Don’t Mess With the U.S. (Financially)

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I’ve been documenting financial warfare in my articles for years, but it still doesn’t get the mainstream attention it deserves.

Because as you’ll see below, it can directly impact your wealth.

Financial warfare tools include account seizures and freezes, expulsion from global payment systems, secondary fines and penalties on banks that do business with targeted entities, embargoes, tariffs and many other impositions.

These tools are amplified by the unique role of the U.S. dollar, which is the currency behind 60% of global reserves, 80% of global payments and almost 100% of transactions in oil.

The U.S. controls the banks and payments systems that process dollar transactions. This leaves the U.S. well positioned to impose dollar-related sanctions.

Much has been made of the recent killing of Iranian terrorist mastermind Qasem Soleimani. Many say it was an act of war. But guess what, folks?

We’ve been in a full-scale war with Iran for two years now. It’s just that most people don’t realize it.

It’s not a kinetic war with troops, missiles and ships (except Iran’s use of terrorist bombs and the U.S.’ use of drones). And it’s severely damaged the Iranian economy, which has led to protests against the regime.

From the U.S. side, it’s a financial war. People need to stop thinking about financial sanctions as an extension of trade policy, for example.

This is warfare. It’s just a different form of warfare.

It’s critical to understand that financial war is not a sideshow. It may actually be the main event in today’s deeply connected and computerized world.

North Korea is also the current target of a U.S. “maximum pressure” campaign, where harsh sanctions are applied to a wide range of banks, companies and individuals.

As with Iran, sanctions have been instrumental in destabilizing the regime and bringing North Korea to the bargaining table to discuss its nuclear weapons programs.

Now, Iraq is the latest country to feel the sting of U.S. dollar sanctions.

Following the killing of Soleimani on Iraqi soil, Iraq threatened to expel all U.S. troops from Iraq. Trump answered in two parts.

He said U.S. troops would not leave until Iraq repaid the U.S. for building bases and other infrastructure in Iraq. Trump also warned that Iraq’s access to its account at the Federal Reserve Bank of New York could be terminated.

That would make it impossible for Iraq to purchase and sell oil in dollars. It could also cause Iraq to lose access to about $3 billion currently held in that account.

Iraq has heard the U.S. threats loud and clear. As of now, U.S. troops are still in Iraq and not planning to leave anytime soon.

The fact that Iraqi policy could be conditioned without a shot being fired shows the raw power of financial warfare.

The trouble is private businesses and investors can get caught in the crossfire of financial warfare.

According to one survey, last year saw a 42% increase in cyberattacks on private companies around the world (attributable to foreign governments).

About 20% of businesses reported daily attacks, many in the banking and financial services sectors. Only 6% of businesses in the survey claimed they weren’t targeted by a cyberattack in 2019.

You as an investor trying to mind your own business or build wealth or expand your portfolio may get caught in the crossfire of a financial war. So you have to take that into account in your portfolio allocations and risk management.

In today’s world, everyone’s a potential casualty of financial warfare.


Jim Rickards
for The Daily Reckoning

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Is War Next?

This post Is War Next? appeared first on Daily Reckoning.

Dear Reader,

Stocks ran red this morning… stained crimson by the blood of Iranian Gen. Qassim Soleimani.

A Reaper drone of the United States Air Force sent this hellcat over the rainbow early Friday.

The late departed was no second-rater, no minion. Explains Matthew Hoh of the Center for International Policy:

The equivalent of the killing of Gen. Soleimani would be as if the Iranians assassinated Gen. Richard Clarke, the U.S. four-star general in charge of all U.S. special operations, but only if Gen. Clarke had the name recognition of Colin Powell and the competency of Dwight Eisenhower.

And so fresh geopolitical anxieties have riled the markets.

The First Shot of World War III?

Iran’s No. 1 man Ayatollah Khamenei insists the “criminals” responsible will face “severe revenge.”

And a red flag ominously rises above the Jamkaran Mosque in Iran’s holiest city, Qom:

Building Iran 540px

Our agents, far more familiar with such matters, tell us this flag nearly always flies blue.

But in ancient Iranian tradition — we are told — blue switches red when an enemy perpetrates a murder.

It stays red until the murder is repaid in identical coin, avenged.

Iranian state television has demanded the head of President Donald Trump. Whoever presents it is to collect an $80 million jackpot.

Meantime, Soleimani’s replacement — a certain Esmail Qaani — pledges to push America out of the Middle East.

And so the warhawks circle overhead… and blood drips from the moon.

