Tag: Russia

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The Shifting Multipolar World

Looking at the website for ForeignPolicy.com, a nexus for foreign policy wonks, there is still much debate about the nature of relative power around the world.  Here is a sample of some of the opinion titles:

      • “Yes, The World is Multipolar;”
      • “No, The World is Not Multipolar;”
      • “America is Too Scared of the Multipolar World;”
      • “The GOP Plan to Bring Back a Unipolar World.”

Emma Ashford and Evan Cooper, senior fellow and research associate, respectively, with the Reimagining US Grand Strategy at the Stimson Center provide some background.

Polarity typically takes on one of three forms: unipolarity (in which one state is by far and away the most powerful), bipolarity (in which two states are about equally powerful), and multipolarity (in which power is more diffused among several states).  It’s a common misconception that multipolarity must involve many states of roughly equal capabilities (i.e., that it must be balanced).  But in fact, multipolar systems are often unbalanced, with two or three big powers and several middle powers all jockeying for position.

For the last 30 years, the United States has been the undisputed global leader.  But today, opinion is divided.  Some argue that the United States will remain the global hegemon for the foreseeable future, others say we’re headed for a new bipolar competition with China, and still others believe that a multipolar era is dawning.

The Stimson Center’s conclusion regarding where we stand: “The United States simply does not hold the level of military and economic power it did during the early decades of the Cold War.  Nor does today’s China match the Soviet Union at its peak.”

In August, the BRICS summit was hosted by South Africa in Johannesburg.  The five founding states are Brazil, Russia, India, China, and South Africa.  While 40 countries expressed an interest in joining BRICS, 23 officially applied for membership (including 7 of 13 countries in OPEC) prior to the meeting in South Africa.  Six of the applications were accepted and will become effective on January 1.  The new members are Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE).  However, Argentina President-elect Javier Milei who will be sworn in on December 10, plans to withdraw Argentina’s commitment after he takes office.

The current five countries of BRICS represent 42 percent of the world’s population and 33 percent of the world’s GDP on a purchasing power parity basis.  The G7 (Canada, France, Germany, Italy, Japan, United Kingdom, and United States), by contrast, account for 10 percent of the world’s population and 30 percent of GDP.

At the initial summit in 2009, the BRIC nations (South Africa had not yet joined) announced the need for a new global reserve currency which would be “diverse, stable, and predictable.”  While the BRICS alliance has not yet established an alternative global reserve currency, they continue to make progress towards that goal.  At the 2014 BRICS summit, an agreement was signed to create and fund the New Development Bank with $100 billion.  A reserve currency pool was also established with over $100 billion.

Another example of the diminished influence of the United States occurred in Africa earlier this year.  On July 28, the final day of the Russia-Africa Summit in St. Petersburg, Russian President Vladimir Putin announced that Russia had signed agreements for military cooperation with over 40 African countries.  The agreements included a broad range of weapons and technology, some for free “with the aim of enhancing the security and sovereignty of the countries.”  In addition, President Putin reiterated that Russia would continue to be a reliable supplier of grain to African countries.

Ukraine seemed to demonstrate the limits of US/NATO military support.  The US Government has spent $113 billion on Ukraine, appropriated in 4 spending authorizations, since the war with Russia began in February 2022.  In October, President Biden requested a supplemental bill for national security of more than $100 billion, which would include another $61.4 billion for Ukraine and $14.3 billion for Israel.  Congressional negotiations have stalled despite a warning by the White House that the US will “kneecap Ukraine on the battlefield” if funding is not approved.  Colonel (Retired) Douglas Macgregor frequently offers his opinions on a variety of YouTube and Rumble channels.  On a December 4 interview with Cyrus Janssen, he had this to say about Ukraine and US involvement.

The Ukranian nation is destroyed….  I don’t know how many civilians have been killed.  I don’t know exactly how many wounded, but I know that you’re looking at 500,000 dead Ukranian soldiers…. You’re looking at World War I scale of losses on the human side that we just can’t begin to comprehend it.

