OUTBREAK ALERT: Yellow Fever Death Toll Triples In Brazil

The yellow fever outbreak in Brazil has taken a backseat to the flu outbreak spreading globally.  But, the death toll from yellow fever has now tripled and travelers are being warned.

The World Health Organization (WHO) said on Monday there are 35 confirmed cases of the disease, including a case confirmed in the Netherlands for a traveler who had recently visited Sao Paulo state. Sao Paulo even closed its zoo and botanical gardens Tuesday as the yellow fever outbreak that has led to 70 deaths is picking up steam.

The big Inhotim art park, which attracts visitors from all over the world, also announced that all visitors would have to show proof of yellow fever vaccination to be allowed to enter. The park said the measure was preventative only and that so far, no case of yellow fever had been found there.

Yellow fever is a potentially life-threatening viral disease that is transmitted to people by the bite of an infected mosquito. Yellow fever is a very rare cause of illness in U.S. travelers. The degree of sickness ranges in severity from a self-limited febrile illness to severe liver disease with bleeding, and even death. The virus has killed 20 people since July.

Health officials have said the disease could quickly spread and become an epidemic in crowded areas, but immunologist Dr. Anthony Fauci told Daily Mail Online that getting the yellow fever shot is the best way to prevent travel-related cases of yellow fever. Brazilians stood in lines for hours to get yellow fever vaccinations in the country’s largest states, including Sao Paulo, last week.

The WHO said 777 human cases of yellow fever had been reported in eight Brazilian states since December 2016 and that 261 people had died from the virus.  WHO officials said the confirmed cases of yellow fever are likely to have been contracted in areas where there have been yellow fever outbreaks among primates. “There is an ongoing threat of an outbreak related to the fact in non-human primates,” D. Fauci explained. “There is an ongoing reservoir of yellow fever.”

The Dollar"s Reign As The Global Reserve Currency Is Running Out - Fast

The dollar’s hegemony over the global financial system can’t last forever. Like all things, it will eventually come to an end.

The only question left, as MacroVoices" Erik Townsend puts it, is whether we’re in the second inning and there’s going to be another hundred years of the dollar serving as the world’s global reserve currency? Or whether we’re in the bottom of the ninth and it’s all about to fall apart? Or maybe somewhere in between.

In an interview with Jeffrey Snider, CIO at Alhambra Partners, Luke Gromen, founder of Forest for the Trees, and Mark Yusko, founder and fund manager for Morgan Creek, Townsend explores the issue in greater detail. For many, the decline of the dollar as the world’s reserve currency is difficult to imagine. But the first blow to the petrodollar system has already been delivered: By refusing to accept oil payments in dollars, Venezuela has demonstrated to the world that an alternative system to the petrodollar is indeed possible. Furthermore, Latin America’s socialist paradise has begun publishing an oil-price index denominated in yuan. We"ve also highlighted reports that Russia, Venezuela and Iran - three countries that have trouble accumulating dollars because of Treasury Department sanctions - are considering launching a cryptocurrency backed by oil.

Townsend begins his interview with Gromen, who points out that, counterintuitively, the dollar’s rapid appreciation beginning in Q3 2014 has coincided with a drop in the share of global trade settled in dollars. Gromen predicts that this trend will continue to benefit the dollar – until it doesn’t.

I would probably say in the later innings. Certainly the last third of the game. Maybe the eighth inning.

 

The reason I say that is that, given the Eurodollar system as it’s structured, early on, if any nations or major parties wanted to move away from using the dollar for any number of reasons, ironically, what that moving away from the dollar would do would drive significant dollar strength. So, ironically, accelerating moves to dump the dollar in global trade usage, which in the long run is the most bearish development for the dollar, in the near term is the most bullish development for the dollar.

 

And so when we look back, we think, beginning in 3Q14 was when you started to see a marked acceleration in the dollar’s share loss in global trade. And, in particular, in energy trade centered between China and Russia. And so we think things began to accelerate in 3Q14 and, like we’ve said, the process of moving away from the dollar, or the dollar losing share in trade, is a big positive for the dollar – until it’s not.

However, Gorman believes an important shift happened in Q3 2016 when the dollar’s share loss in global trade started to accelerate. At that point, the dollar’s climb from 2014 and 2015 had already been unwound to a degree. Furthermore, Gorman posits that the dollar will weaken because it’s in the national security interest of the US for the dollar to weaken.

And then the “until it’s not” part of this movie began over a year ago now, in 3Q16. The reason we say that is because from 3Q14 until 3Q16 you saw a rising dollar, rising Libor, and a pretty traditional dollar strengthening cycle up to that point.

 

Where it started to become non-traditional relative to what pretty much any market participant trading in markets today – or even alive today – was when in 3Q16 rising dollar, rising Libor, drove a year-over- year decline in US tax receipts and therefore an increase in the US deficit as a percent of GDP. And it did this before you had a major emerging crisis.

 

This was the first time the US’s tax receipts declined before a major emerging market crisis, in a dollar-tightening cycle, in the post-Bretton Woods period.

 

And so, then, when you combine that with what has become effectively a system that requires as infinitum asset price appreciation in order to drive tax receipts for the US government, it sets up – beginning in 3Q16, where we started to get into late innings of this game. Where, not only are foreign creditors looking to move away from the dollar in trade usage for a number of reasons, but it also started to become a matter of national security for the

 

US government for the dollar to weaken.

Moving on, Townsend turns next to Jeff Snider, CIO at Alhambra investments. Snider explains how the Eurodollar system harms emerging-market economies and ultimately weakens the global financial system with each cycle of tightening.

The last tightening cycle, which lasted from 2014 through 2016, was particularly destabilizing, Snider explained, particularly for emerging markets like Brazil, Russia, and China. Many EM countries and corporations based in those countries issue dollar-denominated debt, which becomes more expensive to pay down when the greenback climbs.

But, for now at least, Snider expects the system to endure – if for no other reason than there’s nothing to take its place.

My position is that the dollar system, the supply of dollars in the global network of trade, continues to be a problem. But it isn’t a problem in a straight line. It’s not like it’s a straight-line decay from where you can draw a singular line from 2007 to 2013. Instead, it’s more of an intermittent type of thing where we have these alternating periods where things tighten up. Then they loosen up relatively.

 

But, as we go through each of these periods, the system is worse off for having gone through each one. And so the last tightening episode, starting in 2014 and lasting through 2016, was severe. Especially in emerging markets like Brazil, Russia, and China, the BRICs, because that’s where that part of the dysfunction was focused. More in FX and more into the Asian part of the system, as it has evolved since 2007 in that direction.

 

So, from my perspective, nothing has really changed except the system continues to get weaker. And I think right now where we are is we’re waiting for the next tightening event to start taking place. That there’s plenty of evidence that the system continues to decay, particularly with China and some of the other emerging markets.

 

So it doesn’t add up to a bullish position, necessarily. And I think that’s one of the things I want to define, is what exactly is a rising dollar? And it’s not bullish. And I’m certainly not of the position that most dollar bulls take, which is that the dollar goes up because the US is going to strengthen either economically, financially, or otherwise. I think that’s just not the case. So if we couch these in terms of the Eurodollar system and its continued decay, it’s not a bullish thing. But I think the dollar continues to go up, at least for the next little while. Because, frankly, there is nothing there to take its place.

