by Bill Holter, JS Mineset:
I have been involved in financial markets for roughly 40 years, the news out this past Thursday was in my opinion more important than ANY announcement during those years. In fact, when I heard it, I thought of it as “the shot heard ’round the world”! But here we are Sunday and almost no discussion nor coverage of “Russia will demand trade payment from the unfriendly countries (the West) in gold…or rubles if they wish”. Are people so dumbed down they do not understand what was said?
First a little background. Russia has been sanctioned by the West and even had some of their FOREX reserves “frozen” (read STOLEN) in an effort to bleed them dry financially and stall military efforts. The freeze came several years after the US very mistakenly began threatening Russia with a cutoff from the SWIFT system. If anyone believes that Vladimir Putin has not used these years since the original threats, to prepare, I believe you are grossly mistaken. You see, the West absolutely needs Russian trade material more than Russia needs dollars.
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Russia does not need the dollars to survive because they are not highly indebted. In fact, they are only 14% debt to GDP whereas most western nations are well above 100%. Besides, who does Russia owe money to that requires dollar payments? Western financial institutions? Do you see where this goes? By using SWIFT and the dollar as a weapon versus Russia, the US just blew a hole under the waterline in the USS Dollar!
To explain, if Russia demands either gold or rubles from the West, then recipients of trade will need gold and or rubles to make settlement. Some nations still have gold (poor Canada) but few have any rubles held in their reserve accounts. (In fact, the US has very small foreign reserve balances as it was not needed with the dollar itself being the world’s reserve currency and dollars can and are simply printed). How will the US settle trade with Russia? By sending Ft. Knox gold…which may or may not be there as no audit has been done since the 1950’s? Or by paying with rubles which we do not own? Or will we just forego the many natural resources we import from Russia?
The net result is severe dollar weakness and a strong bid under gold AND the ruble because any western nation wishing to import Russian material will need to either buy gold or rubles for payment. Another way of saying this is; they will need to sell either their local currency (or their dollar reserves held) in order to procure gold/rubles to make payment. Do you remember when supply and demand used to “matter”?
In the same way that Russia views the Ukraine as we did the Cuban missile crisis, Russia’s demand for payment in gold/rubles is to Kissinger arranging for Saudi Arabia to ONLY accept dollars for oil. Settlement flows are huge and not just on the margin. They are not just huge, they are “contagious” if you will? There are many countries who today use dollars because they have to, they have been forced to. I also believe much of the current trade settlement in dollars would be done in other currencies if it was “allowed”. It will not be a shock to see dollar trade flows shrink dramatically as many nations will use this as an opportunity to shed their dollar hegemony shackles!
Let’s finish with an overview. The US has for years relied on “King dollar” to support living well beyond our financial means. Having the privilege of issuing the world’s reserve currency (and the most powerful military) allowed the US to borrow $ trillions upon trillions. This is now changing after our bungled retreat from Afghanistan…and now Russia challenging the trade dollar. Can you imagine what US GDP would have been all these years without massive deficit spending? Can you imagine the levels where equity markets would be trading if not for all the easy and free credit thrown around? Can you imagine where interest rates would have been (and will be) if it wasn’t for reserve currency privilege? And thus, can you imagine what the US standard of living would have been? Unfortunately, we are about to find out the answers to all these questions!
Lastly, please understand the coming problems as they will entail every facet of life. US (and global) financial markets will be greatly affected as lower dollar demand will create a de facto margin call on an already struggling Ponzi scheme. Also, trade balances will be forced back into relative realignment. Meaning those with the greatest trade deficits will feel the pain the most. Especially those nations that allowed their manufacturing and production to leave and instead import. Is the current predicament because of poor judgement/decisions/planning…or, was it the plan all along?