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
https://twitter.com/Aquaman19527159/status/1541649137820631040
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
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.
Thanks for Tuning In!
Please Subscribe to MishTalk Email Alerts.
Subscribers get an email alert of each post as they happen. Read the ones you like and you can unsubscribe at any time.
If you have subscribed and do not get email alerts, please check your spam folder.
Mish
Are the financial gurus who purchase bonds seeing the “default” as a real default (say an Argentina type default where the country can’t pay its bondholders) or just a load of nonsense to be ignored once the sanctions are lifted as Russia is solvent. Plus with the reserves that Russia is salting away I guess they will not need to borrow for years or decades. Also I presume that once Ukraine and the west capitulate Russia will demand its frozen reserves back and maybe even a few hundred billion reparations ( no pay then no gas and no peace).
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.”
back. It is that the best option at that point is often to double down
and go forward.”
“In more than two and a half years of conversations with key Russian players, from knuckle-draggers in the dark recesses of the Kremlin to Putin’s sharpest liberal critics, I have yet to find anyone who views Ukraine in NATO as anything other than a direct challenge to Russian interests.” – William Burns, former ambassador to Russia and current CIA Director in the Biden admin.
… according to Goebbles, anyhow…
So, why would I patronize this bank in the future?
By analogy, I point to Darwin’s theory of evolution. It’s all to often collapsed into the stock phrase, survival of the fittest. That’s a fundamental error of understanding. Darwin’s theory says that a species that replaces itself will endure, and will thrive to the extent that it more than replaces itself, sustainably over time. If Darwin is reduced to a one-liner, it should be: survival of the fit, or better yet, survival of the adequate.
The post-Bretton dollar-denominated trading system has been adequate. This year’s events have shaken it to its roots. I am increasingly inclined to think that the dollar is on borrowed time. For how long is the issue, and the answer is above my pay grade. If I were China, OPEC, and the BRICs, I’d use some of those dollars to fund a deep inquiry into alternatives. Lots of tough questions revolving around the dynamics of reserve currencies.
The dollar system is supported by U.S. dominance of the sea lanes + the U.S. consumer being the de facto guarantor of employment within the rising non-Western economies. From the point of view of the BRICs: How to escape the dollar without wrecking our own economies? They shouldn’t spend a whole lot of time consulting the West about this. The U.S. and its allies are showing themselves to be economic imbeciles, so any alternative will have to come from the outside.