Energy, Money, and Trust
What happened to COVID? It has disappeared from the headlines. And Joe Biden says it’s no longer anything to worry about.
We didn’t hear him mention terrorists. But they mustn’t be worth worrying about either. Both have been supplanted by the Bugaboo du Jour: Russia, bad; Ukraine, good.
And like the two previous crises of the 21st century, only one point of view is permitted. Any other is cause for firing, cancelling, de-platforming, and defenestrating. The Hill:
‘A Milwaukee assistant city attorney has been fired after backing Russian President Vladimir Putin in an appearance on Russia Today TV.’
But there’s always more to the story.
And when the US banned Russian banks from the international money-clearing system, known as SWIFT, there was a whole rack of shoes waiting to fall.
In effect, what the US is doing to Russia is similar to what the Canadians did to their protesting truckers — cutting them off from their own money. No due process. No courts. No trials. No defence witnesses. And no jury of 12 citizens, good and stout, to hear them.
Sanctions may seem like a fairly harmless way — better than dropping bombs — to meddle in foreign affairs. But foreign affairs are almost always disasters. And all actions have consequences. In today’s letter, we wonder what they might be…
Inflation, meet recession
In the sanction program, one thing was spared — Russian energy exports. It was all very high-minded of the Europeans and Americans to express their outrage at Putin’s invasion. (‘If there’s any invading going on, we’ll do it ourselves’, Hillary Clinton should have said.) But they had no intention of shivering in the dark to make their point. Europe relies on Russian gas. The US uses Russian-sourced energy too. If those pipelines were turned off, the price of oil worldwide — already hitting US$110 this morning — would go even higher…and the US might be dealing with not just inflation but recession too.
Russian companies can still sell gas and oil…and still receive dollars or euros for them. The trouble is, what good are they? Cut off from the global financial system, they can’t use them…at least, not through the regular, official channels. Adam Tooze writes:
‘The crucial thing is that reserves of euros and dollars can be put to work only by selling them in western financial markets. Those transactions require intermediary banks. And those banks can be blocked from engaging in transactions involving Russia’s central bank. To do this to a fellow central bank involves breaking the assumption of sovereign equality and the common interest in upholding the rights to property.’
What made civilised money such an important innovation is that it’s neutral. Neither judge nor jury, a dollar is a dollar. An ounce of gold is just an ounce of gold. Trade flourishes because you don’t have to know everything there is to know about your counterparty. You buy carpet from Iran…you don’t have to speak Persian. You don’t have to know the family that made it. You don’t know how they treat their sheep, their women, or their children. 200 years ago, did their ancestors own slaves? And do they now doubt the Virgin Birth or that universal vaccination is the best way to deal with COVID?
Pulling the pin
Until recently, you didn’t have to worry about it. You just had to know that the gold was real…or the dollar wasn’t counterfeit.
But today, trading your money for ‘stuff’ comes with conditions attached. ‘Where did you get the money’, your bank might ask. Has it been laundered? Did you trade with the Russians?
Money has been ‘weaponised’, say the pundits.
But when the money goes, everything goes. With consumer price inflation already at 7.5%…and price hikes for raw materials hitting double digits…the US is already juggling with hand grenades. Not only do you have to wonder what your dollars will be worth…you also may wonder if you will have permission to spend them.
Russian exporters must be wondering too: ‘If I can’t spend the money as I please, I might as well just close the valves’. Or ‘I’ll have to raise my prices…and find a workaround’. In either case, the effect is likely to be higher prices…less trade…less prosperity. And whatever you may think of Vladimir Putin, the US and its allies may be jeopardising three key elements of modern prosperity — energy, money, and trust — all at once.
Weaponised? For sure. The kind of weapon that blows up in your face.
More to the story…coming next week.
For The Daily Reckoning Australia