 

So we’re kind of stuck with it.

Moving on, while Yusko didn’t feel comfortable attaching an expected expiration date for global dollar hegemony, he did draw some interesting parallels between the dollar and the British pound, the global reserve currency that immediately preceded the dollar.

You know, the interesting thing about world reserve currency is there have been lots of them over time. And I always joked that Americans are like Notre Dame football fans – they remember a past that never was. Notre Dame football fans think that we win all the time, which, clearly, we don’t. I was down in Miami. That was horrible.

 

And, you know, Americans think that we’ve always been the world reserve currency, for some reason. And we clearly haven’t. It’s only been since 1944. What’s interesting about that is the transition can last a long time. The sun never set on the British Empire for 70 years. They had the world reserve currency. They had the strongest navy.

 

And then in 1913 they invaded Mesopotamia, incurred a bunch of debt, the pound sterling collapsed, the dollar ascended. We, 31 years later, became the world reserve currency. And then in 2013, we (coincidentally) invaded Mesopotamia, incurred a bunch of debt, the dollar collapsed, and the Renminbi ascended.

 

Well, that hasn’t all happened yet. But I think it’s on its way to happening. And when I look around the world, I think it’s supremely clear that China has a plan. And for the last 50 years, their stated goal was a harmonious rise.

 

Doesn’t that sound poetic? It’s beautiful. It’s non-confrontational.

Ultimately, Yusko believes the Chinese yuan will replace the dollar as the world’s reserve currency sometime before 2050, the time by which Yusko expects China will become the dominant global power.

This contrasts with the consensus view, that, after the dollar, there won’t be one dominant currency, but several in separate spheres of influence.

The conversation is part one of a five-part series from MacroVoices exploring the dollar’s future as the world’s dominant currency.

Readers can listen to the whole conversation below:

China"s Raging Against Dying Of The Light (Or Why Peak Employment Is Imminent)

Authored by Chris Hamilton via Econimica blog,

China"s working age population is clearly defined as those aged 16 to 50 years old for females (55 for "white collar" females) and 16 to 60 years old for males.  China mandates retirement at these outer age limits.  Perhaps of some interest should be that this working age population peaked in 2011 and has been declining since.  This decline will continue indefinitely as China has a collapsing childbearing population (detailed HERE), net emigration (outflow), and a still decidedly negative birthrate.

There is no evidence to believe the working age declines will abate any decade soon.  As the chart below shows, China"s potential workforce will be shrinking indefinitely... and by 2030 China"s potential workforce will be over 100 million fewer than the 2011 peak (an 11% decline)...and only further down from there.

China has one of the youngest average retirement ages in the developed world.  On average, according to a recent study (HERE), Chinese leave the work force by age 55 compared to age 63 in the US (Norway has the latest average departure at age 67).  So, perhaps China will be raising the retirement age to curb the ballooning 60+yr/old population entering retirement (chart below)?  More on that later.

Comparing the working age population versus the 60+yr/old population (chart below).  A shrinking potential workforce since peaking in 2011 and a rapidly growing elderly population.

Below, that elderly growth versus the working age depopulation as a % of all adults (chart below)...think hockey stick.  After nearly six decades of maintaining a consistent 60+yr/old % of the adult population...the elderly explosion is just beginning.

If we take the now declining total potential working age population vs. China"s still rising total number of employed individuals (according to Statista)...the chart below shows that if China adds just a mere million employees a year (about a third of the annual average employment growth seen from "06 through "16)...that by 2030 China"s employment will exceed 100% of the potential workforce.  Wait...what?!?  Or perhaps working from the premise that people who don"t exist can"t be employed...it"s time to start considering China"s employed population is set to begin falling.

This idea that there are "millions upon millions of Chinese just waiting to be incorporated into the workforce"...not so much.  While a continuing shift from rural to urban is likely, China has already or will soon experience peak employment. Simply put, there will be fewer consumers of everything (homes, cars, appliances, etc.) every year than the year before. 

Whatever overcapacity exists now will be joined by massive increases in excess housing, excess production, excess shopping malls as this depopulation plays out over the coming years and decades.

Five big points here:

1) China ends one child policy, with little to no impact...

• 
  

  Although China implemented its one child policy in 1979 and officially phased it out in 2015, China"s birthrate was actually consistently higher than most of the other major economies in East Asia (Japan, S. Korea, Taiwan, Singapore...chart below) and only N. Korea"s fertility rate is currently higher.

  
  

• 
  

  None of these other East Asia nations ever implemented birth restrictions.  Instead, their populaces chose not to replace themselves responding to the availability of birth control, surging costs of child rearing, and inclusion of females into the workforce, etc.  Simply put, the one child policy was inevitable and has now organically gone global.  The phase out of this policy will have little to no impact of China"s fertility rates.

  
  

2) China to raise retirement age, but no time soon...

• 
  

  In early 2015, China suggested it would detail in 2017 (which I still have not seen) a gradual, multiyear process to raise the retirement age (China"s version of political suicide).  Suggestions focused on slowly, incrementally, raising female retirement ages to match males and likewise, pushing retirements out by a month or two per year.  However, none of this was even suggested to start within the next five years and like most things, almost surely be back-end loaded so any real impacts are overstated.  Regardless Communist or "Capitalist" politicians, the game is the same.  A little "razzle-dazzle" that ensures any negative policy impacts never occurs on your watch.

  
  

3) China to institute Universal Pension Plan...

• 
  

  In late 2015, China said "We will achieve a basic pension for all employees nationally".  Currently, about 800 million of China"s 1.3 billion are eligible for state pensions.  According to Sinosphere, pensions for non-state employees vary widely, as high as 3000 RMB ($480) month in Beijing to as little as 80 RMB for rural farmers.  Civil Servants pensions are generally higher than those of non-state employees.  The party statement said, China would be;

  
  
  • 
    

    “Building a fairer and more sustainable social welfare system.

    
    
    
    

    Implementing plans for every person to take part in social insurance.

    
    
    
    
    
    

    Diverting capital from state-owned enterprises to social security funds.

    
    
    
    
    
    

    
    

    Offering all urban and rural residents insurance for serious illness.”

    
    

    
    
    
    
  
  

4) Chinese wages & average per capita disposable income rising but gains are hugely variable...

• 
  

  While Chinese factory wages in tier 1 urban areas are now inline with Portugal or S. Africa, this terrific rise has created it"s own problems.  The rise in wages has been met with inflationary spikes in rents, fuel, food, etc. etc.  Average disposable income has risen in the urban areas but flat at best across rural China.  However, the response of employers to the spectacular rising wages has been automation, a shift away from labor intensive production, and outsourcing to lower cost countries.  This is at odds with the generally low skill/low education rural population looking for opportunity in the urban areas.  The breadth and size of further gains in disposable income is likely to be limited.  Economically, a declining total number of workers making marginally more money will not provide the desired growth.

  
  

5) China cannot export its way out of this...

