Overview From the TIS Group: (Scroll down for oil thoughts)ASIAN GURUS 3 - WHAT THE END GAME LOOKS LIKE - RESETTING THE GLOBAL MONETARY SYSTEM
Apart from the move away from the USD as the sole reserve currency, are there any other issues we should be aware of? Will there be a spike in long-term global interest rates until the resetting is complete? Will the U.S. go to war if this is a market driven loss confidence in the USD?
I am watching the burgeoning web of trade deals very closely. The U.S. does not have the leader of Vietnam in the White House for nothing (TPP), as it did several weeks ago. Without Japan, TPP does not work; and we believe there is resistance inside the Japanese power structure to aligning with other TPP partners and against China. The Atlantic Trade agreement is not as important in my view, nevertheless it would continue the lock-up of a U.S.-oriented trade bloc from Tokyo to New York to Berlin.
The other trade related development occurred in Ufa, Russia and it received way too little attention in the media. While China and Greece hog the headlines, Russia, the SPCO, Brazil India and of course, China, are designing a competing trade system which will avoid using the Dollar, avoid U.S. monetary policy and operate in its own self-interest. The Asian pivot which the U.S. is supposedly executing will be met an increasingly self-dependent group of trading nations. This is not a political event, at this point. It is an economic development, potentially seismic in proportion.
The U.S. pullout from the Mideast is likely to pick-up steam now that the Iranian nuclear deal is signed and that will leave the Saudis with less reason than ever to deal oil in Dollars. Fewer Dollars should translate into fewer Treasury purchases.
I see the Saudi government went to the local bond market for $4 billion recently, a harbinger of things to come. If I may divert slightly, I am being asked about the nuclear deal and what the implications are. Why is it being done? When President Obama promised during his 2008 campaign to end the Mideast wars, it surely implied U.S. troops would leave the area, which they have pretty much done.
But with U.S. oil production set to exceed Saudi production, there is little reason to remain engaged in the region. The U.S. is dis-engaging from the Mideast. Netanyahu knows this, which is one reason why he made the speech to Congress in February. The Saudis know it and must be extremely upset While the Saudis are obsessed with the Iranians and perhaps right to be concerned, the country, which must feel it is being left to fend for itself, is Israel. A Saudi-Israel alliance, forged over the past 1-2 years in a series of meetings held across Europe, would be a powerful, if temporary arrangement.
Iran, despite being financially bailed out by the removal of sanctions, is more vulnerable now than it probably will be in six months or one year from now. With its $100-$150 billion in assets unfrozen, Tehran is already offering Syria a $1 billion line of credit, preparing to buy a sophisticated anti- missile system from Russia and if the masses in Iran think the money is headed their way, they should think again.
The Mideast arms race is on. Saudi Arabia has two options here in my view, with respect to oil policy. There as not country hurt worse by Saudi price cuts, than Iran. Needing a $140 per barrel oil to meet their budget, Iran is on the ropes financially. This deal bails them out, financially. So before Iran gets the unfrozen assets, the Saudis could hit the production pedal, pump 11-12 million bpd, temporarily and try to break Iran’s economy before the money arrives. In that case, oil could re-test the January lows. The other option is to simply admit defeat, reverse policy and print 8 million bpd, down from 10 million bpd and watch oil trade back to the 70s or higher. Riyadh could use the cash for all the nuclear power they are buying from Russia and the defense deals they will sign with the French.
The bottom line is the Mideast is being prepared for the U.S. to depart. The two regional powerhouses are being pitted against each other, much as the U.S./Russia were pitted against each other in the cold war. The difference is the Russians and Americans were rational and so MAD (mutually assured destruction), worked. Iran is led by a death cult, which in terms of self-preservation may be no different than Russian commissars are.
However, their willingness to sacrifice their own people was on full display during the 1980s Iran/Iraq war, when they marched their men into minefields. Below the top of the mullahocracy, lies a people who I believe want any of the same things everyone wants. They are industrious, smart, they like Western culture and they were a vibrant culture my Iranian friends tell me, all the way into the 1970s. Then the revolution came and a small number of people seized the government, gained control of key segments of society and here we are, thirty-six years later, those revolutionaries were accompanied by President Rouhani, in a march thru Tehran this week, chanting Death to America.
It took a lot longer than I thought, for the third Mideast war to get underway, but I think the result of the nuclear deal will be war. I don’t want that, so readers do not mistake what I think for what I want. I am paid to write what I think. This is what I think. Markets are not priced for a third Mideast war since 1991. Iran is now a full U.S. partner in the Mideast, at least in Washington’s view. Middle East - Redrawing the Political Map in Middle East Breaking Up Saudi-U.S. 40-Year Deal
Will the U.S. go to war if a loss of confidence develops in the USD?
Yes, I think the U.S. would and there is a capability to do so. Remember this type of conflict occurs in cyber-space, in markets, between computers and its casualties will be economies/markets. There is another possibility. The next map shows the US has roughly 700 military bases, spread around the world. The cost to maintain this web of military influence dwarfs military spending by any other nation. The core of America’s ability to sustain that spending is the Dollar, operating as a reserve currency. Prolonged Dollar weakness would be harmful to the U.S. system, not just U.S. purchasing power or the rate of inflation. I believe the Dollar will be defended at all costs.
Simmons & Company. “The Saudi Arabia Oil Miracle.” CSIS, 2/24/04.
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