The anchor of the global system is shifting from debt claims to real assets, and the implications are profound<\/p>\n
During his Valdai speech on Thursday, Russian President Vladimir Putin made the following rather dry statement: \u00a0
\n\u201cIt\u2019s impossible to imagine that a drop in Russian oil production will maintain normal conditions in the global energy sector and the global economy.\u201d
\nIt certainly wasn\u2019t the highlight of the night, and I haven\u2019t seen it in the headlines of any of the recaps. The statement is, of course, true. Putin is saying: \u201cyou can\u2019t kick us out.\u201d
\nBut let\u2019s unpack this a bit and try to get a bird\u2019s eye view of what this mundane statement implies in a much deeper sense \u2013 not in the sense of counting barrels of oil and the Brent price, but in terms of understanding the shifting tectonic plates.
\nLet\u2019s first imagine what a Western leader might have said in the same tone, circa January 2022.
\n\u201cIt\u2019s impossible to imagine that a country that loses access to dollars and Western capital markets will maintain normal economic conditions.\u201d I don\u2019t know if anybody actually said\u00a0this in as many words, but that\u2019s exactly what many were thinking.
\nNow, recall the G10 Rome meetings in late 1971, as the Bretton Woods-established gold peg of the dollar was being dismantled, when US Treasury Secretary John Connally famously told his European counterparts: \u201cThe dollar is our currency, but it\u2019s your problem.\u201d It is an oft-cited instance of American hubris.
\nIn other words, despite its global use in trade and finance, the dollar would be managed for American economic interests.
\nWhen the collective West placed what were supposed to be crushing sanctions on Russia in 2022 in light of the Ukraine crisis, the idea was, again, \u201cour currency (system), your problem.\u201d
\nThe message: the dollar will be managed for American geopolitical interests.<\/p>\n
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Putin in Q&A at influential Valdai policy forum: As it happened<\/p>\n
According to the conventional thinking, being cut off from the dollar system should have spelt doom for Russia. The many forecasters predicting exactly such a dire outcome weren\u2019t necessarily simply Russophobes. They were working within a certain paradigm. Without access to its now frozen central-bank reserves, how would Russia stabilize the ruble? Without access to correspondent banking in dollars\/euros, how would trade be settled? And without access to foreign capital markets, wouldn\u2019t a funding crisis ensue? This type of thinking gave rise to these types of comments:
\n\u201cWe will provoke the collapse of the Russian economy,\u201d in the words of French Finance Minister Bruno Le Maire about ten days into the war.
\nBut the Russian economy didn\u2019t collapse and in fact stabilized far faster than anyone expected. The thing is Russian oil and gas was still needed. And those who thought they didn\u2019t need it (read the EU) found out the hard way that they did \u2013 even if the Europeans obscured the ramifications as much as possible through large fiscal support and subsidies. But it is no coincidence that \u2018deindustrialization\u2019 has become a household word in Europe. And somehow the political will to really clamp down hard on Russian energy never seems to materialize.
\nAll of a sudden we have, from a Russian perspective: \u201cOur commodities, your problem.\u201d
\nThe question now is: does this mean we\u2019ve suddenly awoken to a strange new world? Are we now in a system where access to real things (like commodities) now trumps access to paper promises (like dollars)? Western policymakers\u2019 futile attempts to cut Russian energy out of the world economy show that they understand only the monetary side of things. They see energy as a source of revenue for the Russian state \u2013 revenues thanks to which Russia is able to sustain its war effort. That the economy might actually fundamentally be an energy system and not a monetary system is incomprehensible to them. It is, in the strict Kuhnian sense, a different paradigm.
