by Bill Holter, Miles Franklin:
We are hearing daily about the possibility of “trade wars”. It is this possibility that is being blamed for the increased volatility (read markets dropping), but I do not believe it is the only factor. In fact, equity markets began their upset as interest rates marched higher and prior to any talk of trade wars. Of course other factors exist such as cross currency rates (which directly affect trade) and liquidity, not to mention the gross indebtedness of nations.
Looking at “finance and economics” from a broad view, we can see they are part and parcel of and actually used as tools for outright war. There are many examples of history such as the US civil war where the North embargoed the South, Germany being starved for oil in WWII, and more recently the USSR being forced to overspend militarily and having the ruble undermined leading to their ultimate bankruptcy.
A recent article on Zerohedge discusses several ways China can attack the US financially. We’ve heard many of these before. I would mention that a currency devaluation by China would mean a stronger dollar, not exactly immediately harmful to the US. Dumping US Treasuries is another theoretical attack but the simple answer for the US would be for the Federal Reserve to buy any and all treasuries offered for sale …their balance sheet be damned!
It s also posited China could block US services and stop importing US oil. While both might cause some pain, neither is a knock out punch because they are simply not large enough slices of the overall pie. As for “rare earth” materials, these ARE very significant should a hot (non nuclear) war break out. Most all high tech weapons rely on the use of various rare earth metals. In my opinion, if China wanted a hot war, restricting access to these would be the ticket.
We have spoken and written of what we believe is THE ultimate nuclear option financially for China but get trolled for our efforts. The simplest way for China/Russia et al to implode the West’s entire financial system would be to simply stand for delivery of too much gold or silver. We are already witnessing this as COMEX has been offloading “EFP” a massive number of contracts to London. As it stands, London now faces contractual delivery of nearly a full year’s worth of global gold and silver production from contracts standing in just the first three months of the year!
You see, the banking/financial system is of a fractional reserve basis … which always carries with it the risk of a “bank run”. Bank runs happened quite often in the old days because of the fear the bank had over lent versus the actual gold they held. In present time, “old fashioned” bank runs are not as serious a threat because the Fed can (and does) just lend liquidity where and as needed. As example, the Fed conjured up $16 trillion to lend all over the word in late 2008. I guess you could say no amount is too much …even if your balance sheet is only $50-60 billion?
So from the standpoint of “paper”, the Fed has the bases covered so to speak, but do they really? If China (Russia) were to cause a failure to deliver gold or silver, then what? You see, gold (real physical gold) cannot be digitally conjured up out of thin air, so in essence a failure to deliver would be nothing more than a good old fashioned REAL run on the bank! A run on gold (or silver) would then bring into question the entire fractional reserve nature of the entire system. Failure to deliver …will cause a “run on the bank” everywhere! Notice the word “everywhere”. ALL gold exchanges everywhere in the world will be run, but more importantly the confidence in paper markets, commodity or not will also experience a confidence crisis. A simple example would be any type of contract that offers delivery of anything …real or not. As we have harped on for years, “promises” (all) will be questioned to the point of performing …which is mathematically impossible because there are multiples of promises when compared to “money” outstanding.
In the extreme, let’s look at trade itself. During or after a financial “run”, what if trading partners do not trust each other or are even angered to the point of only accepting their own currency or …gold as settlement? The US runs the largest trade deficit ever imagined in history and at the same time does not have much in the way of foreign reserves (and in reality nor gold). How under these circumstances will the US settle trade? The result will be a sharply lower dollar, much higher prices for imported goods (currently $750 billion worth per year), and most likely shortages that develop quite quickly.