• 
  

  The annual change to the 0-64yr/old combined populations of the 35 OECD nations (US, Canada, Europe, Japan, S. Korea, Australia/NZ) plus China, Brazil, and Russia begin declining in 2018 (chart below).  The core populations of the nations responsible for consuming 80%+ of all Chinese exports have peaked and begin shrinking.  Fewer consumers every year than the year before, indefinitely.  As for the nations that are doing all the growing, India and Africa, they consume about 4% of all Chinese exports.  BTW, the chart below shows when each nation/region 0-64yr/old population began declining.

  
  

Simply put, China is offering to increase and broaden it"s pension system to a ballooning population of elderly but will have a decreasing potential number of employees from which to pay for that increase?!? 

How will China achieve this?  Well, as the chart below shows, as Chinese core population growth has been decelerating, Chinese debt growth has been accelerating. 

While China"s GDP and energy consumption have led the world, they have not responded in kind to China"s debt explosion and exponentially more will be necessary to continue to show "growth".  Over a third and perhaps half of all the debt has been mal-invested in a housing bubble for a population that is never coming. 

What comes next isn"t going to be good for China nor the rest of the world as China looks to flood a depopulating nation with new debt only creating more housing overcapacity... China will look to beat the Japanese at the debt game.

For instance, the Chinese public-pension system as of 2014, took in 2.33 trillion yuan in revenue and paid out almost 2 trillion...with 3 trillion in net funds.  The net outflows and drawdown of those net funds is imminent.

But not to worry, the Communist Party explained that..."We will look at some opportunities with higher yields but will contain risk".  Again, no details were offered.  However, one asset it is clear the Chinese will not be buying...US Treasury"s (chart below, showing the net purchases since the debt ceiling debate of July 2011 according to TIC).  Since that date, China has been a net seller of US Treasury debt despite running record US dollar surplus" (BLICS = Belgium, Luxembourg, Ireland, Cayman Island, Switzerland).

From 2000 "til July 2011, China recycled 50% of its dollar trade surplus into US Treasury debt accumulating over $1.3 trillion.  Since July 2011, China has net sold over $100 billion and as of October, held about $1.2 trillion (chart below).

But I"m pretty sure those dollars aren"t sitting fallow and are finding their way into some asset, probably one in particular that is selling on the cheap about right now.

 

The Trump Doctrine In A Regional Context

Authored by Andrew Korybko via Oriental Review,

The last section of the new US National Security Strategy (NSS) describes the envisaged application of the Trump Doctrine in a regional context all across the world, and it’s worthwhile to examine what storylines will most likely be advanced by the policy document’s intrinsic infowar component. This analysis is divided according to the geographic categories contained in the NSS and proceeds along that order, after which a brief summary will be presented in highlighting the most discernable global trends.

Indo-Pacific

The US says that “a geopolitical competition between free and repressive visions of world order is taking place in the Indo-Pacific region” as China employs multifaceted influence strategies in a concerted effort to get regional states to follow its economic and political models. Although presented by China as being mutually beneficial, the NSS describes Beijing’s Silk Road relationships as being detrimental to its partners’ sovereignty. In response, Washington claims that “states throughout the region are calling for sustained U.S. leadership in a collective response that upholds a regional order respectful of sovereignty and independence”, which implies the creation of what the author has previously described as a ‘China Containment Coalition’ (CCC) to preserve the existing US-led unipolar system them. The suggested outcome of this initiative is the US’ “quadrilateral cooperation with Japan, Australia, and India”, with the latter once again being referred to as a “Major Defense Partner” whose “growing relationships throughout the region” will be supported by the US.

Elsewhere in the area, North Korea is identified as “a global threat that requires a global response”, later revealed in this section as being missile defense cooperation between the US, Japan, and South Korea towards the eventual aim of “an area defense capability”, one which was previously described in the document as “not intended to undermine strategic stability or disrupt longstanding strategic relationships with Russia or China.” Looking southwards, the US wants to “reenergize [its] alliances with the Philippines and ­Thailand and strengthen [its] partnerships with Singapore, Vietnam, Indonesia, Malaysia, and others to help them become cooperative maritime partners”, with it being inferred that “reenergizing” is a euphemism for “winning back” Manila and Bangkok. Altogether, the US plans to use ASEAN and APEC as regional institutions for advancing its geopolitical and economic interests, with the former probably seeing some of the ASEAN states become the US’ “Lead From Behind” partners in “containing China” while the latter will result in more bilateral trade deals.

EU

Russia is fear mongered as engaging in “subversive measures to weaken the credibility of America’s commitment to Europe, undermine transatlantic unity, and weaken European institutions and governments”, suggesting that any objective developments that even remotely hint at either of these three conclusions will be dismissed as ‘Russian propaganda’ and their messengers discredited as ‘Russian agents/trolls’. China is also mentioned in this section as having “gain[ed] a strategic foothold in Europe by expanding its unfair trade practices and investing in key industries, sensitive technologies, and infrastructure”, showing that the US is now paying attention to the progress that its 16+1 framework has made in the “Three Seas” region of Central and Eastern Europe and will likely go on the information offensive against it in the coming future.

Daesh and the Migrant Crisis are also listed as posing serious threats to the EU as well.

In reassuring the continent, the US says that its “European allies and partners increase [its] strategic reach and provide access to forward basing and overflight rights for global operations”, which explains the self-interested reason why Washington will evidently abide by its Article 5 commitment to NATO. It believes that deepening transatlantic collaboration is necessary to protect Europe from the aforementioned threats that were described, with military spending increases geared towards modernizing capacities and building a ‘missile defense shield’ to ‘protect’ against Russia, Iran, and even supposedly North Korea too, while US efforts to “contest China’s unfair trade and economic practices and restrict its acquisition of sensitive technologies” in the EU will probably mean that Junker’s September 2017 proposal for a “European Enabling Framework” ‘screening process’ will become a roadblock to Beijing’s plans.

Furthermore, the US wants to expand its energy exports to Europe, which might see it getting more involved in the activities of LNG terminal-hosting “Three Seas” states such as Croatia and thus setting the stage for a “Balkan Pivot” to more directly counter China there.

Middle East

Right off the bat, the US blames Iran for all of the region’s woes by stating that “the interconnected problems of Iranian expansion, state collapse, jihadist ideology, socio-economic stagnation, and regional rivalries have convulsed the Middle East”, accusing what it labels as “the world’s leading state sponsor of terrorism” of “tak[ing] advantage of instability to expand its influence through partners and proxies, weapon proliferation, and funding” that oftentimes takes the form of Iran “develop[ing] more capable ballistic missiles and intelligence capabilities, and [undertaking in] malicious cyber activities.” Iran is painted as the ultimate evil in order to whitewash Israel, which the US attempts to unabashedly do in the passage where the authors write that “the threats from jihadist terrorist organizations and the threat from Iran are creating the realization that Israel is not the cause of the region’s problems.”

In fact, the NSS notes, “states have increasingly found common interests with Israel in confronting common threats”, in a nod to the de-facto alliance between the GCC and Israel against Iran. The US lists its chief objectives as strengthening cooperation with the GCC and what it describes as the “independent state” of Iraq, with the latter phrase hinting that Washington will work behind the scenes to counter Tehran’s influence in Baghdad. This presumption is apparently confirmed by the next passage where the US commits to “work[ing] with partners to…neutralize Iranian malign influence”, which again implies a similar “Lead From Behind” strategy just like it wants to employ in the Indo-Pacific.

