Inevitability
It's finally coming to pass...
Iran conflict turns shipping market into ‘wild west’
ZeroHedge posted this chart showing the break in crude prices:
The world broke in 1973 with the Arab Oil Embargo. It came at a time of higher U.S. inflation, but also amid Arab-Israeli wars. The Arabs used their economic power to change the course of world events.
U.S. actions in Iran have accelerated the inevitable again. It no longer needs the Middle East with ample gas and oil production. Americans hoped it would mean a U.S. exit from the Middle East, but Israel cannot allow the U.S. to exit, at least not until it takes care of Iran first.
If not this war though, the U.S. would eventually have found policies predicated on its energy production.
South America is turning towards the U.S., or at least away from socialism for now. Venezuela is an oil exporter. Brazil is self-sufficient. Guyana has a big find. Colombia and Argentina are joining Peru and Chile in tapping their local resources. Booming Latin America is part of a total package for eliminating the migration pressure on the U.S. and reorienting supply chains. Everybody wins, except holdout governments such as Cuba.
Canada is an exporter too. Alberta politics needs a review after the Iran situation. If the U.S. wants to lead a hemispheric power, it doesn’t want Canadian socialists mucking it up, and if Albertan oil producers are sick of Ottawa too, there will be a rethink not unlike the U.S. rethink on the Middle East once it became self-sufficient in energy.
The Dollar
Nobody wants to issue the reserve currency. Countries such as China and Russia cannot trust the U.S. dollar if it is a political weapon of the U.S. government. They need a transaction alternative. If the American voter no longer wants the cost of reserve status, the result is not the death of the dollar. It’s the remonetization of gold.
The value of the dollar relative to other currencies will be determined into economic output, inflation and so on. Where capital is treated best. Which countries have the most opportunity, lowest taxes and so on.
Gold bulls have a strong argument for a weak dollar, but anyone stretching this into the U.S. dollar losing relative status among fiat currencies is on thinner ice. The U.S. dollar weakened during economic cycles because of its reserve status. Foreign banks inflate the money supply by creating eurodollar loans. There are no foreign dollar, but they create a loan in dollars and another bank accepts it as dollars.
Then there’s Empire argument. Both Empire itself and the U.S. military as guarantor of the reserve currency. Protecting shipping lanes.
The U.S. Empire is a continuation of the British Empire. Globalization was an imperial project. The U.S. abandoned the name, but not the power, not the system. Free trade is a luxury of Empire though. No country actually engages in free trade except the U.S. because as global hegemon, the global economy is kind of like the domestic economy.
The U.S. has very free trade internally. Companies, capital, people can move from New York to Alabama at will. Why? The U.S. benefits because all that trade is internal. If the U.S. controls the world to whatever degree, then growing the world economy benefits the USA. When the cost exceeds the benefit, the U.S. eventually stops.
China’s trade surplus and domestic policy isn’t supporting international free trade. It’s maximizing the benefits under the American system. Which country in the world is dedicated to running a trade deficit? Only the USA is willing to pay a price for global hegemony. More accurate to say the U.S. ruling class is willing to impose the cost on its middle and lower class.
If the U.S. stops running deficits for any reason, it must produce more to stay wealthy. There’s no alternative.
Politically, one can argue the U.S. might opt for socialism and collapse. There’s also a large voting block that wants to build and work. The history of the country suggests it might do the latter too, in which case the U.S. trade deficit goes down. Since all trade must balance, trade deficits all over the world must go up to absorb existing surpluses or those trade surpluses must go down. I leave it to the reader to think through the implications in a transition phase.
It’s assumed that a decline in U.S. power or a voluntary abdication will leave room for some power such as China to take over. That’s not what will happen. The world will look like the oil market does right now: it will fracture. Costs go up. The most at risk are the wealthy in America, the investors holding highly valued equity. Poised to benefit are middle and lower wage workers, Main Street, manufacturers, emergent industries that will suddenly find more government and financial support.
Gold Done For Now
How will gold perform in the short-term?
If the U.S. gets bogged down in a ground invasion, then perhaps the U.S. collapses entirely and the dollar goes down the tubes. Even that disaster scenario means the U.S. trade deficit goes to zero and the U.S. then forced to rebuild after suffering a massive decline in wealth. Gold soars as soon as it starts.
If the U.S. leaves soon, with the Middle East in a mess or not, it is bullish for the U.S. dollar. Countries that import energy in East Asia and Europe would be damaged the most. Export economies with long, global supply chains such as Germany, China and South Korea would be the most exposed to fractured supply lines. The USA would suffer too, but onshoring means relatively speaking, the U.S. does better.
Gold is done for now, but of course war remains a risk. If there’s no escalation by the U.S., the chaos is squeezing the global economy. Economic destruction leads to deflationary forces. There are targets all the way down below $3000 that still leave gold in an uptrend from 2023.
Animal spirits may be dying here.
Vomit time has come for equities if they break support.
Investors were piling into stocks beyond 1929 valuations, and only below 2000 valuations because the tech bubble inflated in “off-balance sheet” cryptocurrency. That’s good for $1 trillion in losses without a direct hit on tech shares. Gold and silver will give back a few trillion. Pretty soon we’ll be talking real money, the $50 trillion Nasdaq market being sawed for a $20 trillion loss, maybe as high as a $40 trillion loss in real terms.