Some have queried how it could be that President Putin would cooperate with President Trump to have OPEC+ push oil prices higher – when those higher prices precisely would only help sustain U.S. oil production. In effect, President Putin was being asked to underwrite a subsidy to the U.S. economy – at the expense of Russia’s own oil and gas sales – since U.S. shale production simply is not economic at these prices. In other words, Russia seemed to be shooting itself in the foot.
Well, the calculus for Moscow on whether to cut production (to help Trump) was never simple. There were geopolitical and domestic economic considerations – as well as the industry ones – to weigh. But, perhaps one issue trumped all others?
The ‘Great Lockdown’ Recession appears to Be the worst Since Depression.
Since 2007, President Putin has been pointing to one overarching threat to global trade: And that problem was simply, the U.S. dollar.
And now, that dollar is in crisis. We are referring, here, not so much to America’s domestic financial crisis (although the monetization of U.S. debt is connected to threat to the global system), but rather, how the international trading system is poised to blow apart, with grave consequences for everyone.
In other words, Covid-19 may be the trigger, but it is the U.S. dollar – that is the root of the problem:
“We’re looking at a commodity-price collapse and a collapse in global trade unlike anything we’ve seen since the 1930s”, said Ken Rogoff, the former chief economist of the IMF, now at Harvard University. An avalanche of government-debt crises is sure to follow, he said, and “the system just can’t handle this many defaults and restructurings at the same time”.
“It’s a little bit like going to hospitals and they can handle only a certain number of Covid-19 patients, but they can’t handle them – all at once”, he added.
“More than 90 countries have inquired about bailouts from the IMF—nearly half the world’s nations—while at least 60 have sought to avail themselves of World Bank programs. The two institutions together [only] have resources of up to $1.2 trillion”.
Just to be clear, this amount is simply not enough.
Rogoff is saying that $1.2 trillion is a drop in the ocean – for what lies ahead. The health of the global economy thus has attenuated down to a race between dollars flooding out of this ‘complex self-organizing’ system amidst the coronavirus pandemic, versus the very limited resources of the IMF and World Bank to pump dollars in.
Just ramp dollar flow into the system. But whoa – hold on! This would mean the U.S. needs to provide a flow of dollars enough to meet ‘rest of world’ needs – ‘during the biggest collapse since the 1930s’?
There is $11.9 trillion of U.S. denominated debt out there alone, plus the dollar float required to finance day-to-day international trade (usually held as national, foreign exchange reserves).
That, however, is only a fraction of the dollar-denominated debt ‘problem’, since a part of that debt takes the characteristics of a distinct ‘currency’ used in international trade, called Eurodollars. Mostly (but not exclusively), they present themselves as if ordinary dollars, but what distinguishes them is that they are overseas dollar deposits that exist outside of U.S. regulation, in one sense.
But which – in the other sense – these Eurodollars have become the tools extending U.S. jurisdiction (think of US Treasury sanctions against Iran for example), across the globe, using U.S. dollars, as its medium of trade. This huge Eurodollar market serves Washington’s geo-political interests by enabling it to sanction the world. Hence, the Eurodollar market is a main tool to the U.S.’ covert ‘war’ against China, Iran, and Russia.
Eurodollars just ‘emerged’, (initially) in Europe after WW2, and grew organically to a huge size, by the European banking system simply electronically creating more of them. The Achilles’ Heel is that it lacks any Central Bank to supply it with additional liquid dollars, as and when, payments into the U.S. sphere are sucked out of it.
This happens especially in times of crisis, when there is flight to the onshore US dollar.
Oh, no. Oh yes!
It’s another self-organizing dynamic system that can only ‘grow’ under the right conditions but will be prone to dynamic de-construction if too many dollars are withdrawn from it. And now, with the Covid-19 pandemic, the Eurodollar market is in a near panic for dollars: liquid dollars.
The U.S. Fed does ‘help out’, at its own discretion, but mainly through offering to swap other currencies for dollars, and by extending short term dollar loans. But this ‘swap bandage’ cannot of course stop a full-blown global trade blowout – in exactly the same way that the Fed is ‘supporting’ U.S. domestic financial system – by throwing trillions of dollars at it.
