Submitted by J.C. Collins – philosophyofmetrics
With the New Year well underway we are beginning to witness the next phase of volatility which will accompany the rebalancing of the international monetary system. This recent batch of volatility can be associated with the normalization of monetary policy by the Federal Reserve. Though most have come to the conclusion that there will in fact be this volatility, many do not consider that it has been accounted for, and a focused strategy has been developed to allow for its occurrence.
The international monetary and financial systems will wax and wane through the year as the Fed incrementally increases interest rates and China continues its transition to a consumer based economy. Each episode of decreases and increases will be met with equal portions of despair and euphoria. Commentaries and conclusions will be quickly drawn that the collapse is near, or that we are on the verge of a new bull market.
The next few years will not be for the faint of heart, but it is important to keep our wits about ourselves and be patient and knowledgeable about the transition. The world monetary framework cannot change direction by ninety degrees. The arc of transformation will take many more years and a final point of arrival is unlikely to ever be realized, as the evolution of all things, whether natural or manmade, knows no beginning or end.
The imbalances in the monetary and financial frameworks are the number one challenge for all countries and economies. This imbalance is personified on one extreme by America’s extraordinary trade deficit, and on the other by China’s ridiculous trade surplus. Both are equally as damaging. The shifting of wealth and resources to balance these deficiencies will cause vast and varying degrees of financial and monetary instability.
But like China expanding the trading band of its currency against the USD to account for these temporary and transitory inflection points (of which the lowering of the daily reference rate is but the beginning), the international framework has been re-engineered to absorb this erratic motion. Occasional tweaks will have to be made at opportune times, but the trend is clear.
Though stock markets have taken a hit in the first few trading days of the year, don’t quit your job and run for the survival shelter just yet. Over the coming days they will rally and the other crowd will get excited and seek validation. It’s a like a demented game of economic and financial Red Rover. (Interesting side note: Wikipedia states that the Red Rover game is also known as “forcing the city gates and octopus tag”. WTF!?)
The other big story since waking up with a hangover on Friday is the increased tension in the Middle East. This is also both problematic and symptomatic of the monetary and financial transition. The geopolitical arrangements which accompanied the economic agreements over the last four to seven decades are beginning to unravel.
This is most visible in the relationship between the United States and Saudi Arabia. The relevancy of the petrodollar arrangement is becoming, well, irrelevant. The first sign of this was when Saudi Arabia began to make energy deals with China. The Saud family, no strangers to surviving harsh geopolitical and socioeconomic conditions, were well aware of the fact that their dependence on western military support was always conditional on the need to support the accumulation of US dollars.
With the rebalancing of the international monetary system also comes the implementation of a multicurrency reserve system. This system will be a de facto mishmash of exchange rate arrangements for a period of time, but will eventual align under the composition of the Special Drawing Right.
Under such a framework the need to continue accumulating dollars at the same pace as in previous decades becomes redundant and detrimental to the multilateral mandates. The House of Saud is well aware of the methodologies which are working against the petrodollar arrangement, and in turn against their hegemony in the Middle East.
The second dead giveaway that the petrodollar arrangement is a monetary zombie is the recent lifting of the crude exporting ban which the US government has had in place for forty years. As covered in the post This One Event Signals the End of the Petrodollar Arrangement, this strategic move was not a knee-jerk reaction. It was one of the planned strategies used to accommodate the transformation of the monetary system.
In that post I wrote the following:
“The recent lifting of the crude exporting ban was not a sudden decision. In fact, companies involved with building pipeline infrastructure and terminal facilities to support American crude exports have been busy for over a year now. This is a clear signal that the multilateral monetary transition which we constantly discuss is moving forward by design as laid out here on POM.”
In the coming weeks I will be writing a full detailed piece on the shifting geopolitical base between Sunni and Shia alliances in the Middle East, but for now we need to keep our eye focused on both Turkey and Saudi Arabia. Each are under threat of being abandoned by the United States and NATO as alliances are being redrawn in the region.
With Iran, Iraq, Syria, and Lebanon being supported directly by Russia, and indirectly by China (the strange bedfellow to Saudi Arabia but not the House of Saud), it is extremely unlikely that the US will overturn its peace deal with Iran and enter into direct confrontation with Russia. Even though those behind the recent spate of severing diplomatic ties with Iran by Sunni nations would hope for such an outcome.
This is one of the main reasons why I have concluded that there will not be a world war fought over this monetary transition. All major players, the two most important ones being the United States and China, are working towards the same result, which is the rebalancing of the international monetary system.
The lower level players, such as Saudi Arabia, and to a lesser extent, Israel, are positioning themselves for survival in a world with dramatically different socioeconomic and geopolitical stress points and alliances. How the confrontation in the Middle East plays out is difficult to conclude. There are so many moving pieces with Israel acting as a wild card.
The Sunni crescent will grow if the House of Saud collapses from internal revolt and external pressure via Yemen in the south, and a Shia alliance lead by Iranian General Qassem Soleimani in the North. Both supported with Russian air power.
Once the scales tip towards the Shia alliance, we can expect that both Israel and the House of Saud will leverage what they can to prevent Saudi Arabia from collapsing. If such a thing happened, Saudi Arabia would no longer need to carry the Saud name and would likely become a part of a larger Middle Eastern Union based on Shiite mandates. Such an outcome would be extremely detrimental to Israeli plans for the region, and could cause a greater conflagration than most would care to imagine.
Though most readers despise the actions of the Israeli and Saudi governments, as do I, it is my conclusion that both states will be with us for a long time to come. Both Sunni and Shia interests, along with those of Israel, will in all probability be begrudgingly forced into some form of regional union, like the dysfunctional EU.
How long this takes, and what consequences it will entail, will depend on factors which are both known and unknown at this time. Most families cannot get along with one another. How do we expect nations and those within nations to achieve what we as individuals cannot? It is only human nature I suppose.
There is a lot at stake for all in the world. A level of healthy concern is understandable, but let’s not get carried away. Just yet. – JC