbook Sun Tzu/ Machiavelli game against a misled gang composed of Ivy League morons operating from a playbook of often contradictory mathematical models, as well as pumped-up testosterone driven neocons. The level of discussion in the West has degenerated; too much wealth, too much easy success, too much leisure. Prosperity ruins, and absolute prosperity ruins absolutely.

      • Do you think that the Generation X,Y,Z 2.0 will enage in philosophy, epistemology, heuristics as a way of tackling the problems of the world?

        Or will they resort to religious inspired violence?

        The Arab spring resulted in a big show for the Muslim Brotherhood. Liberal (Left Socialist) parties did not do too well.

        Will religious radicalism (not intellectual Anarchic ideas) combined with the State (No separation of religion and state) be the order for the new millenium?

        Russia is deeply religious, and the State is very powerful. So too are a handfall of Islamic States.

        • As a member of the generation of which you speak (I was born 1987), and as an individual who resorts to philosophy quite a lot, I think my generation — at least the Western part of it — will choose violence. I don’t know about religiously-inspired violence; more likely just a mixture of mindless self-gratification like we saw in England last year, and political violence demanding government handouts and bread and circuses.

          In Eurasia and Africa I actually think there will be far less violence. Not for political reasons, but economic. They will start enjoying the prosperity of their productivity, instead of shipping it away to lazy and feckless Westerners.

        • Yes I have been to England, and seen the “youths” you talk about. I even hung out with them, and a dodgy pub, before I took the ferry to Ireland. Now those guys would be scary when agitated!

          I saw an entire pub run by a ” Bovver Boy Gangster” he offered drugs, shoes off the back of a truck. I politely refused and humored him about coming from a family too smart to be caught and shipped off to Australia. He loved that!

          I always take the less beaten tourist path. It helps me understadn a country. I walked through the slums of India, Mumbai made famous by “Slum Dog Millionaire” The most crushing poverty with families living in cardboard boxes, and some men sleeping on the rooves of cars, so the dogs would not hassle them. These people would not riot because it is engrained in them to be submissive.

          So predicting human nature is difficult. One may react to poverty. One may embrace it as their destiny.

  4. The next frontier is the impact the Greek default — that even Merkel now foresees — on Morgan Stanley et al. They have massive indirect exposure, even if they claim that isn’t the case. That’s why the Fed is using FX swap shenanigans to ensure Euro-liquidity. This trend will get bigger in the next few weeks.

    Bernanke’s pedigree should Europe trigger another credit event is another zombie bailout. More taxpayer cash for dim-witted jackasses who spent too much time trading charts and not enough time picking apart the fundamentals.

    Will this be the cotton-linen blend to break the camel’s back? Aziz suggests he thinks so. I think the black swans flock in ways we do not understand. The end will come not from the printing press, but something far pettier. The US fleet as the hired mercenary muscle enforcing the New Chinese World Order is far likelier than any conflict.

    • Well I don’t rule out the world coming to blows. As I said above, the Western establishment is an unsavoury blend of testosterone-driven libidinous alpha dogs and autistic wonks. It’s not China’s plan to have a war (as I’ve detailed before), but there’s nothing like the sour taste of collapse to trigger aggression. I don’t play poker but I know that players lose way more than they would otherwise when they tilt.

  5. I’m a big fan of of Russia over the long term. Low debt, many natural resources and a battle harden population (economically speaking) point to a future of out-performance in the global marketplace. Too bad I know next to nothing about Russia.

    • I wouldn’t put my money into something Putin could arbitrarily seize. Then again, I wouldn’t put my money into something Obama could arbitrarily seize.

      It comes down to whichever jurisdiction you think you have the most judicial recourse.

      • I pick Russia. Thats just based on my above parameters.

        It is my belief that both regimes are SNAFU, therefore picking between the two would, for me, be a guess.

    • I am with you on Russian. I have been trying to find English speaking mining experts. None available. I hear from the English schools over there that the students are not interested in learning english. I guess they feel it is better to work in Russia, deal with China. I guess you can have a home and car and family with all the holidays to Asia or Europe.

      It has stupendous natural reserves, and the neo cons are investing in its infrastructure and business.

      If you don’t interfere in Politics, Putin has no reason to seize your assets.

  6. I have never understood this talk about a Greek default. It was never going to happen that way. There’s just too much exposure in all the powerful places. Generally, I’ve found all this Greece drama to be a deliberate distraction (generated by the UK and US) from the bigger picture.

    I’m watching Davos; not attending. I pay attention, however (not that they have ever had any foresight about economic conditions even a few months out. In fact, they may be the worst of the worst anticipators). I watch for the policy squabbles. This one, however, was quite unique in that “capitalism” itself was analyzed as a problematic system for the global demands of the future. That was interesting. The Chinese didn’t attend because the dates conflicted with their national New Years celebration. The Davos organizers decided to never let that happen again and changed future dates. Good thinking….

    • Well, Greece is a “real story” in the sense of watching what will be done about it, and what consequences those actions will have on the wider picture, i.e. how much money will be printed, by whom, where that money will be channelled, and how creditors will react.

      I think it’s very interesting that “capitalism” is now being perceived not only as the economic system we live in (its not), but also as the “problem” (moot point if we don’t live in a capitalistic system.