President Putin saw this eventuality long ago, and predicted the dollar’s ultimate collapse, as a result of the world’s trade becoming too large and too diverse to be sustained on the slender back of the U.S. Fed alone. As the global economy grew dramatically, and US share of global trade diminished, there was an inevitable crisis in the making.
The US fed cannot provide enough dollars, fast enough to support a sudden rise in global dollar demand. And the world too, is no longer ready or willing to fully cooperate with U.S. dictates i.e. sanctions, and willy-nilly policies, and at will of sometimes idiotic (small minded) leadership in the White House.
And here ‘is’ that moment – very possibly. The collapse in the oil price is one more ADDITIONAL straw that is breaking the American Camel’s back!
Putin – not so surprisingly – cooperated with Trump’s OPEC initiative, no doubt guessing that the attempt to ramp prices higher would never ‘fly’. Putin may not want to see the dollar hegemony renewed, but nor would he want Russia to be viewed as a main contributor to a global blow-out. The blame being heaped on China over coronavirus serves as a potent alert in this context.
This is not an essay about barely understood Eurodollars.
It is about real global risk. Take West Asia, as one example. Oil is trading currently at $17 (Friday’s WTI). No producer state in the region’s business-model is viable at this price level. National budget ‘break-evens’ require a price of oil to be at least three times higher – maybe more. And this, comes on top of the collapse of the air-travel in the region’s hubs i.e. Dubai etc. and related businesses and tourism. Not to mention the stress causes in Lebanon, Syria, Iran and even Iraq – who are all pressed hard with US policies and sanctions. As Covid-19 strikes, the situation is even more stressed. They all have national business-models that are essentially bankrupt. They all require bailouts.
And into this bleak picture, coronavirus has gripped precisely that class of expatriates and migrant workers that sustain the region’s ‘way of life’ and its business model. NGOs presently are scouring the UAE for empty buildings, and Bahrain is re-purposing closed schools in order to re-house migrant-laborers from cramped accommodation where one room with bunkbeds would sleep a dozen workers.
The virus has also spread to densely populated commercial districts of cities, where many expatriates share housing to save on rent. Many have lost jobs and are struggling. The authorities are trying to deport the migrant’s home; but Pakistan and India both are refusing them immediate entry. These victims have lost their livelihood, and any chance to escape their misery.
Just to be clear: élites in the region are not exempt from Covid-19. The al-Saud have been particularly hit by what they sometimes call the “Shi’i virus” – conveniently blaming Iran! The situation is turning explosive. Their economies are all held aloft by expatriates, migrant workers and domestic help, and coronavirus has upended the pillars of their economies.
The state looms large over the financial sector in the region, and this makes financial institutions especially vulnerable, because the proportion of loans that local banks extend to the government or to government-related entities, has been rising since 2009. As the authorities draw further on these institutions, so the economies will prove more vulnerable to Eurodollar stress – absent huge Fed bailouts.
The global impact of Covid-19 is only beginning, but one thing is abundantly clear: West Asian states will be needing a great deal of spending money, just to fend off social disorder. An economic breakdown is more than just economic. It leads quickly to a social breakdown that involves looting, random violence, fraud and popular anger directed at authorities. Global trade is going to be hit hard, and U.S. imports are going to tumble, which threatens one of the main USD liquidity channels into the Eurodollar system.
This fear of a systemic dynamic destruction of the trading system has led the BIS (Bank for International Settlements: The Central Bankers’ own Central Bank) to insist that:
“… today’s crisis differs from the 2008 GFC and requires policies that reach beyond the banking sector to final users. These businesses, particularly those enmeshed in global supply chains, are in constant need of working capital, much of it in dollars. Preserving the flow of payments along these chains is essential if we are to avoid further economic meltdown”.
This is a truly revolutionary warning. The BIS is saying that unless the Fed makes bailouts and working capital available on a massive scale – all the way down, and through, the supply-pyramid to nitty-gritty individual enterprises – trade collapse cannot be avoided. What is hinted at here is the concern that when multiple dynamic complex systems begin to degrade, they can, and often do, enter a spiraling feedback-loop.
