The primacy of the dollar

Image: Arseniy Kotov, Mariupol
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By ALASTAIR CROOKE*

The US government is hostage to its financial hegemony in a way that is rarely fully understood.

It is the quintessential miscalculation of the era we live in, and one that could trigger the collapse of the dollar's primacy and, therefore, also of global complacency towards US political demands. But its most serious component is to corner the United States in the position of promoting a dangerous escalation of the Ukrainian conflict, directly against Russia (from the Crimea).

Washington dares not – indeed cannot – cede the primacy of the dollar, the hard core of American decline. And so the US government is held hostage to its financial hegemony in a way that is rarely fully understood.

Joe Biden's team cannot renounce its fantastical narrative of Russia's impending humiliation. They bet the house on it. And yet, the theme became existential for the United States precisely because of that initial flagrant miscalculation, subsequently leveraged with the preposterous narrative of an agony that would at some point make Russia “collapse”.

What then would be the big surprise, the almost entirely unforeseen event of recent geopolitics, which has shaken American expectations to the point of bringing the whole world to the brink of a precipice?

It is, in a word, “resilience”: the resilience displayed by the Russian economy after the West has committed the full weight of its financial resources to crushing it. The West has attacked Russia in every conceivable way – financial, cultural and psychological warfare – and with actual military warfare as a consequence.

However, Russia survived, and did so relatively haughtily. And it is doing well, perhaps even better than many in Russia itself expected. British intelligence services, however, assured EU leaders not to worry; that it was going to be a rout; that Vladimir Putin could not survive. Russia's rapid financial and political collapse would be assured with the tsunami of Western sanctions.

This analysis represented an intelligence failure analogous to the nonexistent Iraqi weapons of mass destruction. But instead of a critical reexamination, since events have failed to confirm expectations, its promoters have doubled down. But two such failures are too much to bear.

So, why is this “disappointed expectation” a moment capable of shaking our era? It's because the West fears that its miscalculation could lead to the collapse of the dollar's hegemony. And the fear extends even further, as bad as it already is for the United States.

The neoconservative Robert Kagan stressed how the outward expansion movement and US sense of “global mission” are the lifeblood of US domestic politics – more than any dubious nationalism such as suggests Darel Paul. Since the country's founding, the United States has been an expansionist republican empire. Without this movement forward, the civic ties of domestic unity begin to be questioned. If Americans are not united by expansionist republican grandeur, for what purpose – asks Professor Darel Paul – would all these races, creeds and divisive cultures of the country be united? (The speech Woke proved to be no solution, divisive though it is, rather than a pole around which unity could be built).

The point here is that Russian resilience, in one fell swoop, shattered the glass floor of Western convictions about its ability to “manage the world”. After several Western disasters based on the regime change quality military shock and awe, even the most hardened neoconservatives admitted (around 2006) that the financial system as a weapon would be the only means of “securing the Empire”. That conviction has now, too, been overthrown. And the rest of the world took notice.

The shock produced by this miscalculation is all the greater because the West scornfully considered Russia a backward economy, with a GDP equivalent to that of Spain. In interview ao Le Figaro last week, Emmanuel Todd observed that Russia and Belarus together make up only 3,3% of global GDP. The French historian therefore questioned, “how then is it possible that these states have shown so much resilience in the face of the force of the financial onslaught”?

Well, firstly, as Emmanuel Todd has pointed out, GDP as a measure of economic resilience is completely “dummy”. Contrary to its name, GDP only measures aggregate expenditures. And much of what counts as “production,” such as the overinflated billings for medical treatment in the United States and (say with a grain of irony) services such as the hundreds of highly paid reviews by economists and financial analysts, is not production. per se, but “water vapour”.

Russia's resilience, attests to Emmanuel Todd, is due to the fact that it has a real manufacturing economy. “War is the ultimate test of a political economy,” he observes. “It is the Great Revealer.”

And what was revealed? It was another rather unexpected and shocking result that leaves Western commentators reeling: that Russia has not run out of missiles. “An economy the size of Spain!… – the Western media ask themselves – How can such a small economy sustain a prolonged war of attrition against NATO without running out of ammunition?”.

But, as Emmanuel Todd describes it, Russia has been able to sustain its arms supply because it has a real manufacturing economy, which has the capacity to sustain a war. And the West has no more... The West, fixated on its misleading GDP metric (and its normality bias), is appalled that Russia has the ability to subdue NATO weapons stockpiles. Labeled by Western analysts as a “paper tiger”, Russia now seems to be slapping NATO with a label as such.

The relevance of the Big Surprise – Russian resilience – resulting from its real production economy vis à vis the glaring weakness of the hyper-financialized western model, fighting for ammunition supplies, is that it has not gone unnoticed by the rest of the world.

There is an ancient history here. In the period just before the First World War, the establishment British was worried about the possibility of losing the looming war against Germany. The reason? British banks tended to lend on a short-term basis, following a “pump and pour” approach, while German banks invested directly in industrial projects in the real economy over the long term, and thus were recognized as better able to sustain the supply of money. War material.

Still, the British elite had an accommodating assessment of the fragility inherent in a heavily financialized system, which they believed to compensate simply by expropriating the resources of a huge empire, with a view to financing the preparation for the coming Great War.

The background, then, is that the United States inherited the British approach to financialization, which would soon be boosted when that country was forced to abandon the gold standard due to growing budget deficits. The United States needed to suck the world's savings into its home in order to finance the Vietnam war deficit.