Moreover, the US says that it will “seek a settlement to the Syrian civil war that sets the conditions for refugees to return home and rebuild their lives in safety”, signaling a step back from its previous regime change obsession and possibly opening the doors for a pragmatic ‘New Détente’ deal with Russia over this issue. In addition, the expected US commitment “to helping facilitate a comprehensive peace agreement that is acceptable to both Israelis and Palestinians” is reiterated in the text, though this is nothing more than rhetoric for distracting from the US’ determinedly pro-Israeli policies. Most interestingly, however, is the penultimate policy prescription that the US will “help (its) partners procure interoperable missile defense and other capabilities to better defend against active missile threats”, which demonstrates that its missile defense plans are indeed Eurasian-wide and stretch all across the EU-Mideast-Northeast Asian Rimland.

South And Central Asia

The US draws significant attention what it describes as Pakistan-based threats on multiple occasions, slyly speaking tongue-in-cheek when talking about the Pakistan that it’s supposedly seeking in order to indirectly accuse the Pakistan of today of embodying these said threats. For example, when the authors write that their country “seeks a Pakistan that is not engaged in destabilizing behavior…will press Pakistan to intensify its counterterrorism efforts, since no partnership can survive a country’s support for militants and terrorists who target a partner’s own service members and officials…(and) will also encourage Pakistan to continue demonstrating that it is a responsible steward of its nuclear assets”, it’s essentially saying that Pakistan is destabilizing the region, supporting anti-American militants and terrorists who target US forces in Afghanistan, and irresponsibly wielding nuclear weapons which might one day fall into the hands of the same terrorists that it’s accused of backing.

India, US, Japan annual Malabar naval drills

All of these hostile narratives against Pakistan explain why the US wants the world to think that “the prospect for an Indo-Pakistani military conflict [which] could lead to a nuclear exchange remains a key concern requiring consistent diplomatic attention”, as the thinly veiled inference is that Islamabad is solely responsible for this dangerous state of affairs. It’s predictable that Washington would weave such a one-sided storyline because it envisions New Delhi as its 21^st-century partner for ‘containing China’, with its strategists writing that the US “will deepen [its] strategic partnership with India and support its leadership role in Indian Ocean security and throughout the broader region”.

Concerning Central Asia, the NSS says that the US “will encourage the economic integration of Central and South Asia to promote prosperity and economic linkages that will bolster connectivity and trade”, and since it’s improbable that this is an oblique statement of support for CPEC, the only realistic conclusion is that it’s an American endorsement for the Central Asian component of India’s Chabahar project. As even the most inexperienced observer would know, this port is based in Iran, so the US will have to work overtime in crafting a semi-cohesive explanation for why it doesn’t mind India working with Washington’s hated nemesis in Tehran, though the answer could probably be simplistically summed up as ‘realpolitik’ for ‘containing China’.

Another point to mention is that the US says that it “seeks Central Asian states that are resilient against domination by rival powers, are resistant to becoming jihadist safe havens, and prioritize reforms”, and that it “will work with the Central Asian states to guarantee access to the region to support [its] counterterrorism efforts.” Evidently, the US is aiming to exploit the new Daesh threat to the region that it helped transfer from “Syraq” to Afghanistan as an excuse for reestablishing the military partnerships that it used to have with Kyrgyzstan and Uzbekistan, possibly up to the point of once again basing its troops on their territory. While pretending that this is only in the interests of “counterterrorism efforts”, the real motivation would be to boost their “resilien[cy] against domination by rival powers”, or in other words, try to dislodge them from the joint Russian-Chinese multipolar orbit of the SCO.

Western Hemisphere

The US claims that “democratic states connected by shared values and economic interests will reduce the violence, drug trafficking, and illegal immigration that threaten [their] common security”, but in reality it’s only concerned about leveraging its economic connectivity with Latin American states to counter the three mentioned threats and doesn’t actually care too much about “democratic states” or “shared values”. After all, the US supports the Honduran government of Juan Orlando Hernandez despite the OAS requesting an electoral redo after the incumbent was suspected of stealing the election and then openly resorting to deadly force to suppress opposition protests against him. The Trump Administration’s visceral hatred of anything socialist is also on full display in condemning Cuba and Venezuela, which it believes have served as magnets for inviting Chinese and Russian influence into the region via economic and military means, respectively.

The NSS emphasizes the US’ “regional efforts to build security and prosperity through strong diplomatic engagement” and its desire to “isolate governments that refuse to act as responsible partners in advancing hemispheric peace and prosperity”, suggesting that the incipient anti-Venezuelan coalition model that’s forming could be replicated against the similarly multipolar-aligned ALBA states of Bolivia and Nicaragua due to their socialist ideals and in the event that they forcibly react against any forthcoming Hybrid War provocations against them. The declaration that the US “will encourage further market-based economic reforms and encourage transparency to create conditions for sustained prosperity” adds credence to the claims that it will probably expand its “Operation Condor 2.0” unconventional campaign of restoring its hegemonic hemispheric influence against those states and possibly other ones as well.

US President Donald Trump attends a working dinner with Latin American leaders in New York

On the economic front, the document says that the US “will modernize [its] trade agreements and deepen [its] economic ties with the region and ensure that trade is fair and reciprocal”, which is just a reaffirmation of Trump’s well-known intent to renegotiate NAFTA, but which could also extend to the US’ other hemispheric multilateral trade deal of CAFTA-DR and the bilateral ones that it has with Chile, Colombia, and Peru (the latter three of which plus NAFTA-member Mexico constitute the four states of the Pacific Alliance trading bloc). The phrasing about “deepening economic ties with the region” might indicate the US’ plans to reach bilateral trade deals with the Mercosur members, probably beginning with Brazil and then having the rest of the bloc fall in line afterwards. Altogether, the interweaving of bilateral trade deals all throughout the hemisphere would represent the de-facto fulfillment of the long-sought “Free Trade Area of the Americas” (FTAA).

Africa

The final section of the NSS’ regional context review is the most direct about the US’ intentions to “contain China” and obstruct its Silk Road strategy. The authors confidently write that Africa “represent[s] potential new markets for U.S. goods and services”, the demand of which “is high and will likely grow” because of what it hints as being the desire of many countries to replicate its political and economic models. This is obviously the infowar narrative that will be spun in serving as the ‘carrot’ for attracting African partners (subordinates), while the ‘stick’ is the equally weaponized storyline that “some Chinese practices undermine Africa’s long-term development by corrupting elites, dominating extractive industries, and locking countries into unsustainable and opaque debts and commitments.”

US President Donald Trump congratulates African leaders

In case there was any doubt that the US wants to challenge China’s dominance in Africa, the document unambiguously announces that the US “will offer American goods and services, both because it is profitable for [it] and because it serves as an alternative to China’s often extractive economic footprint on the continent.”

