The Next Empire

The Next Empire

Authored by: Jeff Thomas, Casey Research, International Man

Throughout history, political, financial, and military leaders have sought to create empires. Westerners often think of ancient Rome as the first empire. Later, other empires formed for a time. Spain became an empire, courtesy of its Armada, its conquest of the New World, and the gold and silver extracted from the West. Great Britain owned the 19th century but lost its empire due largely to costly wars. The US took over in the 20th century and, like Rome, rose as a republic, with minimal central control, but is now crumbling under its own governmental weight.

Invariably, the last people to understand the collapse of an empire are those who live within it. As a British subject, I remember my younger years, when, even though the British Empire was well and truly over, many of my fellow Brits were still behaving in a pompous manner as though British “superiority” still existed. Not so, today. (You can only pretend for so long.)

But this does suggest that those who live within the present empire—the US—will be the last to truly understand that the game is all but over. Americans seem to be hopeful that the dramatic decline is a temporary setback from which they will rebound.

Not likely. Historically, once an empire has been shot from its perch, it’s replaced by a rising power—one that’s more productive and more forward thinking in every way. Yet the US is hanging on tenaciously, and like any dying empire, its leaders are becoming increasingly ruthless, both at home and abroad, hoping to keep up appearances.

Warfare is often the death knell of a declining empire—both in its extreme financial cost and in its ability to alienate the peoples of other countries. In the new millennium, the US has invaded more countries than at any other time in its history and appears now to be in a state of perpetual warfare. This is being carried out both militarily and economically, as the US imposes economic sanctions on those it seeks to conquer.

This effort has become so threatening to the world that other major powers, even if they do not have a history of being allies, are now coming together to counter the US.

The US is encouraged in its effort by an unnatural alliance between the countries of Europe. Although Europe is made up of many small countries, often with dramatically differing cultures, who have bickered with each other for centuries, the European Union has cobbled them together into an ill-conceived “United States of Europe.”

Although the relatively new EU is already clearly stumbling and is on the verge of fragmenting, their leaders are desperately attempting to hold the unlikely alliance together with the help of the US. Meanwhile, the other major powers of the world are going full steam ahead to ensure that, when the US and EU reach their Waterloo, the rest of the world will carry on independently of the dying empire.

They are not merely waiting along the sidelines for the collapse to come, awaiting their turn at the top of the pecking-order. They are actively preparing their position to, as seamlessly as possible, take the baton at a run.

The End of Dollar Hegemony

Since the Bretton Woods Conference in 1944, the US dollar has reigned supreme as the world’s default currency. In 1944, the US held more gold than any other country, but in 1971, the US went off the gold standard, and since then, the dollar has been a fiat currency. The US has become increasingly cavalier in its abuse of the dollar—often at the expense of other countries.

Russia and China dealt with the latest round of strong-arm tactics by the US to adhere to the petrodollar by creating the largest energy agreement in history. This and all trade between the two countries will be settled in the ruble and the yuan. Russia has since been active in creating agreements with other fuel customers, also bypassing the petrodollar.

In creating these agreements, the Asian powers have unofficially announced the demise of the petrodollar. For decades, the US has applied its muscle to other countries, using the petrodollar. So, the Sino-Russian agreement stands, not only to end the petrodollar monopoly, but to create a decline in US power over the world, generally.

A New SWIFT System

Presently, the vast majority of economic transfers in the world pass through the SWIFT system, located in Brussels but controlled by the US. In recent years, the US has barred, or threatened to bar, other countries from the SWIFT system, effectively making it impossible for banks to transfer money and, by extension, causing the collapse of their banking systems. Russia has responded by creating its own SWIFT system.

It’s entirely likely that, if Russian trading partners, such as Iran, are barred from the use of the Brussels SWIFT (or even threatened to be barred), Russia would extend the use of its SWFT to them.

The creation of a second worldwide SWIFT would effectively remove the SWIFT threat from the US bag of tricks as an economic weapon. As long as Russia provides an effective money transfer service and does it without the intimidation that the US employs, it’s predictable that other countries would flock to the new system, in preference to SWIFT. Once other countries are fully on board, the US would have no choice but to interface with the new system or lose trade with those countries.