There may be agreement in the G7 on the principle of a limited debt moratorium to be offered to struggling economies, but an approach à outrance – on the BIS lines – apparently is being blocked by U.S. Treasury Secretary Mnuchin (the U.S. enjoys a veto at the IMF by virtue of its quota): No more U.S. cash is being offered to the IMF by Mnuchin, who prefers to keep the U.S. Fed front and center of the USD liquidity roll-out process.
In other words, Trump wishes to keep intact the scaffolding of the ‘hidden’ dollar-based, sanctions and tariff ‘war’ against China and Russia. He wants the Fed to be able to determine who does, and who does not, get help in any ‘liquidity roll-out’. He wants to continue to be able to sanction those he wants. And he wants to maintain as large an external footprint of the dollar as possible.
Here then, is the crux to Putin’s complaint:
“At root, the Eurodollar system is based on using the national currency of just one country, the U.S., as the global reserve currency. This means the world is beholden to a currency that it cannot create as needed”.
When a crisis hits, as at present, everyone in the Eurodollar system suddenly realizes they have no ability to create fiat dollars and can rely only on that which exists in national foreign exchange reserves, or in ‘swap lines’. This obviously grants the U.S. enormous power and privilege.
But more than subjecting the world to the geo-political hegemony of Washington, the crucial point is made by Professor Rogoff:
“We’re looking at a commodity-price collapse – and a collapse in global trade unlike anything we’ve seen since the 1930s. An avalanche of government-debt crises is sure to follow, he said, and “the system just can’t handle this many defaults and restructurings – at the same time”.
This simply is beyond the U.S. Fed, or the U.S. Treasury’s capacities, by a long shot. The Fed is already set to monetize double the total U.S. Treasury debt issuance. The global task would overwhelm it – in an avalanche of money-printing.
Does Mnuchin then, believe his and Trump’s narrative, that the virus will soon pass, and the economy will rapidly bounce-back? If so, and it turns out that the virus does not rapidly disappear, then Mnuchin’s stance portends a coming, tragic debacle. And with further massive money issuance, a collapse in confidence in the dollar. (President Putin would have been proved right, but he will not welcome, assuredly, being proved right in such a destructive manner).
In a parallel sphere, the global trade plight is being mirrored in the microcosm by that of EU states, such as Italy, whose economies similarly have been racked by Covid-19. They too, are beholden to a currency – the Euro – that Italy and others cannot create as needed.
With this crisis hitting Europe, everyone in the Euro system is experiencing what it means to have no ability to create fiat currency, and be entirely subject to a non-statutory body, the Eurogroup, which – like Mnuchin – simply says ‘no’ to any BIS-like approach.
Again, it is about scale: this is not business as usual, as in some neo-‘Greek’ eruption, to be countered with EU ‘discipline’. This crisis is much, much greater than that. The absence of monetary instruments – in crisis – can become existential. The Globe simply doesn’t have the tools to deal with this situation. Ironically, at a time when many governments are becoming more insular and shunning globalization, we need new global tools and more coordinated global action.
There is a suggestion that Mnuchin and the Eurogroup, are behaving like in Alexander del Mar’s 18th century Monetary History, where the maneuvers of the British Crown, in constricting the export of gold and silver (i.e. money) to its American colonies, led to the Crown’s ‘war’ on the paper monetary instruments – Bills of Credit – issued by the Revolutionary Assemblies of Massachusetts and Philadelphia, to compensate for this British monetary starvation. It left desperate colonists with but one resort: “to stand by their monetary system. Thus, the Bills of Credit of this era … were really the standards of the [American] Revolution. They were more than this: They were the Revolution itself!”
Standby, for a modern era global revolution, a complete collapse of the US regime – because my friends, the whole system is broken. We just don’t have enough of the world’s fiat currency (the Dollar), and idiotic leadership in precisely where the Dollar is printed, to bail the globe out of this one!
Edited from an original article authored by Alastair Crooke via The Strategic Culture Foundation