To this end, the US “seeks sovereign African states that are integrated into the world economy”, which is a just another way of saying that it wants its partners to abandon the Chinese model of state-driven development and open up their economies to Western businessmen and their Indo-Japanese partners instead. “Support[ing] economic integration among African states” could be seen as developing an anti-Chinese trading bloc in the future, though this is unlikely since all existing economic organizations on the continent are closely aligned with the People’s Republic, as are most of the countries that are party to the massive 2015 Tripartite Free Trade Area in China’s most active “sphere of Silk Road influence”.

However, where the US is most capable of making African inroads is through military-security relations in “partner[ing] with governments, civil society, and regional organizations to end long-running, violent conflicts”, which carries with it a whiff of “Lead From Behind” “nation-building” that America is much more experienced with (for better or for worse) than China. By using the existing anti-terrorist pretext present throughout most of Africa to degree or another and especially in the transregional Sahel, the US will probably seek to leverage its military advantages to “stabilize” these states in exchange for them disengaging from China and/or clinching profitable trade deals with the US afterwards, since it will otherwise be exceptionally difficult for the US to economically counterbalance China any other way.

Global Trends

 After examining the Trump Doctrine in all of its regional contexts, it’s possible to detect several interconnected global trends that are present in the US’ National Security Strategy:

Demonization Of Strategic Rivals:

The US is hell-bent on framing its strategic multipolar rivals of Russia, China, and Iran as responsible for global destabilization in order to deflect attention from it and its partners’ responsibility for this state of affairs, with the distinct possibility that Pakistan will soon be added to this list of adversaries as America moves towards making India its top international ally in the future.

Assembling “Lead From Behind” Coalitions:

The demonization of the US’ strategic rivals provides it with the ‘plausible pretext’ for assembling regional coalitions against them all throughout the Eurasian supercontinent and potentially even in Latin America too if it gets its way against Venezuela, thus formalizing a new model of unipolar proxy control that has flexibly adapted to multipolar challenges.

Building “Missile Defense Shields”:

One of the most prominent state-to-state manifestations of “Lead From Behind” cooperation between the US and its subordinates is the construction of “missile defense shields” on trumped-up pretexts in order to undermine Russia and China’s nuclear second-strike capabilities, with the possibility existing that the same model can one day be implemented in South Asia to support India against Pakistan.

Exploiting Non-State Threats:

Another way in which the US plans to utilize its “Lead From Behind” coalitions is to exploit the prevalence of threatening non-state actors such as jihadists and transnational criminal organizations by using them as a ‘plausible pretense’ for setting up a range of differently sized regional bases in its partnered countries to support special forces raids against these shared menaces.

Stopping The Silk Road:

The combination of demonizing infowars, “Lead From Behind” coalitions, and multidimensional partnerships with its allies naturally leads one to the conclusion that the US plans to employ all instruments of its power (Hybrid War) in stopping China’s One Belt One Road global vision of New Silk Road connectivity so as to counter multipolarity and indefinitely preserve the declining unipolar system.

Escobar: Vladimir Putin Takes Spotlight As Eurasia Connector

Authored by Pepe Escobar via The Asia Times,

At his trademark annual year-end press conference in Moscow, Russian President Vladimir Putin once again let drop selected foreign-policy nuggets essential to understanding what lies ahead on the turbulent Eurasian geopolitical chessboard.

By now it’s well known that Putin will run again in the presidential elections scheduled for March 18 (“it will be self-nomination” and “I hope for the overall support from the public”). The Man in Charge might as well continue to be in charge. So it’s always enlightening to bring down the (spin) noise: sit back, relax, and just listen.

On President Trump: “I am on first-name terms with Trump; yes, we would probably use the familiar ‘you.’ I hope he’ll get the opportunity to improve relations with Russia. Look at the markets, how they have grown. This means that investors trust the US economy, this means they trust what he [Donald Trump] is doing in this field.”

On Russiagate: “What’s so strange about this [diplomats speaking with officials in their host country]? Why do you have this ‘Russian spy’ hysteria?” On accusations of Russian interference in the 2016 US presidential race, Putin said, “They have been invented by those aiming to delegitimize Trump. These people don’t understand they are undermining their own country – they aren’t showing respect for the Americans [who] voted for Trump.”

On working together with Washington: “Russia and the US can work closely on a range of issues” even given the “well-known limitations” on Trump.

On potential US withdrawal from the Intermediate-Range Nuclear Forces Treaty: “We hear about the problems with the INF Treaty. Apparently conditions are being created and an information-propaganda campaign is being run for a possible US withdrawal from the treaty. There is nothing good about a US withdrawal, that [would] be highly detrimental to international security. The US has de facto left the INF Treaty already, with the deployment of the Aegis ashore, but Russia is not going to leave the treaty. We will not be dragged into an arms race.”

Putin stressed that Russia’s defense spending was US$46 billion a year, while the US plans to spend $700 billion in 2018.

On the Arctic: “I have visited [the Arctic archipelago] Franz Josef Land; several years ago foreign guides, accompanying foreign tourist groups, would say that these islands ‘recently’ belonged to Russia. They had forgotten that [Franz Josef Land] is a Russian archipelago, but we reminded them, and at the moment everything is fine. We shouldn’t forget it. Developing all those resources in the Arctic should take place in sync with taking care of the environment … we should not impinge on economic activities of ethnic minorities.”

On Ukraine: “The Kiev authorities have no desire to implement the Minsk agreements, no desire to launch a real political process, the completion of which could be the implementation of an agreement on the special status of the Donbass, which is enshrined in the relevant law of Ukraine, adopted by the Rada [Ukraine’s parliament]. Russians and Ukrainians are basically one people” (the audience is audibly pleased).

On Syria: “The US is not contributing enough to the successful resolution of the Syrian crisis. It is important that none of the participants in this [Syrian peace] process have the desire or temptation to use various terrorist or quasi-terrorist radical groups to achieve their immediate political goals.”

On Iraq: “Let’s say, militants are parting for Iraq. We are telling our US colleagues, ‘Militants have gone this or that way.’ There is no reaction, they [militants] are just leaving. Why? Due to thinking that they could be used in the fight with [Syrian President Bashar] Assad. That’s very dangerous.”

On Russia possibly influencing North Korea to abandon its nuclear program: “Your congressmen, senators look so good, they have beautiful suits, shirts, they are seemingly clever people. They put us alongside North Korea and Iran. At the same time they push the [US] president to persuade us to solve the problems of North Korea and Iran together with you.”

On a nuclear DPRK: “On North Korea, we don’t accept it as a nuclear country. As for the US, it has gone beyond previous deals [with the Democratic People’s Republic of Korea] … and has provoked North Korea to withdraw from agreements.  I think we heard the US would stop military drills, but no … they didn’t. It is vital to act very carefully when dealing with the DPRK’s nuclear program.”

On China: “I have full confidence that cooperation with China is beyond any political agenda. We will always remain strategic partners, for a long period of time. We have similar approaches to the development of the international system. We are both interested in joint [economic] projects, including integration of OBOR [One Belt One Road] and the Eurasian Union.”

Crafting the integration soundtrack

And that takes us to the heart of the geopolitical New Great Game in Eurasia: the Russia-China strategic partnership, once again reaffirmed, and the deepening of integration between the New Silk Roads, formerly OBOR, now Belt and Road Initiative (BRI), and the Eurasian Economic Union (EAUA).