      I wrote this article last month on this point: http://azizonomics.com/2011/12/06/capitalism-explained-for-angela-merkel/

      I’ve been thinking a lot about the psychology of central planning. I think it’s mostly a hubris problem; very clever but also simultaneously naive people believe they “understand” systems, they “understand” causality, they “understand” the economy and so can take the “right” actions to “improve” things, without grasping the unintended consequences of their behaviour.

  7. Another very important statistic that a lot of people forget is that China’s GDP is 80% enterprise and 20% state. America’s is 75% enterprise and 25% state. Who are the “capitalists” now?

  8. http://www.zerohedge.com/news/its-official-german-economy-minister-demands-surrender-greek-budget-policy-says-it-first-many-s

    Sam Clemons says:
    “Even though it is as easy as just creating it out of thin air, why just give something away when you can make people beg and fight for it? Doing it this way clearly defines the servant and the master. Now that living standards have risen too much for most average people, the sociopath elitists want a way to easily distinguish themselves as the saviors for the masses.

    To borrow from George Orwell even though it is about war, I think it still applies.”

    “The primary aim of modern warfare is to use up the products of the machine without raising the general standard of living. Ever since the end of the nineteenth century, the problem of what to do with the surplus of consumption goods has been latent in industrial society. From the moment when the machine first made its appearance it was clear to all thinking people that the need for human drudgery, and therefore to a great extent for human inequality, had disappeared. If the machine were used deliberately for that end, hunger, overwork, dirt, illiteracy, and disease could be eliminated within a few generations. And in fact, without being used for any such purpose, but by a sort of automatic process — by producing wealth which it was sometimes impossible not to distribute — the machine did raise the living standards of the average humand being very greatly over a period of about fifty years at the end of the nineteenth and the beginning of the twentieth centuries. But it was also clear that an all-round increase in wealth threatened the destruction — indeed, in some sense was the destruction — of a hierarchical society. In a world in which everyone worked short hours, had enough to eat, lived in a house with a bathroom and a refrigerator, and possessed a motor-car or even an aeroplane, the most obvious and perhaps the most important form of inequality would already have disappeared. If it once became general, wealth would confer no distinction. It was possible, no doubt, to imagine a society in which wealth, in the sense of personal possessions and luxuries, should be evenly distributed, while power remained in the hands of a small privileged caste. But in practice such a society could not long remain stable. For if leisure and security were enjoyed by all alike, the great mass of human beings who are normally stupefied by poverty would become literate and would learn to think for themselves; and when once they had done this, they would sooner or later realize that the privileged minority had no function, and they would sweep it away. In the long run, a hierarchical society was only possible on a basis of poverty and ignorance.

    To return to the agricultural past, as some thinkers about the beginning of the twentieth century dreamed of doing, was not a practicable solution. It conflicted with the tendency towards mechanization which had become quasi-instinctive throughout almost the whole world, and moreover, any country which remained industrially backward was helpless in a military sense and was bound to be dominated, directly or indirectly, by its more advanced rivals. Nor was it a satisfactory solution to keep the masses in poverty by restricting the output of goods. This happened to a great extent during the final phase of capitalism, roughly between 1920 and 1940. The economy of many countries was allowed to stagnate, land went out of cultivation, capital equipment was not added to, great blocks of the population were prevented from working and kept half alive by State charity. But this, too, entailed military weakness, and since the privations it inflicted were obviously unnecessary, it made opposition inevitable. The problem was how to keep the wheels of industry turning without increasing the real wealth of the world. Goods must be produced, but they must not be distributed. And in practice the only way of achieving this was by continuous warfare. The essential act of war is destruction, not necessarily of human lives, but of the products of human labour. War is a way of shattering to pieces, or pouring into the stratosphere, or sinking in the depths of the sea, materials which might otherwise be used to make the masses too comfortable, and hence, in the long run, too intelligent. Even when weapons of war are not actually destroyed, their manufacture is still a convenient way of expending labour power without producing anything that can be consumed. A Floating Fortress, for example, has locked up in it the labour that would build several hundred cargo-ships. Ultimately it is scrapped as obsolete, never having brought any material benefit to anybody, and with further enormous labours another Floating Fortress is built.

    In principle the war effort is always so planned as to eat up any surplus that might exist after meeting the bare needs of the population. In practice the needs of the population are always underestimated, with the result that there is a chronic shortage of half the necessities of life; but this is looked on as an advantage. It is deliberate policy to keep even the favoured groups somewhere near the brink of hardship, because a general state of scarcity increases the importance of small privileges and thus magnifies the distinction between one group and another. By the standards of the early twentieth century, even a member of the Inner Party lives an austere, laborious kind of life. Nevertheless, the few luxuries that he does enjoy his large, well-appointed flat, the better texture of his clothes, the better quality of his food and drink and tobacco, his two or three servants, his private motor-car or helicopter—set him in a different world from a member of the Outer Party, and the members of the Outer Party have a similar advantage in comparison with the submerged masses whom we call ’the proles’. The social atmosphere is that of a besieged city, where the possession of a lump of horseflesh makes the difference between wealth and poverty. And at the same time the consciousness of being at war, and therefore in danger, makes the handing-over of all power to a small caste seem the natural, unavoidable condition of survival.”

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