Entry 10 – War (second phase)

I am aware that I have issues started in previous entries and not finished commenting yet. In particular, regarding what we individuals can do to adapt to the ongoing changes.

I will do so in subsequent notes, because I have come across issues that I consider more topical. Specifically regarding a recent document of the International Monetary Fund, and other things that I talk about a little further down.

My new context selection.

Recent news stories I have selected to think about contextual changes are:

Western support for Ukraine is starting to become increasingly more rhetorical than real.

At a recent meeting in Ramstein, Germany has stonewalled and delayed sending tanks to Ukraine (news here). Is this pressure to force a peace negotiation?

There is debate as to whether Brazil was a coup d’état or not (news here, and in many other places).

My opinion is that, coup or no coup, what is really happening are the pressures on Brazil to choose sides in the two world blocks that are emerging (USA, or China).

The truth is that Brazil’s natural resources are essential to both sides.

Will they have convinced Lula to make his left-wing revolution within the U.S. bloc?

Something similar is happening with Peru (news here). … And more things that I will comment on at the end of this note.

Cryptocurrencies are moving into the official world (despite their recent problems, and their volatility). This may change the “ecosystem” of currencies, because of their ease of transacting.

China has made the e-yuan official (news here, and here). But they are going slowly, and still represent a tiny percentage of the yuans in circulation (more news about cryptocurrencies at the end of this note).

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The IMF has already found out what is going on.

The International Monetary Fund has published, last January 15, a very interesting document, about which a friend alerted me (thanks, Paco). You can download it by clicking here (and then, where it says “free download”).

For those who do not have the time or the inclination to read it, here is my summary, with my interpretations of the content.

However, it must be said that the first thing the document has is a disclaimer saying that it is a discussion document, and that it does not represent their views (for now). But they publish it on their WEB, so I can deduce that there is a tendency warning.

The title of the document already says a lot. It is called “Geoeconomic Fragmentation …”.

Before going deeper into the document, I advance what is my main reading of it. What they imply is: The old world of poor countries today accounts for almost the same amount of international trade as the old world of rich countries. And, … the poor refuse to participate with the rules set by the rich. This can only imply a change of global power rules, or a world of two blocs of countries, very little interconnected, each with its own rules.

At the end of the paper they try to expose solutions. But, given that organizations such as the IMF are traditionally dominated by the USA, and given that China and its friendly countries do not accept this domination, I interpret this as a “harakiri” of the IMF. But, it is also true that it may be a “Lampedusian” operation of the “change everything so that nothing changes” style.

After this first summary of mine, I will highlight what I found most interesting. I will do it in the way I always try to do it, which is simple language, which loses precision, but facilitates understanding. I say this because the language of the document, is very pompous and technical, which is the trick they use to say things without being too noticeable (actually, that trick is used by almost everyone almost all the time).

In the first paragraph of the document, they recognize that the world economy is on the verge of ending globalization (they confirm this later). They see as one of the fundamental causes the unequal distribution of the benefits of globalization. And they sum it up in the economic power war between the USA and China.

They say what we all know: that first the pandemic, and then the war in Ukraine, have generated a loss of confidence in global trade, payment systems and supply chains. And that this implies price increases (inflation). This is not a finding, but it is very important for them to recognize it.

Describing the current state of globalization, they say (pg. 7) that the production of critical commodities has become highly concentrated, which they recognize as a fragility of value chains. They say that the USA dominates the oil and gas supply chains, and that China dominates the supply chains of minerals for clean energy. They do not say so, but I summarize that this means that the USA dominates the world that is ending, and China dominates the world that is beginning. They provide the following interesting graph.

The most significant graph they include (in my opinion), is the percentage of international trade in goods between blocks of countries from 1990 to 2021.

The following conclusions can be drawn from this graph:

Contrary to what happened in 1991, in 2021, goods originating in China and other emerging countries exceed those originating in developed countries.

Developed countries now receive almost half of their goods from China and other emerging countries.