\nThe BRICS countries talk a lot about a monetary reset being underway and about how new financial architecture is being created. It is fair to say that some of this rhetoric has been premature and that reports of the demise of the dollar system have been overstated. There have been a lot of checks written that BRICS and the Global South aren\u2019t ready to cash.<\/p>\n
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T\u00fcrkiye rejects US demand to abandon Russian gas<\/p>\n
Nevertheless, change is afoot, and what is taking shape has roughly the following contours: commodities are beginning, at the margins, to act as system-level collateral. By contrast, up to now, the system relied on trust in the issuer of paper claims (dollars, US Treasuries, euro-denominated assets). Gold accumulation by central banks has been massive \u2013 it is a quiet de-dollarization of reserves. Oil-for-yuan deals are modest but growing. And what can the commodity seller do with the yuan it receives? Convert them to gold on the Shanghai Gold Exchange. This may not yet be widespread, but the plumbing is there.
\nThe anchor is shifting from debt claims to real assets \u2013 and this is bad news for countries whose economies are perched precariously atop a mountain of debt claims. Think of this as part hedge against Western sanctions and weaponization of the system, and part recognition that commodities have intrinsic durability that paper claims can\u2019t always guarantee. \u00a0
\nUltimately, of course, paper promises can be inflated. It\u2019s not lost on anybody in the Global South that the dollar is down some 111% against gold in just two years and that US debt seems to be spiraling to infinity.
\nIf the current system is one where money, credit, and financial assets are king, this means the constraints in this system are money-related. The crises tend to start with something like a spread blowing out, liquidity drying up, or collateral chains breaking. This is basically a money problem, not a real-economy problem. Remember the 1998 Asia currency meltdown; or the Global Financial Crisis of 2008; or Covid; or the UK gilt crisis of 2022; or the various US repo spikes. Such dislocations are dealt with by throwing balance sheet at them \u2013 swap lines, quantitative easing, backstops, emergency loans.<\/p>\n
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Tomahawks for Kiev, French pirates and Charlie Kirk: Key takeaways from Putin\u2019s talk at the Valdai forum<\/p>\n
In 2022, we suddenly found out that Russian energy is not just another financial dislocation that can be covered with a swap line or emergency loan. From this, it follows that we need to think in terms of two economies: the real economy of energy, resources, goods and services, and a parallel financial economy of money and debt. There will always be a financial economy \u2013 and always be spreads blowing out on a Bloomberg screen somewhere \u2013 but we\u2019re finding out now that it is the real economy that underpins the financial one and not the other way around.
\nBut here\u2019s the catch. When energy is abundant and cheap \u2013 and when money holds its value against energy \u2013 this energy foundation to the economy can be disregarded. The peak of renewables-based energy transition euphoria in Europe coincided with the peak of Russian supply of cheap hydrocarbons to Europe. A coincidence?
\nThe legendary strategist Zoltan Pozsar once wrote: \u201cRussia and China have been the main \u2018guarantors of macro peace\u2019, providing all the cheap stuff that was the source of deflation fears in the West, which, in turn, gave central banks the license for years of money printing (QE).\u201d
\nI would add that this also gave the West license to dwell comfortably in the illusion that the economy is primarily a monetary system and not an energy-and-real-stuff system. Ironically, it was the reliable presence of cheap Russian oil and gas that helped this economic illiteracy fester. \u00a0
\nPutin did not connect these dots in his remarks at Valdai; the focus of his speech was obviously elsewhere. But the dots are there to be connected. And there are a lot of people in Moscow and Beijing to whom these dots are very apparent.<\/p>\n","protected":false},"excerpt":{"rendered":"
The anchor of the global system is shifting from debt claims to real assets, and the implications are profound During his Valdai speech on Thursday, Russian President Vladimir Putin made…<\/p>\n","protected":false},"author":1,"featured_media":19631,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"rop_custom_images_group":[],"rop_custom_messages_group":[],"rop_publish_now":"initial","rop_publish_now_accounts":[],"rop_publish_now_history":[],"rop_publish_now_status":"pending","footnotes":""},"categories":[4,6,3],"tags":[],"class_list":["post-19630","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","category-environment","category-politics"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t