In an era of ascendant democratic socialism, the invisible hand lingers. As we are embroiled in financial turmoil or Armageddon, why, is a question that looms large. What is the root cause of the financial panic? What will the West do as deflation begins? What consequences will be suffered due to uncertainty?
Oil markets began their plummet on March 8th after OPEC production cuts failed to materialize. Instead, a purported price war between Saudi Arabia and Russia is publicized. Equities plummet in sympathy or as a reaction to the crude oil collapse. Interest rates also fall to record lows as a flight to safety ensues.
But what is safe? What pillars of our economy will hold? What does a debt laden band of brothers do to support jobs, economic growth and control inflation? Given the uncertainty, why is gold selling off? Does flight to safety no longer apply to gold? How can our government pay 23 trillion in debt?
Looking back to 2008 Saudi Arabia was the largest oil producer in the world followed by Russia. Once upon a time The United States was the largest customer of the Kingdom. Not so anymore. China imports 5 times the value of oil from Saudi Arabia as the United States as of 2018. In addition, the United States has displaced Saudi Arabia as the world’s largest oil producer. The US also leads in natural gas production.
Although China is the largest market for Saudi oil, the European Union is the largest importer of oil. This places Europe in a position of dependence and a huge customer of Russia. China is the second largest customer of Russian oil. This is where the invisible hand comes in.
In terms of Energy, the previous leaders of energy exports are threatened by Increased US production. With Multiple LNG projects planned, the threat to the Saudis and Russians is existential. Neither of them is unaware of this threat to their core export product. Here is where the Sovereign entity has power over the entrepreneur.
Both Putin and MBS are autocrats. Relative to Western heads of state they have relatively unlimited power. Now we add Xi to the Mix and we approximate the conflict that the greatest generation confronted. Three dictators confronting the free world. One war fought with weapons and the current conflict by financial instruments. The ability to borrow of the Sovereigns far outweighs the entrepreneurs or private sector.
There is little chance that the Saudis and Russians have a long-term strategy of destroying their sustaining industries. Much more likely they are undermining their common enemy under the disguise of misdirection. Their long-term customer is China, their long-term rival is the United States. Obviously, China is intent on their own hegemony, yet they must rely on others for energy. The enemy of my enemy may be a good friend.
In between the Oil producing states and the independent entrepreneurial producers lie the Multinational corporations. They know no borders and as Tillerson demonstrated no loyalties. They, like the sovereign producers, in the end just want controlled markets. Lower volume with higher margins.
Yet, Sovereigns still need revenues to maintain social order. Whether it be China, Russia or Saudi Arabia their citizens are accustomed to controlled societies. The West is not. However, the measures taken to inhibit the spread of COVID 19 will prepare the populations for the consequences of economic warfare. Primarily high unemployment, bankruptcies and staying at home. A change in our way of life and greater dependence on the state. What good is liberty if you are dead or dying?
While the west was getting comfortable and lazy on a diet of government debt. China was investing in manufacturing and employment. Destroying the factories of their rivals without ever launching a bomber of dropping a bomb. Why invade when you can just buy the shares at a discount. Which leaders put our futures in the hands of autocrats? Which democratically elected officials sold us into bondage? Why would we elect those leaders?
Perhaps none of current events reflect upon anything nefarious. Perhaps it is just peculiar circumstance that the oil precipice coincidentally impacted equities and caused treasuries to rally. Perhaps gold is just separating itself from any norm and has lost its haven status.
It is possible that the Coronavirus is at the root of the market destruction. That self-quarantine would diminish demand for energy to such an extent that Russia and Saudi Arabia, both dependent on oil revenues, decided it is better to fight than die quietly in the dark. Maybe the egos of MBS and Vladimir dwarf Trump to the extent they wanted to prove which was the dumbest.
On the positive side, zero or negative interest rates will facilitate coping with the debt crisis of the West. Interest payments consume an ever-increasing ratio of GDP which is an anchor to economic growth, productivity gains and employment. Previously, budgets and deficits were important topics in political discourse. Now, all nations have huge debt burdens which put the global financial system at risk. A banking system based on the collateral of treasuries.
There are no winners in wars. There are those that suffer more damage and those that suffer less. Everybody suffers in the end. Yet, Maduro lives lavishly while his people starve. Putin, Xi and MBS will always live like kings while many of their people struggle. In the West it will be the people that suffer and throw out their leaders. likely in pursuit of security. Wars cost money yet nations still fight them. Is it possible that we are engaged in a battle of democracy versus autocracy? Fascism versus Capitalism once again?
Or, are we just experiencing the perfect storm of random events which threaten our way of life and institutions put in place to protect our liberties? In case of an economic contraction where does China ship its goods? In the case of declining energy use, where do energy producers get their revenues? If we can identify the interests that are the catalyst to this dislocation, it may be possible to stop the cascade. It is scary to think we are helpless to check the momentum. It is even more scary to think the events are beyond our control.
Given that engaging is wars damages all sides, rational people would conclude nobody would ever start a war. Their never would have been an attack on Pearl Harbor and Manilla Bay. Hitler never would have invaded Poland or have attacked Stalingrad. The Peninsular war never would have occurred in a rational world where costs were measured. Therefore, we cannot conclude that nations will resist conflict based on their own welfare. Human history presents a very different narrative.
What price will nations pay to vanquish their enemies? IF we ask Hirohito, Hitler and Mussolini we may hear that power is worth any price or any risk. If so, is it unreasonable to believe that modern day autocrats such as Putin, Xi and MBS would pay any price to increase their power? Is it unreasonable to believe they would band together to topple the singular superpower?
The dramatic steps that are being undertaken to preserve our markets, coupled to the defense production act may be signals we are at war. What role COVID -19 plays is another discussion. Discussion of a US Sovereign fund to buy stocks, signals a realization that private interests are unable to fend off economic assaults by other nations. There is no barometer to measure the nationalism possessed by corporations which are citizens of the world. Nor can we measure the patriotism of pension fund managers that chase returns for retirees. There is an open question of whether we should have a litmus test.
Imagine that we have in office 536 elected officials that have made us vulnerable to economic warfare via out of control spending and the ever-expanding role of government in our daily lives. 536 elected officials pursuing power while weakening our nation and provoking an economic assault by hostile foreign powers. 536 elected officials who pursue power at the expense of liberty and independence. 536 elected officials that other than being elected are just like Putin, Xi and MBS. Which American public servant proclaims today “give me Liberty of give me death”?