A New Central Bank

In recent decades, China and Russia have been expanding their economic powers dramatically and have periodically complained that their seats at the IMF table are unrealistically low, considering their importance to world trade. In 2014, China officially replaced the US as the world’s largest economy, yet the IMF has consistently sought to minimise China’s place at the table.

It would seem that the West believes that it’s holding all the cards and that the Chinese and other powers must accept a poor-sister position, if they are to be allowed to sit at the IMF table at all. The West somehow does not seem to recognise that, if frozen out, the other powers have the ability to create alternatives. As with the SWIFT system, the Asian powers have reacted to US overreach, not by going away licking their wounds, but by creating a second IMF.

The Russian State Duma (the lower house of the Russian legislature) have now created the New Development Bank. It will have a $100 billion pool, to be used for the BRICS countries. Its five members will contribute equally to its funding. It will be centered in Shanghai, India will serve as the first five-year rotating president, and the first chairman of the board of directors will come from Brazil. The first chairman of the board of governors is likely to be Russian Finance Minister Anton Siluanov. It’s therefore structured to be truly multinational.

In creating all of the above entities, the BRICS will, in effect, have created a complete second economic world.

In the latter days of the British Empire, we Brits seemed to be under the illusion that, even as our power base crumbled, we might somehow retain control by threats and bluster. The UK was utterly wrong in this and only succeeded in alienating trading partners, colonies, and allies by doing so.

The same is happening again today. China, Russia, and the rest of the world, when faced with American threats and bluster, will not simply fold their tents and accept that the US must be obeyed. They will, instead, create alternatives. And they are doing so exceedingly well and quickly. At this point, the overreach of the US is not only enabling other powers to rise, it is forcing their hand to literally create the next full-blown empire.

Editor’s Note: It’s always been true, as Bourne said, that “war is the health of the State.” But it’s especially true when economic times get tough. That’s because governments like to blame their problems on outsiders; even an imagined foreign threat tends to unify opinions around those of the leaders.

Since economies around the world are all weakening, and political leaders are all similar in essential mindset, there’s good reason to believe the trend toward World War 3 is accelerating.

Unfortunately, there’s little any individual can do to practically change the trajectory of this trend in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible and even profit from the situation.

Behind Korea, Iran & Russia Tensions: The Lurking Financial War

Authored by Alastair Crooke via The Strategic Culture Foundation

Behind Korea, Iran & Russia Tensions: The Lurking Financial War
What have the tensions between the US and North Korea, Iran and Russia in common? Answer: It is that they are components to a wider financial war. Russia and Iran (together with China) happen to be the three key players shaping a huge (almost half the global population) alternative currency zone. The North Korean issue is important as it potentially may precipitate the US – depending on events – towards a more aggressive policy toward China (whether out of anger at Chinese hesitations over Korea, or as part and parcel of the US Administration’s desire to clip China’s trading wings).

The US has embarked on a project to restore America’s economic primacy through suppressing its main trade competitors (through quasi-protectionism), and in the military context to ensure America’s continued political dominance. The US ‘America First’ National Security Strategy made it plain: China and Russia are America’s ‘revisionist’ adversaries, and the US must and intends to win in this competition. The sub-text is that potential main rivals must be reminded of their ‘place’ in the global order. This part is clear and quite explicit, but what is left unsaid is that America is staking all on the dollar’s global, reserve currency status being maintained, for without it, President Trump’s aims are unlikely to be delivered. The dollar status is crucial – precisely because of what has occurred in the wake of the Great Financial crisis – the explosion of further debt.

But here is a paradox: how is it that a Presidential Candidate who promised less military belligerence, less foreign intervention, and no western cultural-identity imposition, has, in the space of one year, become, as President, a hawk in respect to Korea and Iran. What changed in his thinking? The course being pursued by both states was well-known, and has offered no sudden surprise (though North Korea’s progress may have proved quantitatively more rapid than, perhaps, US Intelligence was expecting: i.e. instead of 2020 – 2021, North Korea may have achieved its weapons objective in 2018 – some two years or so earlier that estimated)? But essentially Korea’s desire to be accepted as a nuclear weapon state is nothing new.