He continues:

What’s clear is it’s over because the United States government, and American media, and finance committees have all changed the topic.  It reminds me of what happened in Vietnam.  What happened at the end of Vietnam?  We left.  People stopped talking about it.  It was over….  We are preeminently a maritime and aerospace power.  We are not a land power anywhere in the world except in the Western hemisphere.  So, what this means is at the end of the day, if things don’t go our way, we don’t like what happened, it doesn’t suit us, we fly away, we sail away.  We’re finished.  But for the Chinese, the Russians, the Iranians, for the Arabs, for whomever, the Africans, wherever your go – they live in the region.  They’re stuck with it.  And they’re stuck with the consequences of our intervention.  And our interventions have always distorted the dynamics of the region.

Israel has always relied on US support.  Perhaps in deference to the United States, countries such as Turkey, Jordan, Saudi Arabia, and Egypt maintained a peaceful coexistence with Israel.  However, after the Hamas attack on October 7, the Israeli response has united Muslims around the world.  Yemen is the only country to declare war on Israel and so far, their attacks have been limited in nature.  But there is now popular support in many Muslim countries for military action against Israel.

How the conflict in Israel/Palestine resolves itself remains to be seen.  But the decline of US economic and military power, and influence in recent decades is clear.

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA

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Don’t Underestimate BRICS+

For more than 20 years, international organizations have been evolving that serve as an alternative to the US-led organizations such as G-7, G-20, and the World Bank.  The Shanghai Cooperation Organization was first created in 2001 as a security and defense organization.  It includes Russia, China, India and five other countries.  In addition, many other countries participate as “dialogue partners,” observers or guests.

The BRICS nations (Brazil, Russia, India, China, South Africa) represent a group of nations with the same core group that seek intergovernmental cooperation.  BRICS is headquartered in Shanghai and its five core countries have a combined population of 3.21 billion people with a total GDP on a purchasing power parity (PPP) basis of US$ 56.65 trillion or 32.5% of global GDP-PPP.  It is responsible for the creation of the New Development Bank, which is an alternative to the World Bank and funded with $100 billion of initial capital.

Since the war started in Ukraine, a US-backed global task force claims that $300 billion of assets owned by Russia’s central bank and $30 billion of assets owned by sanctioned Russians have been frozen.  The actions by the US government and its allies did not go unnoticed by other countries.  Since then, more international transactions have been paid for with national currencies and central banks have been diversifying their reserve assets.  There are now 41 other countries that are interested in joining BRICS, so the core countries plus the 41 potential new members are often referred to as BRICS+.

BRICS+ will have their annual summit in Johannesburg, South Africa on August 22-24 this year.  While there has not been an official announcement yet, there have been recent posts by Russia and Iran regarding a new gold-backed currency for international trade.  On July 5, RT News, the English language news agency sponsored by the Russian Government, announced that the BRICS group of countries is set to introduce a new currency backed by gold.  Some other headlines posted on RT.com during the last three weeks include:

    • July 16 – Italian businesses want to switch to rubles in Russia trade
    • July 15 – Taking the dollar down a peg
    • July 12 – Russia seeks to expand de-dollarization drive
    • July 10 – China and Russia should lead “global governance reform” – Xi
    • July 6 – Russia proposes alternative to EU clearing houses
    • June 30 – Central American country (Nicaragua) wants to ditch dollar in Russia trade
    • June 30 – BRICS diplomat comments on what is drawing countries to the bloc

Since 2010, central banks around the world have been net purchasers of gold, after being net sellers for the years 1989-2009.  The pace of central bank gold acquisitions has accelerated in 2023 in anticipation of a new gold-backed currency.

The remainder of the year promises to be an interesting time for the international monetary system and precious metals.  If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA

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More of the Same in 2023?

US Deficit Spending

Congress once again demonstrated a remarkable lack of fiscal discipline.  The 2023 Omnibus Bill, which consisted of 4,155 pages, was passed on December 23.  Projected federal spending for the fiscal year ending September 30, 2023 is $5.9 trillion.  Tax revenue is expected to be $1.0 trillion less than the spending authorized by the bill, adding to the current $31.3 trillion of federal debt outstanding as of December 28 (https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny).