Between 1991 and 2021, the increase in the value of exchanged products has been 131 times between China and other emerging countries; 31 times between China and developed countries; and only 4 times between developed countries. In other words, if this rate continues, developed countries will become insignificant in terms of world trade.

They include another very interesting graph, comparing figures from 1995 with those of 2019. With the way it is presented (by the order of the subjects) they try to divert attention. But it is clear that China has already surpassed the USA in industrial value added, in high-tech exports, and in natural resources. The graph is as follows.

On page 10 they say that dissatisfaction with the inequality generated by globalization has generated populism, and tensions in world trade, which has been increased by the pandemic and the war, creating greater protectionism and border problems. What a discovery!

He states, in a somewhat convoluted way, the obvious: that globalization, by taking production to cheaper places, has allowed access to cheaper products for the lower classes in developed countries (Pg 12). And they states the logical consequence: that ending globalization will imply the opposite, i.e., higher prices for the lower classes in the West (inflation).

They also say that another negative effect of fragmentation will be to further spoil demographic trends by closing borders for the movement of workers (pg 16). They say that the West, with an aging population, will lose young immigrants; and that less developed countries will lose the foreign exchange remittances that these immigrants send.

An important issue they mention is that uncertainty during the transition process (towards less globalization) will delay investment decisions, as well as encourage precautionary savings, and investment in safe haven assets (pg 17).

They address the issue of making it more difficult for capital to move internationally. They say that this will bring more volatility and less growth. Say (pg. 18) that “financial globalization” is evolving into “financial regionalization” (movements within blocs, but not outside).

On page 18 it expressly says something very significant (said by them it is much more relevant): when the transitional phase is passed, in the new stationary state, the consequences of fragmentation will depend on the contours of the blocks of countries, and on the new institutions that support those blocks. It is almost an acknowledgement that they will not be one of those institutions.

Talking about the international payment system, they say something else is obvious: that expelling Russia from the SWIFT system has “put fear” into other countries. And that new parallel systems will be created, disconnected from each other, which will lead to higher costs and inefficiencies (pg. 20).

It deals with the issue of “official” cryptocurrencies, the so-called CBDC. They hide, among sophisticated wording, the recognition that they are going to be the new international payment system. It says that 16 G20 countries are developing their own.

As for the global reserve currency, they recognize that the dollar is under threat, especially after 300 billion was blocked from the Russian Central Bank. But they does not see competitors with sufficient strength. They say maybe it could be gold, or perhaps some digital currency (pg. 21).

The way it talks about itself as an institution is curious. It does so by addressing the issue of the global financial safety net, which it describes as consisting of several layers, the apex of which is the IMF itself. They say (pg. 22) that “multilateral institutions dominated by a specific geopolitical bloc may find it difficult to be perceived as neutral.” They also say that those with a more balanced form of governance will have risks of disagreement and inaction. Wow, … they see their own future as difficult. And they say that in the last paragraph of what can be considered as the analysis of the situation. After that, they begin to propose alternatives for the future.

The exercise they do on the alternatives for the future is of some interest, but, knowing that they themselves are “under suspicion of not being impartial”, I think it is of little use. Somehow, without quoting them, they come to say that we need the “new Yalta Conference”, and the “new Bretton Woods”.

The whole document is full of phrases in which they repeat how good globalization has been for world development, and how dangerous it is to break it. But it recognizes that the time has come.

Finally, the last point of the document (pg. 26) deals with the future of the IMF. With good wishes, they say that it could become the arbiter between blocs to settle disagreements. And they say that achieving this depends on getting the “16 general review of quotas” right. That is, the decision of who is in charge there. I don’t see a good future for that (but I am nobody talking about these things). Although I repeat that there is the “Lampedusian” alternative, that of “changing everything so that nothing changes”, a matter that we will have to see how it develops.

The “financialized” economy is a farce.

Continuing with economic issues, I would like to highlight comparative numbers of the big figures.

I am going to devote little space to this important issue, but I think it will be clear that it is another of the issues in which we have to make major changes before “the bomb explodes”.