It is ‘the Federal debt’, and a pending ‘debt ceiling’ that is crucial. There is little doubt that the US military is not what it used to be, and the Republican Party possesses a wing that is quite fundamentalist about limiting debt (Freedom Caucus). A serious military crisis is possibly the only way Trump is likely to get a huge ramp-up of military expenditure past Congress’ fiscal hawks. President Trump – the Tax Bill saga tells us — is going to be a big spender as part of MAGA (Make America Great Again). The increase in proposed US defence spending alone, more or less equates to the whole annual Russian defence spending. US Federal debt is already above $20 Trillion, and accelerating fast: the borrowing requirement is ballooning and interest payments to service this additional borrowing, normally would be expected to rise.

But Trump is also explicitly a low interest rate, expanding balance-sheet, sort of guy. So, how does one finance a truly ballooning budget deficit, whilst keeping interest rates low, or at zero? Well a fear-driven rush by foreigners into ‘risk free’ US Treasuries (i.e. military crisis again), historically serves to keep rates low – and dollars plentiful — as ‘overseas dollars’ return ‘home’ to Wall Street. This could be a solution, of course, but it would be entirely contingent on maintaining the present dollar status, and the large pool of dollars held externally for the principal purpose of having to transact trade in dollars.

And why is it that in place of détente with Russia, we have Herman Gref, the CEO of Russia’s largest commercial bank, telling the Financial Times that any further tightening of anti-Russia sanctions, including the potential exclusion of Russian banks and corporations from the SWIFT payment system (the global network of secure financial messaging services) would have such a devastating effect that it would “make the Cold War look like child’s play”? (The US Treasury is expected to present its report on further sanctions to Congress as early as February 2018, the Financial Times reports). What is the point? Why should the US and Europe proceed down this particular rabbit hole — it would be particularly damaging for Europe? Well, the answer, probably, is similar: the imperative to maintain the dollar’s global status for a programme to reclaim America’s pre-eminence, which – given the overhang of additional debt in the wake of 2008 – has to be contingent on the dollar’s global status.

And from the US perspective, President Putin has declared himself to be an opponent to dollar special privilege when, at the BRICS summit in September 2017, he insisted on “the BRIC countries’ concerns over the unfairness of the global financial and economic architecture which does not give due regard to the growing weight of the emerging economies”. Putin further stressed the need to “overcome the excessive domination of a limited number of reserve currencies”. Russia consequently has duly earned American wrath for this stance. Saddam Hussein and Muamar Gaddafi both questioned the dollar hegemony, and look what happened to them.

Financial war, of course, is nothing new. The US began staging annual financial war ‘War Games’ as long ago as 2005. General Hayden, the former director of first the NSA and subsequently of the CIA, has characterised financial war as the primary means of warfare in the twenty-first century, and sanctions as its Precision Guided Munitions (PGMs). But what, it seems, might be bringing matters to a head is not just President Trump’s need for a higher debt ceiling, and low-cost debt availability to fund his revival of the American economy; but rather that the new bulbs that were planted over the years, for monetary revolution, might suddenly break through the covering soil as new shoots, emerging ready to flower, in due course.

Traditionally, transformation of the global monetary system conventionally has been thought of not as something sudden, but rather as a slow, incremental displacement of one system by another, (or by several). But these bulbs really began to be planted in 2012 after Washington blocked international clearing for every Iranian bank, froze $100 billion in Iranian assets overseas, and curtailed Tehran’s potential to export oil. The consequence was a severe bout of inflation in Iran that debilitated the currency.

Then, in 2014, Saudi Arabia engineered the oil price drop against US shale oil production, but also to punish Russia for its support for President Assad. And to rub salt into the wound, the US Treasury facilitated a ‘bear raid’ on the Rouble, which only was brought to a halt by China quietly intervening in the foreign exchange market, to prevent a collapse of the currency. It was clear at this point, that China, Russia and Iran shared a common strategic interest to establish a currency zone, with the depth of markets and infrastructure, to operate independently of the dollar sphere. These states have made it very clear that they are committed to a long-term strategy to stop using the US dollar, as their primary currency, in global trade.