The Omnibus Bill included $47 billion in emergency assistance to Ukraine.  It also included $16 billion for 7,510 “earmark” projects in lawmakers’ districts.  The earmark projects are usually local projects that should be paid for by state or local governments.  However, as Adam Andrzejewski, CEO and Founder of OpenTheBooks.com, wrote in an opinion, “earmarks are legal bribes doled out to members of Congress in exchange for their support of these large, irresponsible spending bills that are rushed through without much scrutiny.”

International Monetary System

Zoltan Pozsar received some attention from his December commentary on oil, gold, and changes to the international financial settlements system.  Pozsar is an analyst at Credit Suisse and previously worked at the Federal Reserve and the US Treasury Department.  He is one of the leading experts on the inner workings of the world’s financial system.  Pozsar believes that the sanctions on Russia marked the end of what he calls “Bretton Woods II” or the use of the US dollar for trade settlement.

The original Bretton Woods Agreement (or Bretton Woods I) was negotiated in July 1944 when representatives of 44 countries met in Bretton Woods, New Hampshire and agreed that US dollars could be redeemed by central banks for gold at an exchange rate of $35 per ounce.  Other currencies pegged their value to the US dollar with narrow trading ranges but adjustments to the exchange rates were sometimes required to restore balance to trade between countries.  Bretton Woods I ended in 1971 when President Nixon took the US off the gold standard and foreign central banks could no longer redeem US dollars for gold at the fixed exchange rate.

What Pozsar calls “Bretton Woods III” is still in the process of development.  While the United States is a staunch defender of a unipolar world, many countries now appear to prefer a multipolar arrangement, involving shared power and an international monetary framework that does not rely on the US dollar and G-7 currencies.  Pozsar expects the emerging monetary framework to involve international reserves for settlement that consist of gold, oil, and other commodities with some inherent value.  The Eurodollar system (US dollar financial assets and liabilities outside US boundaries) will contract and contribute to inflationary forces in the West.

At the 2022 St. Petersburg International Economic Forum, Russian President Vladimir Putin’s speech included comments entirely consistent with Pozsar’s comments:

Caught in the inflationary storm, many nations are asking, why bother exchanging goods for dollars and euros when they are losing value right before our eyes?  Indeed, the economy of imaginary wealth is being inevitably replaced by the economy of real, valuable, and hard assets.

According to the IMF, today’s global foreign currency reserves contain 7.1 trillion dollars and 2.5 trillion euros.  And this money is depreciating at an annual rate of about 8%.  Moreover, it can be confiscated or stolen at the whim of the US if it disapproves of something in a country’s policy.

I think this has become a very real threat for many countries that keep their gold and foreign exchange reserves in these currencies.  According to objective expert analysis, in the coming years a conversion process of global reserves will get underway.  Reserves will be converted from weakening currencies into tangible resources like food, energy, commodities, and other raw materials.  Clearly, this process will further fuel global dollar inflation.

The potential for change to the international system is reflected in central banks’ demand for gold.  Central banks around the world added nearly 400 tons of gold in the third quarter, the largest quarterly increase in central bank gold reserves since the World Gold Council started keeping records in 2000.  The World Gold Council reports that demand “has outstripped any annual amount in the past 55 years.  Last month’s estimates are also far larger than central banks’ official reported figures, sparking speculation in the industry over the identity of the buyers and their motivations.”

US/Ukraine/Russia Conflict

There does not appear to be any resolution to the conflict between the United States/Ukraine and Russia anytime soon.  The continuation of the war will, of course, pose problems for economic activity in Europe and international trade.  David Collum, Professor of Chemistry and Chemical Biology at Cornell University, writes an annual review blog at the end of each year and has developed a following.  He dedicated Part 2 of his commentary this year to the war in Ukraine.  His commentary is lengthy but full of interesting facts and quotes.  https://www.zerohedge.com/geopolitical/dave-collums-2022-year-review-part-2-war-ukraine-how-does-it-end

Economic and Financial Market Outlook

Vanguard published their economic and market outlook for 2023.  Among their expectations:

  • Rapid monetary tightening will eventually succeed in reducing inflation.
  • There is likely to be a global recession due to a deterioration in financial conditions, increased policy rates, energy concerns, and declining trade volumes.
  • Central banks will continue their aggressive monetary tightening in early 2023 before pausing as inflation falls and job losses increase.
  • Equity markets have yet to drop materially below their fair-value range, which they have historically done during recessions. However, their global equity outlook is improving because of lower valuations.
  • Over the next 10 years, they expect annualized returns of high single digits for foreign equity markets and mid-single digits for US equity markets.

