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Biden Forces Russia to Default, the Repercussions May be Serious

Biden and the G7 think forcing Russia to default was a good move. It wasn't.
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What Now

Sign of Stupidity

Forcing Russia to default was the subject of a Tweet thread I was involved in on Monday. Here's a recap.

My Position: Default is not a sign of strength by Russia, it's a sign of stupidity by the West. Instead of paying bills, Russia gets to keep reserves. Instead of getting money, corporations, mainly in the EU, get nothing. This is a really stupid thing for the West. Period.

That was in response to the following Tweet.

Manufactured Defaults and Spotlight BRICs 

Absolutely No Return

"There's absolutely no return to the old normal of global financial markets."

How Stupidity Happens 

1. Politicians would rather do something counterproductive than do nothing at all

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2. When caught doing something that does not work, politicians would rather double down than admit a mistake

Those discussions took place yesterday. Everyone above should be proud of their analysis except the person who started the topic. 

Crossing the Rubicon

If we took the ideas above and combined them into a post, it would look remarkably like this post that came out on Tuesday.

A Rubicon, Crossed by Eurointelligence author Wolfgang Münchau.

One of the lessons during the global financial crisis was the need to avoid binary outcomes, as in defaulting on all of your debt. The Romans, of course, have known this for much longer. When Julius Caesar and his army crossed the northern Italian river Rubicon into Roman territory, he could not go back.

Russia’s default, together with the freezing of central bank assets, is the financial market equivalent of a modern Rubicon crossing. There is no way back now. Or to put this into modern geopolitical jargon: there is no off-ramp for Russian finance.

In normal times, a default cuts you off from the financial markets, but Russia is cut off anyway. That Rubicon has been crossed with the financial sanctions. The default has therefore no further short-term consequences. But it might become a problem later. If the west ever agreed to lift the sanctions, for example as part of a Russia/Ukraine peace agreement, the default cannot be reversed. You can unfreeze assets. But you can’t un-default. 

The problem with crossing the Rubicon is not only that you can’t go back. It is that the best option at that point is often to double down and go forward. This is what Caesar did. If you default on one part of your debt, you might as well default on the rest. 

 As a direct result of financial sanctions, Russia has started to diversify its foreign reserves, and is working on a parallel payments system infrastructure. We are entering a period in which the US may lose its global financial monopoly, which is at least in part due to a lack of alternative infrastructure. The dollar won’t be easily displaced as a global currency, but there is no reason why the countries known as the Brics should transact among each other by channeling flows through the US jurisdiction.

From our admittedly skewed perspective another Rubicon has been crossed since the start of the Ukraine war: the de facto abandonment of European strategic autonomy. 

The things about Rubicons is you can’t go back later when you want to. We are crossing a lot of them right now with consequences that will outlast the war in Ukraine.

G-7 Agrees to Cap the Price of Russian Oil Using a Buyer's Cartel

In case you missed it please see G-7 Agrees to Cap the Price of Russian Oil Using a Buyer's Cartel

It's another round of economic madness.

This post originated at MishTalk.Com.

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