Trump’s Security Strategy – if prosecuted seriously – precisely risks an upset to the precarious balance to this ongoing, (and until now) slowly unfolding, financial war. Pursuing aggressive financial sanctions against any of these three states risks now precipitating a premature triggering of substantive monetary change in retaliation (and, a concomitant risk of financial chaos). It is possibly this latter outcome to which Herman Gref was hinting when he told the Financial Times that blocking international clearing for Russian banks would have such a devastating effect, that it would “make the Cold War look like child’s play”.

The key here is China: China’s economy is about nine times that of Russia. Mr Trump already had accused China of various trade and intellectual property infractions during his Presidential Campaign, threatening tariffs in retaliation. That was before Treasury Secretary Mnuchin, in September, warned China that the US could impose additional sanctions on China – potentially cutting off access to the U.S. financial system (the Treasury’s ‘neutron bomb’ of blocking the SWIFT clearance system) – if China failed to impose sanctions against North Korea, sufficient to satisfy the US demand. Now, in the US National Strategy statement, China repeatedly is cast as an economic miscreant, a “revisionist power” and “rival” to America’s economic and political primacy. The writing of aggravated relations, clearly is on the wall.

How might China react? The western view is sanguine: China has more to lose in any financial war (because of its US Treasury holdings), and there is anyway, nothing that can substitute for the dollar, with its unique market depth. But is this complacency misplaced? What is clear is that China and Russia and the BRICS have been thinking and preparing – as best they can – for an escalation of financial war arising from whatever pretext is used to launch it.

China, too, it would appear, shares Mr Hayden’s view that today’s conflicts primordially are geo-financial. In brief, the opinion of China’s strategic advisors is likely to be that America’s renewed desire to escalate military tensions – this time directed at North Korea, Syria and possibly Iran – is a front for America’s continual financial war, and that China needs to prepare its riposte. I have written on this before, but for clues, we should, as Alasdair Macleod suggests, “look at this from China’s point of view. The People’s Liberation Army’s most influential strategist, Major-General Qiao Liang, laid out his overall strategic philosophy at a book-study forum of the Communist Party’s Central Committee in Autumn 2015. His view can be taken to be that of the Chinese leadership.” As Qiao puts it:

The U.S. avoided high inflation by letting the dollar circulate globally. It also needs to restrain the printing of dollars to avoid a dollar devaluation. Then what should it do when it runs out of dollars?

The Americans came up with a solution: issuing debt to bring the dollar back to the U.S. The Americans started to play a game of printing money with one hand and borrowing money with the other hand. Printing money can make money. Borrowing money can also make money. This financial economy (using money to make money) is much easier than the real (industry-based) economy. Why will it bother with manufacturing industries that have only low value-adding capabilities?

Since August 15, 1971, the U.S. has gradually stopped its real economy and moved into a virtual economy. It has become an “empty” economy state. Today’s U.S. Gross Domestic Product (GDP) has reached US$18 trillion, but only $5 trillion is from the real economy.

By issuing debt, the U.S. brings a large amount of dollars from overseas, back to the U.S.’s three big markets: the commodity market, the Treasury Bills market, and the stock market. The U.S. repeats this cycle to make money: printing money, exporting money overseas, and bringing money back. The U.S. has thus become a financial empire.

Macleod comments: “In other words, America’s wealth is sustained by a pump-and-dump operation facilitated by the dollar’s reserve status, replacing genuine industrial production. It is worth clarifying one point: foreign owned dollars never leave the US, only their function. It is more correct to state that the US Government causes dollars to be diverted from foreign trade and investment in manufacturing, to be invested in Treasuries”.

“The first cycle identified by Qiao was the expansion of dollars aimed at creating a boom in Latin America in the mid-seventies. The second cycle was aimed at South-East Asia, which expanded on the back of a dollar that weakened from 1986 onwards. From 1995, the dollar began to strengthen, culminating in a bear-raid on the Thai baht, which spread to Malaysia, Indonesia and other countries in the region. The Asian Tiger phenomenon was created and destroyed, not by the countries themselves, but by the flood and ebb of dollar ownership and investment. Qiao notes that China escaped being caught up in this US-inspired operation”.