Putin is clearly positive about the benefits for Russia from this economic interpenetration. He noted how “Russia was able to overcome major crises: the collapse of prices for energy carriers and trade sanctions. But the country is moving in the right direction with a greater focus on domestic production. Our internal trade grew by 3%. This has to mean something.”

Stressing how Moscow is totally on board the BRI, Putin implied how this cooperation extrapolates to both the BRICS (Brazil, Russia, India, China and South Africa) and the SCO (Shanghai Cooperation Organization) spheres as well; and that’s where we should place Moscow’s current efforts to convince New Delhi – also a BRICS and SCO member – that betting on the BRI favors India’s interests.

As recently as early this week in New Delhi, after a trilateral meeting with Chinese Foreign Minister Wang Yi and Indian Foreign Minister Sushma Swaraj, Russian Foreign Minister Sergey Lavrov has been adamant: “I know India has problems, we discussed it today, with the concept of One Belt and One Road, but the specific problem in this regard should not make everything else conditional to resolving political issues.”

New Delhi has to be listening, as it was one of Moscow’s staunchest allies during the Cold War.

In a parallel development, Iran is bound to join the EAEU as early as February, according to Behrouz Hassanolfat, director of the Europe and Americas Department of Iran’s Trade Promotion Organization, as quoted by the Islamic Republic News Agency (IRNA).

As Asia Times has reported, India and Iran are getting more in sync economically via a parallel Silk Road to Central Asia centered on the port of Chabahar. Iran is also an essential BRI hub, and now will become an EAEU hub as well.

As much as Beijing in relation to its BRI, Moscow has been on a charm offensive to enlarge the EAEU. Turkey – already on board the BRI – is a possible EAEU candidate for the near future, as well as India and Pakistan.

Even as Putin at his presser once again advanced the cause of these multiple cross-pollinations of Eurasian integration, India sometimes may give the impression of being the odd partner out. New Delhi has just hosted the first ASEAN-India Connectivity Summit, which can be interpreted as an attempt to go against the BRI. Yet the emergence of an anti-China bloc across Southeast Asia seems far-fetched.

In parallel, Moscow certainly does not welcome a somewhat evolving “Indo-Pacific” US/India/Japan alliance. The undercurrent narrative in Putin’s script could not be more crystal clear: The roadmap for Eurasia integration is all about the coming together of the BRI, EAEU, the SCO and BRICS.

Billionaire Tycoon Will Be Next President Of Chile

A billionaire who has been described as one of the world’s wealthiest politicians just won his second non-consecutive term as president of Chile when he defeated his center-left opponent in what observers are calling a landslide victory in Sunday"s election.

As the Washington Post reported, Sebastián Piñera, of the right-leaning National Renovation party and conservative Let’s Go Chile coalition, defeated center-left candidate Alejandro Guillier, of the ruling New Majority coalition, by 9 percentage points, turning the current government out of office. Piñera previously governed Chile between 2009 and 2014. Turnout increased between yesterday’s vote and a Nov. 19 runoff, as large numbers of conservative voters showed up at the polls, while leftists stayed home.

Guillier conceded and congratulated his opponent on his win and his return to the presidency after a four-year gap, according to the BBC.

Like we mentioned above, Piñera is a billionaire who once owned the television channel Chilevision, a large share of Lan Chile airlines, and the Colo-Colo soccer team. He won despite criticisms of his offshore holdings and use of tax havens. He joins Trump and Adrej Babis, a Czech tycoon who rode to electoral victory in a landslide in his home country earlier this year.

As WaPo points out, the 67-year-old will succeed Socialist President Michelle Bachelet, whose New Majority coalition came to power in 2014 on a platform promising sweeping change. Her administration reformed Chile’s tax and education systems and legalized abortion in the event of rape, endangerment to the mother’s life, or an unviable pregnancy. Bachelet began reforming Chile’s constitution, submitting a bill to the Congress earlier this year that would allow for a constitutional convention. Pinera is apparently a fan of many of these reforms and has vowed to preserve them. According to Reuters, Pinera said on Monday he would work to form a “broad cabinet, of continuity and change,” as he sought to strike a tone of conciliation a day after his resounding victory.

Regarding the bill calling for a constitutional convention to reform the dictatorship-era constitution, Pinera said he was in agreement “of perfecting it but in a climate of unity,” according to Reuters.

Pinera’s victory didn’t represent a sharp turn to the right for Chile - the world’s largest copper producer and widely considered Latin America"s most-stable economy - as it did exhaustion with Bachelet, whose second term was clouded by accusations of corruption, including an incident involving her son and daughter-in-law. The media and opposition politicians condemned Bachelet’s family for having secured a loan days before her 2013 victory to purchase land that was resold shortly thereafter, generating millions of dollars in profit. Though leftists weren’t the only ones impugned by scandal during her tenure: The right-wing Independent Democratic Union party was implicated in a campaign finance scandal, leading many Chileans to perceive the overall political system as corrupt. Bachelet leaves office with a dismal 23% approval rating.

Though Pinera’s victory is the latest in a wave of support for right-wing candidates across South America. Last year and this year, right-wing parties have won in Argentina and Peru. In Brazil, the impeachment of Dilma Rousseff brought right-wing Michel Temer to office.

According to WaPo, support for leftists parties was still strong during the runoff race, forcing Pinera to move to the center on issues like education and pensions, and managed to exploit divisions between the country’s far-left and center-left factions that caused many voters to stay home in the final round.

Piñera represents a coalition of conservative parties, but his victory does not signal a right turn. In the first round, Piñera won 36.6 percent of the vote, while Guillier took 22.7 percent, and the further left Broad Front candidate, Beatriz Sánchez, won 20.27 percent. The Broad Front increased its seats from 3 to 20 in the lower house, surpassing expectations. The coalition’s strong performance shows support for leftist ideology and pushed Guillier to the left during the second-round campaign; he changed his position on student debt forgiveness and pension reform.

 

Piñera sought to woo centrist voters by shifting his position on education and pension policy, while also mobilizing the far-right, in part because far-right independent José Antonio Kast did well in the first round. Kast ran a nationalist campaign that called for the construction of a wall between Chile and Peru and won just under 8 percent of votes. Piñera attempted to attract these voters, accusing the center-left parties of moving Chile in the direction of Venezuela and hinted that voter fraud had helped the center-left in the first round. These appeals likely motivated increased conservative turnout in Sunday’s runoff election.

If there’s any broader takeaway from the vote, it’s that Chile’s center is vanishing. In the first round, centrist Christian Democratic Party candidate Carolina Goic won only 5.88% of the vote.

Still, while he won the presidency by a wide margin, Pinera’s administration faces seemingly insurmountable obstacles in the battle to get things done.

This morning, he shared breakfast with president Bachelet and her family.

 

Newly elected president Piñera shares breakfast with president Bachelet and Min. of National Affairs Mario Fernandez, discussing transition of power. pic.twitter.com/0jC6H7116z

— SantiagoTimes (@SantiagoTimes) December 18, 2017

 

His coalition controls only 73 of the 155 seats in the lower house. The composition of congress means that the president will need support from the opposition to pass legislation. As we already noted, with fewer centrist lawmakers, the divisiveness in the legislature might soon rival the US Congress.