“The first shot of World War III has been fired,” shrieks forecaster Gerald Celente.

“The region (and possibly the world) will be the battlefield,” intones Council on Foreign Relations President Richard Haass, his face taut with urgency.

Is it true? Is war next?

Answer shortly. But our beat is money. Let us first take the historical view of Friday’s murder… and the monetary view.

British and American Imperial Weapons

As we have written before:

“The guinea and the gallows” were the true instruments of British imperial power.

The guinea represented the coined wealth of Great Britain.

The gallows represented its… constabulary zeal to put down and scotch irksome natives.

This is the 21st century of course — a time of enlightenment.

The British Empire is a distant and cobwebbed memory. As is the guinea. As are the gallows.

But their example lives on in the American Empire…

America’s imperial weapons are not the guinea and the gallows.

They are rather “the dollar and the drone.” They serve precisely identical functions.

Yes… the dollar and the drone are America’s nonhuman janissaries, its imperial enforcers.

Different, Yet Identical

Like the 19th-century pound (which replaced the guinea), today’s dollar is the world’s reserve currency.

Like the 19th-century pound, the dollar finances some two-thirds of global trade.

And the gallows?

Britain hanged its overseas nuisances. America disintegrates its own:

Baghdad Airport Attack

Here is civilization. Here is progress.

The sun eventually sank on the British Empire… the gallows came down… and the pound fell off its global perch.

The United States has its drones, as Mr. Soleimani’s ethereal form can presently attest.

But is America’s other weapon — the dollar — near to losing global reserve status?

The Global Counterattack Against the Dollar

The United States has employed its dollar to bludgeon its enemies. It is a weapon the president holds close.

As our colleague Dave Gonigam of The 5 Min. Forecast half-jestingly wonders:

“Is the Trump administration trying to kill off the U.S. dollar’s status as the globe’s reserve currency?”

And “for every action, there is an equal and opposite reaction,” says Jim Rickards:

The U.S. has been highly successful at pursuing financial warfare, including sanctions. But for every action, there is an equal and opposite reaction.

As the U.S. wields the dollar weapon more frequently, the rest of the world works harder to shun the dollar completely.

I’ve been warning for years about efforts of nations like Russia and China to escape what they call “dollar hegemony” and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.

The “Axis of Gold”

Jim reminds us that Russia and China — among others — are hoarding gold to break their dollar shackles.

Thus they are forming an “axis of gold”:

A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.

This is the axis of gold.

This gold-based payments system will dilute and ultimately eliminate the impact of U.S. dollar-based sanctions.

Gold offers adversaries significant defenses against these dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations.

Gold flows cannot be interdicted at SWIFT, the international payment system. Gold is fungible and untraceable (it is an element, atomic number 79), so its origin cannot be ascertained.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a network that facilitates trillions of dollars in international money transfers each year.

It is the oil that lubricates the machinery of the international financial system — or as Jim styles it, “the oxygen supply that keeps the global financial system alive.”

Can we be surprised the Russias and Chinas and Turkeys and Irans of this world seek alternate sources?

The message, clear as a rifle shot on a still morning: The dollar’s days of “exorbitant privilege” are ending.

Slowly at First…

Of course… the dollar will not lose its throne tomorrow, next week, next year. But beware the trend, warns Jim:

In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.

How does one go bankrupt?

Slowly at first, said Hemingway — then all at once.

That is how the dollar will likely lose its reserve status. Slowly at first… then all at once.

But to return to our central question:

Will the Soleimani murdering plunge the United States into war with Iran?

Will There Be War?

The war hawks circle menacingly, as noted.

But they will scatter. The doves of peace will chase them off…

The dueling parties will break a lance or two upon each other’s shields. But the swords stay in the sheaths.

Argues Jim:

The media are buzzing with stories about how Soleimani’s death will lead to a major war with Iran. The killing of Soleimani was a big deal and a clear win for the U.S. It’s true that Iran may well retaliate in some way, at least for the sake of its honor. But it’s unlikely to do anything that will invite a major U.S. response.

It will not turn into a full-scale war. Iran would lose and they know it. It will ratchet up the anti-American rhetoric for sure, but Iran does not have a lot of options.

They’ll fire a few missiles (we’ll fire back), shout threats and then that will be that. The real action will be in Iraq (will U.S. troops leave or not; I say no) and Israel (a target of opportunity and Iran’s real goal in the Middle East).

And so we conclude the hounds of war will stay on their leashes.