“Qiao then turns his attention to the contemporary cycle (in 2015) of dollar management, claiming it was now aimed at China. In his words:

“It was as precise as the tide; the U.S. dollar was strong for six years. Then, in 2002, it started getting weak. Following the same pattern, it stayed weak for ten years. In 2012, the Americans started to prepare to make it strong. They used the same approach: create a regional crisis for other people.

Unfortunately, the U.S. played with too much fire [in its own mortgage market] earlier and got itself into a financial crisis in 2008. This delayed the timing of the U.S. dollar’s hike a bit.

If we acknowledge that there is a U.S. dollar index cycle and the Americans use this cycle to harvest from other countries, then we can conclude that it was time for the Americans to harvest China. Why? Because China had obtained the largest amount of investment from the world. The size of China’s economy was no longer the size of a single county; it was even bigger than the whole of Latin America and about the same size as East Asia’s economy.”

“Qiao goes so far to state that the most important event in the twentieth century was not the two world wars, but America’s abandonment of the gold standard in 1971. This is some statement”, exclaims Macleod.

It is indeed … And here lies the crux of China’s strategy. It will be some years before the Yuan assumes the status of a major reserve currency (it had been planning a ‘harmonious’ ascent – in China’s non-assertive parlance), but China dominates world trade, and is in a position at any time henceforth to tie oil (and commodities) to gold – as they originally were. The Shanghai International Energy Exchange (INE) has already run four production environment tests for crude oil futures. The latter will be convertible into physical gold on either the Shanghai or Hong Kong gold markets. And Russia’s central bank has opened an office in Beijing, specifically tasked with resolving the technical aspects of gold deliveries from Russia into China. Just to be clear: these contracts are only available to non-domestic traders, and any gold bullion acquired through the yuan-gold futures contracts will be sourced from international markets, not China nor her citizens. In the longer term, with oil becoming directly linked to gold, rather than the dollar, we may see a revaluation of gold in respect to the dollar.

And, in October 2015, China inaugurated its International Payments System (CIPS). CIPS has a cooperation agreement with the private, Belgium-based SWIFT international bank, clearing system, through which virtually every global transaction must transit, but in the event of China being excluded from SWIFT, as Mnuchin so hinted in September, China and Russia will be able to clear through CIPS.

So far, China’s policy has been to avoid instigating a disruption to the dollar sphere, preferring not to risk having global trade dislocated, which could easily occur if there was a substantive loss of confidence in the dollar. But might American belligerency toward China – tied in some respect to North Korea – be the trigger? In fact, Venezuela has already set the ball rolling by refusing to accept oil payments in dollars, thus demonstrating to the world that an alternative system to the petrodollar is indeed possible. Furthermore, Caracas has begun publishing an oil-price index denominated in Yuan.

The operational launch of the Chinese Yuan denominated oil futures option in time — depending how quickly contracts can be adjusted – holds the prospect for displacing the petro-dollar system, especially if Saudi Arabia agrees to sell crude to China in Yuan (perhaps as part of China buying a stake in the Aramco offering).

China has other options were the US to become more aggressive and attempt adversely to change the terms of trade against China. It might simply switch to trading goods exclusively in Yuan, thus displacing the dollar completely as the medium for transactions. China and Russia would almost certainly be joined by their major trading partner countries in the BRICS (Brazil, Russia, India, China, South Africa), as well as by their Eurasian partner countries of the Shanghai Cooperation Organization (SCO) — comprising a population of well over 3 billion people, some 42% of the entire world population.

But because China still owns large quantities of US Treasuries and dollar reserves, for the moment she might prefer more time before executing such a coup de grace. But if pressed hard enough by the Trump team, execute it, she will: Hence Gref’s warning.

So the bigger question, if Trump does pursue an economic ‘containment of China’ strategy – and China and allies respond – is what will be the effect on ‘risk free’ US Treasury values in the wake of a major segment of the global economy going its own way? And what too, will be the ability of the US government then to finance its debt at its current, and growing, levels? Matters to ponder, perhaps.