This may reinforce the electorate’s perception that Chile is “stuck,” generating further discontent.

Pinera will lead Chile until his term ends in 2022.
 

In Defense Of Bitcoin Hoarding

Authored by Jeffrey Tucker via The Foundation of Economic Education,

In Internet slang, they are called the HODLers, the people who are clinging to their Bitcoin and refusing to spend it. Instead, they just refresh their wallet apps, feeling richer by day while deferring consumption. Many of these burgeoning millionaires live like paupers. I’ve met many of them: all over the U.S., in Israel, in Brazil. They believe that every dollar they spend today is two dollars they won’t make in a few months. Probably they are right.

Bitcoin is undergoing a historic deflation, which simply means that its value is growing relative to the goods and services it can purchase.

This is in contrast to inflation, in which the value of the currency falls relative to its purchasing power. Inflation inspires spending – better to get rid of the money while it is more valuable. Deflation inspires saving – better to keep it so that your wealth rises over time.

So there is nothing selfish, strange, or weird about holding an asset that is rising in value. It would be irrational to do otherwise. And there is nothing odd about spending like mad in an inflation either. Our expectations of the future determine what we do today in every life and especially in monetary economics.

Some Money! 

This tendency to hold rather than spend is giving rise to a new claim. Bitcoin isn’t really a viable medium exchange, they say. You can’t buy a sandwich with it. Few people are paid in it. Adoption in the retail sector is slow. The total market capitalization is $219 billion and yet the trade volume nowhere near reflects that.

And it is true that most of the big money people are just holding it. James Mackintosh, writing in the Wall Street Journal, summarizes the conclusion: “It has become a vehicle for hoarding by libertarians for gambling by hordes of speculators attracted to its wild price swings.”

I’m looking now at the total market capitalization of the entire sector of cryptoassets: it approaches $400 billion. That is larger than the market cap of JP Morgan, by the way. That valuation is in private hands, growing in value at incredible rates. It’s risen 1,000% in 2017, and many people are predicting much higher growth in 2018.

The Implications

Under old-style Keynesian theory, economic growth is driven by consumer spending, not saving, so anyone who is hoarding money under the mattress is holding back progress. Hoarders are the enemy. “Every such attempt to save more by reducing consumption will so affect incomes,” wrote J.M Keynes, “that the attempt necessarily defeats itself.” He popularized what became known as the “Paradox of Thrift.”

It’s supposed to be counterintuitive. You think that saving up for the future is a good thing. Whoops, you are hurting others and, in the long run, hurting yourself. You should be spending, even going into debt to spend.

But sometimes “counterintuitive” is just wrong. That is the case here. There is no paradox. The intuition is right. Thrift is a good thing, on the individual level or for the whole society. Deferring consumption is the necessary precondition to permit saving. Saving is never wasteful. It’s true that infinite saving is pointless but that’s not how this works.

You are always saving for something. The end of saving is eventual consumption in some form. More importantly for economic growth, saving is the precondition for investment. Investment is what extends the complexity of the structure of production. This leads to employment, expansion of the division of labor, and the eventual rise of wealth.

 Consider the classic case of Crusoe on the island. Every day he is out catching fish to eat. He doesn’t have time to weave a net because he is always fishing with a pole. But at some point, he realizes that he could catch more with a net. In order to gain time, he has to stop fishing. So he saves up a few days of fish so he can eat without fishing, during which time he weaves a net. That net allows him to multiply his catch by 10 times. The deferring of today’s consumption for great overall wealth later is what makes progress possible.

The Policy of Pillage

Once the wrong (Keynesian) theory took hold in the 1930s, it became national policy to incentivize consumption over spending. Gold was confiscated from people. Government spending, it was believed, would goose the economy to make up for the ability or willingness of people to spend. The gold standard itself was destroyed in order to build a monetary system that could be inflationary – so that the money would be worth less in the future than it is today, thereby motivating the desire to spend.

This whole policy became a disaster for economic growth. After World War II, the US underwent a huge expansion as a result of the hoarding that occurred throughout the Depression and the War, and this was despite (and not because of) federal policy.

After the initial boost in economic growth, the Federal Reserve began its inflationary path. The personal savings rate peaked at 15% but then savers were blindsided by a wicked hyperinflation that hit in the late seventies, pillaging the savings that had been built up for the last two decades. No surprise: personal saving fell and fell, incomes flattened, and economic growth became ever more of an uphill climb. In our own times, inflation has been fixed but now we deal with near-zero interest rates, which harms saving as well.

As you can see in the chart, the economic crisis of 2008 traumatized a generation to the point that people began to save at much greater rates. No more would be trust the system to take care of them. It was exactly at this point that Bitcoin came into being, and created something that is really the opposite of the dollar: a currency designed to rise in value over time.

Many of the metaphors surrounding Bitcoin were drawn from the old-world gold standard. We speak of mining, for example, and proof of work (think of miners wearing jeans, panning gold from stream or banging picks into mountains). As with gold, there is a limit on the amount that can be created. And there are multiple levels of standards to determine authenticity and truth in accounting. In some ways, Bitcoin was invented to be the ultimate anti-Keynesian monetary praxis.

Up with Thrift

Now we see the results. Bitcoiners are HODLers. They save. They hoard. They have turned against consumption in favor of saving. I see it myself all around me. Young people who are invested in Bitcoin turn down luxury consumption. They don’t own cars. They bike and walk. They don’t spend big on dinners. They live off cheap groceries. They know that everything they consume today eats into their capacity for consumption, investment, and building wealth for the future.

So much for the Paradox of Thrift. Bitcoin is about the Virtue of Thrift. The pundits can decry it all day. Bitcoin doesn’t care. What’s more, you don’t need economic theory to understand this. You only have to follow the money.

If you ever despair of the future, just consider how much capital is currently being built up in the crypto sector. There will come a time, maybe in five to 15 years, when all this deferred consumption is going to be unleashed on the world economy in the form of real capital to build wealth and prosperity. And consider too: this is not about one economy, not about one nation. It’s about the whole world, capital and prosperity without borders.

The pundits can fulminate all they want. Technology doesn’t care.

Russia, China, India Unveil New Gold Trading Network

Submitted by Ronan Manly, BullionStar.com

One of the most notable events in Russia’s precious metals market calendar is the annual “Russian Bullion Market” conference. Formerly known as the Russian Bullion Awards, this conference, now in its 10th year, took place this year on Friday 24 November in Moscow. Among the speakers lined up, the most notable inclusion was probably Sergey Shvetsov, First Deputy Chairman of Russia’s central bank, the Bank of Russia.

In his speech, Shvetsov provided an update on an important development involving the Russian central bank in the worldwide gold market, and gave further insight into the continued importance of physical gold to the long term economic and strategic interests of the Russian Federation.

Firstly, in his speech Shvetsov confirmed that the BRICS group of countries are now in discussions to establish their own gold trading system. As a reminder, the 5 BRICS countries comprise the Russian Federation, China, India, South Africa and Brazil.

Four of these nations are among the world’s major gold producers, namely, China, Russia, South Africa and Brazil. Furthermore, two of these nations are the world’s two largest importers and consumers of physical gold, namely, China and Russia. So what these economies have in common is that they all major players in the global physical gold market.