Do not forget: It is an election year…

Why Trump Doesn’t Want War

War with Iran — and its skyshooting oil prices — would send these fiendish canines tearing into the economy. And onto Wall Street.

Who requires an intact economy… and an intact stock market… for reelection?

That is correct.

The president will therefore keep the war dogs tethered tight — at least until the election passes.

But we depart with caution…

Nations can stumble into war… as easily as men can stumble into love.

The June 1914 assassination of Austrian Archduke Franz Ferdinand did not automatically fire off the guns of August. War was far from inevitable.

But blunders were made… and miscalculations. That is, human beings were at their normal follies.

And the guns roared for the next four years.

The dogs of war are willful creatures, ever hot to break free.

And this president is easily distracted.

If he isn’t watchful, they could just slip their leashes…


Brian Maher
Managing editor, The Daily Reckoning

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Trump Declares War

This post Trump Declares War appeared first on Daily Reckoning.

Trump has had it!

He is apparently declaring a currency war on the rest of the world. Trump resents China and Europe cheapening the yuan and the euro against the dollar in order to help their exports and hurt ours.

He says it’s time for the U.S. to cheapen the dollar also. Trump has a point. If you put a 25% tariff on many Chinese exports to the U.S. (as Trump has done) or a 25% tariff on German cars exported to the U.S. (as Trump has threatened to do), it can be a powerful way to reduce the U.S. trade deficit and generate revenue for the U.S. Treasury.

But a trading partner can undo the effect of the tariff just by cheapening its currency.

Let’s say a Chinese-made cellphone costs $500 in the U.S. If you slap a 25% tariff on the imported phone, the immediate effect is to raise the price by $125.

A simple solution to tariffs is to devalue your currency by 20% against the dollar. Local currency costs do not change, but the cellphone now costs $400 when the local currency price is converted to U.S. dollars.

A 25% tariff on $400 results in a total cost of $500 — exactly the same as before the tariffs were imposed. Tariff costs have been converted into lower production costs through currency manipulation.

There’s only one problem with Trump’s currency war plan. There’s nothing new about it. The currency wars started in 2010 as described in my 2011 book, Currency Wars. 

As soon as one country devalues, its trading partners devalue in retaliation and nothing is gained. It’s been described as a “race to the bottom.” Currency wars produce no winners, just continual devaluation until they are followed by trade wars.

That’s exactly what has happened in the global economy over the past 10 years. But the final step in the sequence is often shooting wars. That’s what happened leading up to WWII. Let’s hope the currency wars and trade wars don’t turn into shooting wars as they did in the 1930s.

Meanwhile, the Fed is a critical player in the currency war because it has a major influence on the dollar.

The world is waiting to see what it does at its policy meeting on July 31. There is almost no chance the Fed will raise rates. The choices are to cut rates or keep rates unchanged. The market is betting heavily on a rate cut, for what it’s worth.

If the Fed cuts rates, we’ll have to see how other central banks react. But the Fed has many factors to consider when it meets later this month…

For the past 10 years, Fed policy changes have been relatively straightforward to forecast, based on a simple model. The model said the Fed would raise rates consistently in 0.25% increments until rates are normalized around 4% (the amount needed to cut in case of recession).

The exceptions (where the Fed would “pause” on rate hikes) would occur when job creation is low or negative, markets are disorderly or strong disinflation threatens to turn to deflation. Markets certainly became disordered late last year, when the U.S. stock market nearly entered a bear market. And so the Fed paused.

None of those conditions apply today. Job creation is strong, markets are at all-time highs and disinflation is mild. But a new factor has entered the model, which is the fear of causing a recession.

Estimated growth for the second quarter of 2019 is 1.3% annualized, compared with 3.1% in the first quarter. Using the Fed’s own models (which are different from mine), the Fed is concerned that if they don’t cut rates, a market correction and recession may occur.

But if they do cut rates, inflation may result due to tight labor markets and higher costs due to tariffs.

This Fed decision will likely come down to the wire. Second-quarter GDP will be reported on July 26, and personal income and outlays will be reported on July 30. Both data points (and underlying inflation data) will be available right before the July 31 decision date.

Markets will cheer a rate cut and probably sell off if the Fed does not cut rates. But both the markets and the Fed itself will have to wait until the last possible minute before this conundrum is resolved.

And the world will be watching very closely.

Below, I show you how Fed policy is one of three factors driving a new multiyear rally in gold. What are the other two? Read on.


Jim Rickards
for The Daily Reckoning

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