The rest of Europe, since the beginning of the XNUMXth century, was suspicious of the “British model” of Adam Smith. Friedrich List complained that the British had assumed that the ultimate measure of a society was always its level of consumption (expenditure... hence the GDP metric). In the long run, Friedrich List argued, a society's well-being and its general wealth would be determined not by what society can buy, but by what it can produce (ie, value from a real, self-sufficient economy).

The German school argued that an emphasis on consumption would ultimately prove self-defeating. This would divert the system away from wealth creation and ultimately make it impossible to consume as much or employ as much. Hindsight suggests that Friedrich List appeared to be correct.

“War is the final test, the Great Revealer,” Emmanuel Todd now tells us. The roots of an alternative economic perspective linger in both Germany and Russia (with Sergei Witte), despite the recent prominence of the hyper-financialized British model.

Now, with the Great Revelation, the focus on the real economy is starting to be seen as a insight key, which can sustain a New Global Order, considerably differentiating it, in terms of economic system and philosophy, from the western sphere.

And the new order is breaking away from the old, not just in terms of economic system and philosophy, but also through a reconfiguration of the neural networks through which commerce and culture travel. Old trade routes are being bypassed and starved, to be replaced by waterways, pipelines and corridors that bypass all the bottlenecks through which the West has hitherto been able to physically control trade.

A Northeast Arctic Passage, for example, opened up an entire inter-Asian trade. Untapped Arctic oil and gas fields will eventually fill the still persistent supply gaps resulting from an ideological discourse that seeks to end investment in fossil fuels by major Western oil and gas companies. A North-South corridor (now open) already links St. Petersburg with Mumbai. Another section connects the waterways from the north of Russia to the Black Sea, to the Caspian Sea, and from there to the south. Yet another leg is expected to carry Caspian gas from the Caspian pipeline network south to a hub of gas from the Persian Gulf.

Looked at this way, it is as if the neural connectors in the real economic matrix are, as it were, being transplanted from the west to be fixed in a new location in the east. If Suez was the waterway of the European age and the Panama Canal of the American century, then the northeastern Arctic waterway, the North-South corridors and the African rail nexus will be in the new Eurasian age.

In essence, the New Order is preparing to sustain a long economic conflict with the West.

Here, we return to the “flagrant miscalculation”. This evolving New Order existentially threatens the hegemony of the dollar. The United States built its hegemony by demanding that oil (as well as other commodities) were priced in dollars, facilitating a frantic financialization of asset markets from within the country. It was this demand for dollars that, in and of itself, allowed the United States to finance its government deficit (and its defense budget) for free.

As far as you're concerned, this highly financialized dollar paradigm has features that evoke a sophisticated Ponzi scheme. It attracts “new investors” seduced by zero-cost credit leverage and the promise of “guaranteed” returns (assets pumped ever higher by Fed liquidity). But the lure of “guaranteed returns” is tacitly underwritten by inflation of one after another “bubble” of assets, in a regular sequence of bubbles – inflated at zero cost – before finally being deflated. The process is then “washed and repeated” ad seriatim.

Here's the point: like a true Ponzi scheme, this mechanism relies constantly (and increasingly) on “new” money coming into the scheme, to offset the “payments”, i.e. finance US government spending. In other words, US hegemony now depends on the constant expansion of the dollar abroad. And, as with any pure Ponzi, once the money falters, or the redemptions mount, the scheme collapses.

It was to prevent the world from abandoning the dollar scheme, in favor of a new global trading order, that the warning was issued, in the form of a vicious attack on Russia, announcing: “if you abandon the scheme, US sanctions United States Treasury will fall on you and bankrupt you.”

But lo and behold, two game-changing shocks came in close succession: first, inflation and skyrocketing interest rates devalued fiat currencies (fiat currencies) like the dollar, and undermined the promise of “guaranteed returns”; and the second: Russia did not collapse under financial Armageddon.

The “Ponzi dollar” collapses; US markets collapse; and the dollar loses value (compared to commodities).

In other words, the whole scheme can be overthrown by Russian Resilience… and by a large part of the planet taking off towards another economic model, no longer dependent on the dollar for its commercial needs. Thus, the new money that comes in becomes negative for the “Ponzi dollar”, at the same time that the “money that goes out” explodes, with the United States finding itself in the need to finance ever-increasing deficits (now internally). .

Washington clearly made a stratospheric error in believing that sanctions – and the alleged collapse of Russia – would win the day; an error so self-evident that it needed no serious pondering.

With Ukraine, Joe Biden's team put the United States in a corner of the ring. But at this stage, what could the White House realistically do? It can no longer throw away the narrative of Russia's impending defeat and humiliation. And you can't abandon the narrative because it has become an existential component to salvage what you can from the Ponzi scheme. Admitting that Russia won would be like saying that Ponzi will have to “close the fund” to new withdrawals (just as Nixon did in 1971, when he closed withdrawals at the gold window).

Commentator Yves Smith argued provocatively: “What if Russia wins decisively and the Western press is instructed not to notice?” Presumably, in such a situation, the economic confrontation between the West and the New Global Order states must escalate into a wider and longer war.

*Alastair Crooke, former British diplomat, founder and director of the Conflicts Forum.

Translation: Ricardo Cavalcanti-Schiel.

Originally published on the portal Strategic Culture.

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