Perspective on Risk - Sept. 1, 2022
I didn’t intend to write this piece but feel compelled; I’ve been working on pieces on 1) geopolitics and climate change, and 2) decoupling/deglobalization. But I must. This strikes me as important.
Zoltan Poszar has published a follow=up piece, War and Industrial Policy, to his earlier piece asserting we were moving to a Bretton Woods III world dominated by commodities.. You will remember than we discussed this in some detail in these posts.
Perspective on Risk, March 2, 2022
Perspective on Risk - March 13, 2022
My angle at the time was that we were looking at more of a geopolitical realignment amidst a ‘financial war.’
Zoltan’s new piece aligns well with this perspective, and has some useful thinking, and a simplifying framework. I’d like to touch on it for a bit. He approaches his analysis through Dale Copeland’s book: Economic Interdependence and War. The two main points that come through are:
We are engaged in an economic and financial war
Historical engagement between US/China and Russia/Germany has now fundamentally changed.
His simplification is that the world had two dominant trade relationships:
Chimerica, where China got rich selling cheap stuff to America, and America benefitted by doing QE in a ‘lowflation’ environment enabled by the China relationship, and
Eurussia, where Russia got rich by selling cheap gas to Germany, and Germany got rich by selling expensive goods made with the cheap gas.
But, in the framework of Copeland’s book:
Put simply…if there is trust, trade works. If trust is gone, it doesn’t. Today, trust is gone: Chimerica does not work anymore and Eurussia does not work either.
As a result, the two partnerships are now facing divorce.
Just as the collapse of the Berlin was has come to signify the numerous changes that led to an expansion of globalism, Zoltan highlights the recent ‘special relationship’ entered into between China and Russia as this turns (oversimplifying) bell-ringing.
[T]he special relationship between China and Russia (”Chussia”) is a powerful one: a marriage of commodities and industry, uniting the largest commodity producer (Russia) and the factory of the world (China), potentially in control of Eurasia,
I fundamentally like his simplification; most evidence seems to suggest we are going in exactly this direction.1
He goes on to use this framework to support his prior statements:
Control of commodities and supply chains will increasingly matter,
‘forecasts of a rapid deceleration of inflation are naively optimistic,
Food and energy shortages are looming … and commodity inventories will take off like FX reserves after the 1997 crisis, and will involve not just food and energy but also some industrial commodities.
He also raises the specter of ‘resource nationalism’ that we have previously discussed when looking at the risks of deglobalization.
He also concludes with perhaps one of the largest risks: Finally, uninvestability [of China, Russia and their allies] means that for certain large countries in the global East, it makes absolutely and categorically no logical sense to roll their investments in G7 debt claims. Not just because of what happened to Russia’s FX reserves, but also because rolling a $1 trillion portfolio of U.S. Treasury securities means that you will fund the West’s effort to re-arm, re-shore, re-stock, and re-wire…
Read his piece. Then read it again. It should change your framing.
We need to de-anchor our expectations that have been based on the last forty years.
More to come.
I’m less enamored of his attempt to use Minsky’s theory of hedge, speculative and ponzi units to categorize supply chains.