Shvetsov envisages the new gold trading system evolving via bilateral connections between the BRICS member countries, and as a first step Shvetsov reaffirmed that the Bank of Russia has now signed a Memorandum of Understanding with China (see below) on developing a joint trading system for gold, and that the first implementation steps in this project will begin in 2018.

Interestingly, the Bank of Russia first deputy chairman also discounted the traditional dominance of London and Switzerland in the gold market, saying that London and the Swiss trading operations are becoming less relevant in today’s world. He also alluded to new gold pricing benchmarks arising out of this BRICS gold trading cooperation.

BRICS cooperation in the gold market, especially between Russia and China, is not exactly a surprise, because it was first announced in April 2016 by Shvetsov himself when he was on a visit to China.

At the time Shvetsov, as reported by TASS in Russian, and translated here, said:

“We (the Central Bank of the Russian Federation and the People’s Bank of China) discussed gold trading. The BRICS countries (Brazil, Russia, India, China and South Africa) are major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal. In China, gold is traded in Shanghai, and in Russia in Moscow. Our idea is to create a link between these cities so as to intensify gold trading between our markets.”

Also as a reminder, earlier this year in March, the Bank of Russia opened its first foreign representative office, choosing the location as Beijing in China. At the time, the Bank of Russia portrayed the move as a step towards greater cooperation between Russia and China on all manner of financial issues, as well as being a strategic partnership between the Bank of Russia and the People’s bank of China.

The Memorandum of Understanding on gold trading between the Bank of Russia and the People’s Bank of China that Shvetsov referred to was actually signed in September of this year when deputy governors of the two central banks jointly chaired an inter-country meeting on financial cooperation in the Russian city of Sochi, location of the 2014 Winter Olympics.

Deputy Governors of the People’s Bank of China and Bank of Russia sign Memorandum on Gold Trading, Sochi, September 2017. Photo: Bank of Russia

National Security and Financial Terrorism

At the Moscow bullion market conference last week, Shvetsov also explained that the Russian State’s continued accumulation of official gold reserves fulfills the goal of boosting the Russian Federation’s national security. Given this statement, there should really be no doubt that the Russian State views gold as both as an important monetary asset and as a strategic geopolitical asset which provides a source of wealth and monetary power to the Russian Federation independent of external financial markets and systems.

And in what could either be a complete coincidence, or a coordinated update from another branch of the Russian monetary authorities, Russian Finance Minister Anton Siluanov also appeared in public last weekend, this time on Sunday night on a discussion program on Russian TV channel “Russia 1”.

Siluanov’s discussion covered the Russian government budget and sanctions against the Russian Federation, but he also pronounced on what would happen in a situation where a foreign power attempted to seize Russian gold and foreign exchange reserves. According to Interfax, and translated here into English, Siluanov said that:

“If our gold and foreign currency reserves were ever seized, even if it was just an intention to do so, that would amount to financial terrorism. It would amount to a declaration of financial war between Russia and the party attempting to seize the assets.”

As to whether the Bank of Russia holds any of its gold abroad is debatable, because officially two-thirds of Russia’s gold is stored in a vault in Moscow, with the remaining one third stored in St Petersburg. But Silanov’s comment underlines the importance of the official gold reserves to the Russian State, and underscores why the Russian central bank is in the midst of one of the world’s largest gold accumulation exercises.

1800 Tonnes and Counting

From 2000 until the middle of 2007, the Bank of Russia held around 400 tonnes of gold in its official reserves and these holdings were relatively constant. But beginning in the third quarter 2007, the bank’s gold policy shifted to one of aggressive accumulation. By early 2011, Russian gold reserves had reached over 800 tonnes, by the end of 2014 the central bank held over 1200 tonnes, and by the end of 2016 the Russians claimed to have more than 1600 tonnes of gold.

Although the Russian Federation’s gold reserves are managed by the Bank of Russia, the central bank is under federal ownership, so the gold reserves can be viewed as belonging to the Russian Federation. It can therefore be viewed as strategic policy of the Russian Federation to have  embarked on this gold accumulation strategy from late 2007, a period that coincides with the advent of the global financial market crisis.

According to latest figures, during October 2017 the Bank of Russia added 21.8 tonnes to its official gold reserves, bringing its current total gold holdings to 1801 tonnes. For the year to date, the Russian Federation, through the Bank of Russia, has now announced additions of 186 tonnes of gold to its official reserves, which is close to its target of adding 200 tonnes of gold to the reserves this year.

With the Chinese central bank still officially claiming to hold 1842 tonnes of gold in its national gold reserves, its looks like the Bank of Russia, as soon as the first quarter 2018, will have the distinction of holdings more gold than the Chinese. That is of course if the Chinese sit back and don’t announce any additions to their gold reserves themselves.

The Bank of Russia now has 1801 tonnes of gold in its official reserves

A threat to the London Gold Market

The new gold pricing benchmarks that the Bank of Russia’s Shvetsov signalled may evolve as part of a BRICS gold trading system are particularly interesting. Given that the BRICS members are all either large producers or consumers of gold, or both, it would seem likely that the gold trading system itself will be one of trading physical gold. Therefore the gold pricing benchmarks from such a system would be based on physical gold transactions, which is a departure from how the international gold price is currently discovered.

Currently the international gold price is established (discovered) by a combination of the London Over-the-Counter (OTC) gold market trading and US-centric COMEX gold futures exchange.

However, ‘gold’ trading in London and on COMEX is really trading of  very large quantities of synthetic derivatives on gold, which are completely detached from the physical gold market. In London, the derivative is fractionally-backed unallocated gold positions which are predominantly cash-settled, in New York the derivative is exchange-traded gold future contracts which are predominantly cash-settles and again are backed by very little real gold.

While the London and New York gold markets together trade virtually 24 hours, they interplay with the current status quo gold reference rate in the form of the LBMA Gold Price benchmark. This benchmark is derived twice daily during auctions held in London at 10:30 am and 3:00 pm between a handful of London-based bullion banks. These auctions are also for unallocated gold positions which are only fractionally-backed by real physical gold. Therefore, the de facto world-wide gold price benchmark generated by the LBMA Gold Price auctions has very little to do with physical gold trading.

Conclusion

It seems that slowly and surely, the major gold producing nations of Russia, China and other BRICS nations are becoming tired of the dominance of an international gold price which is determined in a synthetic trading environment which has very little to do with the physical gold market.

The Shanghai Gold Exchange’s Shanghai Gold Price Benchmark which was launched in April 2016 is already a move towards physical gold price discovery, and while it does not yet influence prices in the international market, it has the infrastructure in place to do so.

When the First Deputy Chairman of the Bank of Russia points to London and Switzerland as having less relevance, while spearheading a new BRICS cross-border gold trading system involving China and Russia and other “major economies with large reserves of gold and an impressive volume of production and consumption of the precious metal”, it becomes clear that moves are afoot by Russia, China and others to bring gold price discovery back to the realm of the physical gold markets. The icing on the cake in all this may be gold price benchmarks based on international physical gold trading.

*  *  *

This article originally appeared on the BullionStar.com website under the same title "Russia, China and BRICS: A New Gold Trading Network".