I say that I am going to dedicate little space to it, because this link is almost self-explanatory.

The folks at Visual Capitalist, who do very good charts, have done this one comparing the major economic masses. It’s a bit long to move around the chart, but I recommend it.

To see the graph, remember that they represent each square as $100 billion.

It is curious to see how, on that date (November 2022):

The world’s total paper currency is 8 trillion;

Total world gold is 11.5 trillion;

The total value of the S&P 500 is 36 trillion;

The total world debt is 300 trillion;

The value of all the world’s buildings is 326 trillion;

… And, the notional value of all derivative financial products is 600 trillion.

In other words, there is much more money in financial derivatives than in total global real assets.

Let everyone think about it in their own way.

In addition to the graph above, I recommend clicking on this link. It talks about the large increase in foreign currency loan debt, which does not appear on bank balance sheets. They highlight the risk involved in foreign exchange and interest rate risk, which can lead to liquidity problems.

Readings that have interested me.

In the process of writing this entry, I have come across the following issues that have caught my attention. Some of them are related to what has been discussed in this entry, and others are not, but I recommend that you check them out.

As far as the evolution of the war is concerned, what we have all seen is very important. I am talking about the helicopter accident in Ukraine in which 18 people have died, including the Minister of the Interior and the entire leadership of the Ministry (news here, and everywhere else).

It remains to be seen how this ministry will be reorganized. It is certainly not the best time for Ukraine to be without leadership.

At the beginning of these entries I talked about the possible relation of the coup d’état in Brazil with the power war between blocs of countries. Related to the same issue, I recommend reading this article, where they talk about it and about Venezuela’s proposals.

About cryptocurrencies, I have also talked at the beginning of this entry about the digital yuan. In addition, there are other interesting developments:
- Europe is trying to react, albeit belatedly. Last November, Christine Lagarde, President of the ECB, gave a conference (video here). There she explained the status of the digital euro project, and its characteristics. I highlight the following:
  - She recognizes it as an efficient and secure payment system.
  - She wants to compete with currencies managed by technology companies, which she sees as a danger (she says this after having spoken well of money managed by commercial banks, … wow!).
  - She says that users want privacy, but that she does not want the digital euro to have as much privacy as cash. She proposes that the digital euro should have similar privacy to cards (some, but not much), although she accepts more privacy for small payments.
- Brazil has published a law accepting cryptocurrencies as a means of payment (not legal tender). It can be seen here.
  
  I found this article on cryptocurrencies interesting. I think it describes well the possibility of them becoming a store of value, especially in places with fragile currencies, and in places that want to attack the dollar.

About another type of asset as a “store of value”, this article that talks about gold is interesting. They do it in a funny and ironic way. They come to say that there is a shift towards gold, especially by the block of countries close to China. The truth is that it has been rising for quite some time.

Regarding the internal polarization of countries, this graph is very interesting. It turns out that China has very little risk in that respect, while the USA (and Spain) have a lot. This is not news, but seeing it graphically helps to consider it more.

Paul Mason has returned to writing. It can be seen here. He describes the conflict as systemic, and calls for greater UK involvement in supporting Ukraine. He compares the situation to the 1930s, and says that this is no time for pacifism (remember that Mason is very left-wing).

I have discussed in previous entries the importance of lithium for batteries, and the impact of this on the geopolitics of blocks. Good data on the subject can be seen here.

This is not a news item, but a comment from one of the readers (thank you, Ivo) that I want to highlight. Talking about what I wrote about the future of democracy, Ivo says that direct democracy can be used as a way to encourage competition between cities and regions to offer better services and quality of life. He is quite right. I have already said that, now, the decision of where to live is increasingly up to the people (the users of the city), not to their companies or rulers. This is so because the internet and teleworking are starting to make it possible to do almost everything quite independently of the place of residence, which gives more freedom to choose that place. Basically, it is the same as I wrote here about how to see who is the current decision-maker for the success of a building (the user, not the owning company).

This is as far as I have gone for today. I hope to continue soon. Hopefully with good news.