I agree with Vanguard’s comments with two caveats.  First, their comments do not reflect the impact on stock returns of lower corporate profits associated with recessions.  Second, like most US investment firms, there is little consideration given to changes in the international monetary framework, which I believe are becoming increasingly likely to happen.

As we enter 2023, asset allocations in client portfolios will continue to reflect a conservative stance, with a significant allocation to precious metals.

Best Wishes for the New Year!  If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA

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Next Moves for the Fed and BRICS+

The Federal Reserve’s Open Market Committee (FOMC) meets Tuesday and Wednesday of this week.  The FOMC meets approximately every 6 weeks and releases their policy statement at the end of their two-day meetings.  The consensus expectation is that the FOMC will announce an increase in the fed funds target rate of 75 basis points this week.

When Chairman Jerome Powell gave testimony to Congress on June 23, he noted that inflation remained “well above our longer-run goal of 2 percent” while the “labor market has remained extremely tight.”  Not much has changed during the last four months regarding both inflation and employment.  The rationale for higher interest rates remains in place for now.  Interest rates remain far below the level of inflation as measured by the government.  However, in the future, there are limits to how much the Fed can raise rates.

As of September 30, 2022, the US Treasury has $30.9 trillion of debt outstanding, reflecting a debt/GDP ratio of 123%.  In December 1980, when Fed Chairman Paul Volcker raised the fed funds rate as high as 22%, the US Government had $908 billion in debt, which represented 32% of GDP.  Since the US debt to GDP ratio has nearly quadrupled during the last 42 years, the Fed will eventually have to consider the impact of higher interest rates on the interest expense of the US Government, as well as businesses and households.  Higher interest rates raise the risk of debt defaults.  It remains to be seen where the tipping point of financial pain is due to higher interest rates.

Meanwhile, in the rest of the world, the dynamics of international relations are changing rapidly and the United States is losing its leadership role.  ZeroHedge described the recent protests in Europe:

Tens of thousands of people have marched across metro areas in France, Belgium, the Czech Republic, Hungary, and Germany – many of them are fed up with sanctions on Russia that have sparked economic ruin for many households and businesses – but also very surprising, support for NATO’s involvement in Ukraine is waning.

There has been increasing awareness and dissent among Europeans about their countries’ leaders prioritizing NATO’s ambitions in Ukraine over their own citizens.  The prioritization has been in the form of sanctions against Moscow, sparking energy hyperinflation and supplying weapons to Ukraine, which has made Moscow displeased with any country that does so.  Some Europeans are now demanding NATO negotiate with Moscow to end the war so that economic turmoil can abate.

There is also increased interest by many countries in joining BRICS+ (an economic alliance started by Brazil, Russia, India, China, and South Africa).  The original five BRICS countries seek to expand their influence by establishing principles of “inclusive and equal cooperation” for international trade and financial regulation.  Among the countries being considered for admission to BRICS+ are Argentina, Egypt, Indonesia, Iran, Kazakhstan, Kenya, Mexico, Nigeria, Saudi Arabia, Senegal, Tajikistan, Thailand, Turkey, and United Arab Emirates.

Saudi Arabia’s intention to join BRICS+ is significant.  Mohammed al-Hamed, President of the Saudi Elite Group in Riyadh, told Newsweek: “China’s invitation to the Kingdom of Saudi Arabia to join the BRICS confirms that the Kingdom has a major role in building the new world and became an important and essential player in global trade and economics.  Saudi Arabia’s Vision 2030 is moving forward at a confident and global pace in all fields and sectors.”  Thus, Saudi Arabia’s snubs of President Biden are no surprise as the country realigns its economic and geopolitical interests.

As Saudi Arabia is the largest exporter of oil in the world, there is serious doubt about the longevity of the “petrodollar” (use of the dollar for payment of oil deliveries).  Fed Chairman Jerome Powell acknowledged this in June when he said, “rapid changes are taking place in the global monetary system that may affect the international role of the dollar.”

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA