What I hope to achieve via my IOsphere blog
A friend of mine - London-based and so very much in the Global North as distinct from in the Global South where I live (Cape Town) - recently told me that mine was a ‘voice’ that was rarely heard in his part of the world. Flattered, I nevertheless pushed back stating that I felt there was far from being a single voice that captured the views of the Global South. He agreed, saying the same went for the increasingly fractured cacophony coming out of the Global North. Nevertheless, he went on to say, “Yours is a measured contribution that speaks to another world that needs to be heard in the fluid and fast changing world of which we are all a part.” This website and especially this blog aims to make a contribution to meeting that challenge.
For starters, here is an image of which few in the Global North appear to be aware. It shows how the world divided in a vote in the United Nations on 14.12.2022 that argued the world should move “Towards a New International Economic Order”. It was adopted 123 for, 50 against with Turkey being the only abstention. If ever there was a snapshot that captured the great divide between the Global North and the Global South — very approximately “the West and the Rest” — it is the map below. Most leaders in the Rest are acutely aware of this division whilst much of the media and leadership in the Global North appears to be oblivious of it. Yes, it may also represent a rough split between the ‘haves’ and the ‘have nots’…but there is far more to it than that. Something profound is broken in today’s world and the first step towards fixing it must be for all to acknowledge it.
My underlying approach: Highlighting the GEOECONOMICS of our fast changing world
The term ‘geoeconomics’ was first used in 1990 - not coincidentally the year after the Fall of the Berlin Wall - in an article by Edward Luttwak entitled: “From Geopolitics to Geoeconomics”. His essential argument was that, with the Cold War over, the importance of military power would give way to geoeconomic power.
Luttwak surely did not anticipate the scale of the transformation that has taken place globally since he wrote his essay. In 1990, Russia’s GDP was 8.6% of the US’s, down from 26.3% a decade previously; that ratio has barely changed as today it is 8.7%. China’s GDP in 1990 was 6% of that of the US; today it is 73%.
With the US’s defence budget even today greater than the next eight biggest national spenders combined, China’s focus - except perhaps where it has been directed on defending its homeland - has hardly surprisingly not been first and foremost a military focus This does not mean China has ignored this aspect of its resource expenditure: after all, today it has the world’s largest army and, by vessel number, the largest navy.
But with the US entangled and distracted since 1990 in costly conflicts especially in the Middle East and adjacent areas (Kuwait, Kurdistan, Iraq, Somalia, Kenya, Yemen, Syria, Djibouti, Libya, Afghanistan), China has instead pursued its ‘peaceful rise’ (even though that term is no longer used). Instead of projecting itself militarily, it has opted to project itself geoeconomically. And its example is now being followed by a number of other countries, notably India. Even the US has woken up to the power of geoeconomics (though as I explain further below in the Blog, they have mostly chosen to practice it ‘negatively’ e.g. via sanctions in sharp contrast to China’s ‘positive’ approach.)
What then is “Geoeconomics”? Chatham House broadly defines it as “the interplay of international economics, geopolitics and strategy”.
Last night - 09.05.2023 - I attended a BRICS Symposium here in Cape Town at which the Foreign Minister Naledi Pandor was the key note speaker. What an elegant and occasionally amusing orator: she spoke mixing both tact with substance - a rare combination for any minister, let alone a diplomatic one!
Granted, the occasion was overtly geopolitical as evidenced by the panelists’ commentaries and the questions posed to them. Still it struck me that many politicians in the Rest - and most likely most in the West - haven’t a clue as to what is happening in terms of all the trio of inputs Chatham House believe go into defining geoeconomics. Yes, they may grasp the geopolitical issues (and Ms Pandor does) and even glimpse the strategy (ditto) but hardly surprisingly the international economics is rarely within their realm of experience. Thus the geoeconomic cocktail created by all three becomes especially difficult to comprehend.
China is playing a clever game…and in the circumstances the world finds itself in and given the scars of China’s history, who can blame them? To the other members of the BRICS Quintet (as well as those 20 something countries lining up to join the club), their agendas are mostly geopolitical with a dash of strategy thrown in. Individual countries - save of course China - simply do not have the economic muscle to add international economics to their agendas. But collectively - if very gently corralled by China - they just might.
And that is what I see happening in coming years. China is not trying to create a club of anti-Americans; far from it. It is just - for now - trying to create a club of members that question the US - and more loosely the Western - narrative.
If a new world order - geopolitical but above all geoeconomic - is to emerge in the next two decades, it will be because of those seeds of DOUBT China is sowing today.
The fate of the US Dollar may be tested as and when that tree of doubt takes root.
The IOsphere nation list defined
For the purposes of this blog, the list includes all those countries on the Indian Ocean rim as well as those countries adjacent to the Arabian Gulf and the Red Sea. In addition landlocked countries whose closest sea outlet is the Indian Ocean are included in the definition.
This adds almost all of the Middle East - fittingly as Kaskazi is an Arabic derived word, from ‘kaws qayz’ meaning ‘headwind of heat’ - plus a number of countries in East and Central Africa and Central Asia - to the wider definition of the Indian Ocean basin.
This region includes 51 countries containing 3250 million people, 40% of the global population.
A few countries are members of two of the three Great Ocean communities: South Africa also with the Atlantic; Indonesia, Thailand, Malaysia, Singapore, East Timor and Australia also with the Pacific.
25.04.2023
I regularly read high brow commentaries that dub gold as a “barbarous relic” presumably echoing what Keynes is said to have called the asset. Not only is this plain wrong, it shows a fundamental misunderstanding of what Keynes was trying to say… which, at the time he was writing, was far more profound.
The Keynes quote from where this misperception on “gold being a barbarous relic” arises from his 1923 treatise Alternative Aims in Monetary Policy. His full quote is as follows:
Those who advocate the return to a gold standard do not always appreciate along what different lines our actual practice has been drifting. If we restore the gold standard, are we to return also to the pre-war conceptions of bank-rate, allowing the tides of gold to play what tricks they like with the internal price-level, and abandoning the attempt to moderate the disastrous influence of the credit-cycle on the stability of prices and employment? Or are we to continue and develop the experimental innovations of our present policy, ignoring the "bank ration" and, if necessary, allowing unmoved a piling up of gold reserves far beyond our requirements or their depletion far below them? In truth, the gold standard is already a barbarous relic.
What Keynes was railing against (and I share his view) was the STANDARD, not gold itself. He was implacably opposed to the mechanics of the STANDARD – an automatic correction mechanism in the event of a nation running a current account deficit (or indeed a surplus) – but not opposed to gold itself. (As Treasurer of Kings College he reportedly made a small fortune investing the college’s endowment in gold shares in the late 1920s.) I am convinced Keynes would have opposed the STANDARD had it been denominated in not gold but cowrie shells or even cows!
There is a faint echo of Keynes’s logic being heard in parts of the world today with a number of countries beginning to oppose today’s equivalent of 1923’s Gold Standard. Those opponents today would maintain that an automatic correction mechanism still to a degree operates (at the first level, via a Central Banks FX reserves) but with one important difference: gold has been replaced by the US Dollar. Much as I am sympathetic to those who maintain that the US enjoys an ‘exorbitant privilege’ in today’s world, I would not go as far as endorsing the idea of the US Dollar Standard, let alone the US Dollar, being a ‘barbarous relic’.
26.04.2023
John Authers wrote this perceptive piece (left) back in 2015 when still at the FT. His forecast chart of countries with the fastest growing GDPs was for this year, 2023. India would lead the pack. He was not far wrong as the developing Asia table below shows: the centre of gravity for GDP has moved south and west from China.
And whilst John Authers might - like the rest of us - have forecast India would become the world’s most populous country by 2030, none saw this happening by 2023!
So where does this leave economic growth prospects in the Indian Ocean Rim looking forward? Citing the same source as did John Authers but updated for 2022, Harvard’s Atlas of Economic Complexity forecasts the First XI growing economies - ranked by average annual GDP growth to 2030 - to be:
The First XI in the GDP Race
Eight out of eleven in the IOsphere ‘ain’t bad’ with near neighbours Cambodia and Vietnam also on the list. But note that China comes in again at number four, ahead of India at number eleven.
…must reading…
27.04.2023
Fascinating piece from Gavekal this morning (Gavekal is one of my top two ‘Go To’ sources for cutting edge ideas; the other is Kiril Sokoloff’s WILTW) explaining how the Indian Ocean’s crux nation - India of course! - is using the Ukraine crisis to cover up the Achilles Heel that has plagued its economy for decades: its structural current account deficit and within that deficit, its dependence on imported oil. Able now to buy Russian oil - purportedly at a $20 per barrel discount to the world price (but this surely will not last forever!) - and do so by paying Russia in Indian Rupees, the FUNDING of its deficit has suddenly become a whole lot easier.
Sure, the current account deficit may not decline per se but the financing burden of it will. Instead, India issues rupee bonds locally to fund these Russian purposes.
Sound familiar? It should. Funding current account deficits by printing your own currency and securitizing it in the form of a domestic bond has been the US’s magic money tree since the mid 1970s.
It is an ill-wind that blows someone some good.
“People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or contrivance to raise prices.”
Adam Smith, The Wealth of Nations
I once remember once being “lectured about the beauties of capitalism” by the Director of one of South Africa’s largest companies. That his business had a monopoly in its sector - over 90% market share - did not appear to phase him: if capitalism created an unassailable stranglehold on a given market, then so be it. To the victor went the spoils.
That the gentleman was also wearing an Adam Smith tie only made matters worse: not only did he not understand the “beauties of capitalism”, he most certainly did not understand the principles for which Adam Smith stood (see above quote).
I was reminded of this occasion this morning on reading the diatribe that the President of Microsoft unleashed towards Britain upon hearing that his company’s attempt to buy Activision had been blocked by the U.K.’s Competition and Markets Authority. “It does more than shake our confidence in the future of the opportunity to grow a technology business in Britain than we’ve ever confronted before. People are shocked, people are disappointed, and people’s confidence in technology in the U.K. has been severely shaken. There’s a clear message here - the European Union is a more attractive place to start a business than the United Kingdom.”
An inconvenient fact to start with:
27.04.2023
US anti-trust has been largely toothless since the Baby Bell system was broken up in 1982, arguably unleashing a competitive firestorm in the US telecoms space in which there were some losers but many winners, the consumer above all.
Since then, industry in the US has become progressively more concentrated as evidenced by this chart from Deutsche Bank (2019.) This is especially so in those sectors most impervious to foreign competition.
Although the two are not umbilically connected, I cannot help but think that the growing concentration of industry in the US is linked to its growing concentration of wealth.
Reinforcing this trend, CEO pay has grown astonishingly over the past four decades: from 1978 to 2021 +1460% versus worker’s compensation, +18%.
That the UK has dared to say ‘no’ to Microsoft must have come as a rude surprise. In the US, there have been no material anti-trust ‘no’s’ since 2000 when the Justice Department sued…er…um… Microsoft for shutting Netscape out of the browser space. A tortuous court case followed where nothing much was decided. Microsoft essentially stymied the attempt to keep the browser market competitive eventually - as all too often happens - settling out of court in 2007…by which time Netscape had been strangled. (Perhaps there is a god: Google’s Chrome is today far larger than Microsoft’s Edge.)
The decline and fall of Netscape
What would Adam Smith say? Perhaps “I warned you so…”?
p.s. Beware monopolists wearing Adam Smith ties!
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28.04.2023
“You cannot replace something with nothing. What other currency is preferable to the dollar as a reserve and trade currency? “ So said Larry Summers.
There is an assumption - especially amongst American commentators - that the US Dollar is secure at the helm of the global financial system simply because there is NO ONE THING that can replace it. And if the only way the Dollar’s status could be challenged was that it would need to be challenged by ANOTHER ONE THING, then in those circumstances, I cannot see a single pretender to the US Dollar’s throne either.
But what would happen if the US Dollar was not replaced by a single thing but a MULTITUDE OF THINGS? What if it were, in coming years, to suffer “a death by a thousand cuts”?
That is what I predict will happen. S-L-O-W-L-Y but S-U-R-E-L-Y. The cuts will come, like London taxis, individually and then many all at once.
And it is already happening. And whilst the increased use of the Chinese Renminbi will be a common theme to many of these cuts, it will not be the only theme: Indian oil refiners buying raw Russian product from Dubai-based traders have started to fund their purchases with UAE Dirhams.
But yes, the Chinese Renminbi will feature more than most in transactions previously carried out in US Dollars. We learned yesterday that Argentina will buy its Chinese imports with Renminbi. Earlier this month, on a State Visit to Beijing, President Lula of Brazil agreed that Brazilian importers of products from China could use Renminbi just as Chinese importers of products from Brazil could settle in Brazilian reais. And now we hear that Bangladesh will import a nuclear power station from Russia and pay for it in Chinese renminbi.
In the grand scheme of things, this is small stuff and should not worry the Dollar Groupies too much.
But if, as is distinctly possible, the oil trade between China and Saudi Arabia should be redenominated in Renminbi - or even Saudi Riyals - now that would be decidedly ominous for the US Dollar. Its international status dates back to a 1945 meeting between President Franklin D. Roosevelt and Saudi King Abdul Aziz Ibn Saud on an American cruiser in the Red Sea. There the Saudis agreed henceforth to denominate their oil sales in US Dollars. Thus was born the Petrodollar, which has helped anchor the US Dollar’s global status for 70 years. Petroyuan anybody?
Tik, tok. Cut, cut.
04.30.2023
Tik, tok! Cut, cut!
If the sheer volumes of articles being written about the prospect of dedollarization could have any bearing on the course of economic history, then today’s Dollar would already be - pace Keynes and see above - a ‘barbarous relic’. But it isn’t…and it is unlikely to be anytime soon. Niall Fergusson got it right in Bloomberg: “The Dollar’s Demise May Come Gradually, But Not Suddenly: Rumors of the death of the US currency are as exaggerated as they are frequently repeated.” The ever-provocative Adam Tooze - whose Chartbook is a Renaissance Man’s dream - also chimed in last Friday “Bucking the buck? Debating the global dollar ... again”.
I too will keep track of the thousand cuts that are being meted out against the body of the US Dollar by the likes of Brazil, Russia, Saudi Arabia, Argentina, the UAE, Bangladesh…the list seems to be growing almost daily…. But for now I want to look at this proposition from a different angle.
Those of us who waded through Ecos 101 will know there are four functions of money:
A medium of exchange
A store of value
A unit of account
A standard of deferred payment (this function is often forgotten and yet - see FOOTNOTE below - may yet be the most important function of the money that is the US Dollar.)
Anyone buying the US Dollar must reason that the US currency must fulfill one - or more - of these functions.
The next section will rely on two sources: the IMF’s April 2023 World Economic Outlook and Ed Yardeni’s ever useful April 2023 update on US Flow of Funds: Treasury International Capital System (TICS).
Extracts from the first shows how the jigsaw of world capital flows as evidenced through each nation’s forecast current account deficit is likely to fit together in 2023. The second summarizes how the largest and systemically most important current account deficit - that of the United States - is financed through inflows on its capital account.
The figures are extraordinary and at times confusing. Bear with me. Without grasping their import, one cannot begin to understand the likely future - and fate - of the US Dollar.
From the IMF’s WEO April 2023, we see that 54 nations run current account surpluses and 125 deficits. Importantly, as we are talking currency here, the 20 nation Euro area is taken as a single bloc, one forecast to run an $83 bn surplus in 2023. (Some nations - Syria, North Korea, Ukraine for example - do not report their figures.)
Here are a number of summary findings:
The US will account for 52% of all global deficits this year.
The UK will account for 12% of the same.
Taken together, the Anglo-American duo - with 5% of the world’s population - will run 64% of its current account deficits.
Of the Five Eyes Nations, only Australia will run a surplus; Canada and New Zealand join the US and UK in running deficits.
The top 5 deficit runners will run 76% of the world’s deficits; the top 10 will run 84%.
On the current account surplus side, the top 5 will account for 52% of the surpluses thereby covering the US’s deficit alone.
The top 10 surplus runners will cover 75% of the world’s surpluses, approximately covering the collective top 5 deficits.
4 out of 10 of the top surplus runners are oil exporters.
Were the man from Mars to visit Earth, he would surely find these statistics extraordinary…indeed extraordinarily unbalanced. As a current account deficit equates to national dissaving that would need to be offset by equivalent capital flows from the rest of the world (at least before adjusting the exchange rate and foreign exchange reserves), this means 5% of the world’s population are currently consuming 64% of the world’s mobile savings to balance their external books!
And at the heart of this remarkable statistic lies the US Dollar and specifically how the US finances is deficit with offsetting capital inflows. What US Dollar denominated assets for foreign savers want to buy each year, and what ‘function of money’ are those assets fulfilling for those buyers? This is where Ed Yardeni’s US Flow of Funds: Treasury International Capital System (TICS) summary comes in use as it explicitly details that ‘how’.
The summary long term findings of capital flows into the US are fascinating. The two headline conclusions are as follows:
Foreigners have since 2014 been selling down their US equity positions though it has not been a one-way trade; on occasion, they have returned to the US equity markets but never to rebuild their status quo ante positions and soon thereafter to resume their selling. These purchasers/sellers are overwhelmingly from the foreign private sector.
It is the bond market that has attracted most inward interest. Foreign official purchases have favoured corporate and agency bonds (Fannie Mae, Freddie Mac) but on balance shunned ‘pure’ US Government securities. Foreign fixed income private sector buyers have bought securities across the board: Treasury note, bonds and bills; agency bonds; corporate bonds. The star of the show has been US Treasury Bonds and their close equivalent, Treasury notes.
What can one thereby conclude about the dedollarization debate is as follows:
There are two parallel stories being played out: one focusses on TRADE FLOWS and here hairline cracks in the US Dollar’s hegemony are appearing; the other focusses on CAPITAL FLOWS and here the US Dollar’s Top Dog position is secure, anchored by the behaviour of global private sector capital allocators.
However there are signs that their public sector equivalents are falling out of love with the US Government security markets even as they continue to support the agency and corporate bond markets.
Perhaps the most worrying conclusion is that foreigners are shunning the equities of US Inc even as they continue to back its bonds. This is not a ringing endorsement of the status of US Inc - and longer term the US itself - in the eyes of the global investment community.
What then does this say about the financing of the US’s current account deficit where 4.2% of the world’s population generates 52% of all current account deficits?
Here would be my answers:
That status rests on an increasingly fragile basis:in the financing of that deficit, the preference for US debt instruments over US equity instruments.
A growing realization behind this ‘kindness of strangers’ that their support up until now of US imbalances allows the US consumer to enjoy an ‘exorbitant privilege’ on the scale of which Giscard d’Estaing (who invented the concept) could not have imagined.
As the balance of net savings on a national level continues to shift towards Asia and the oil exporters and away from the West, the financing of the US’s deficit will likely become progressively harder for the US to do. One of the most interesting tidbits I have gleaned recently is that despite the recent oil bonanza, the US Dollar-denominated foreign exchange reserves of Greater Arabia have not materially risen. Where then have those savings gone? it is hard to tell precisely but a sizeable share of the windfall appears to have been invested in Asia.
IMPORTANT FOOTNOTE
I wrote above that money as a standard of deferred payment is often overlooked as one of its functions but may yet be its most important function.
Capitalism is in essence - as Karl Marx rightly identified - about capital. And the most important feature of capital is its price, known in corporate finance circles as the cost of capital. Why? Because it is the ‘Caesar’s thumb’ in the arena of capitalism: it decides whether capital lives or dies. It lives when returns cover that cost of capital; it dies when they do not.
In modern corporate finance, the cost of capital is rooted in the 10 year US Treasury’s yield. Often called the ‘risk-free rate’ (which it is not as no instrument is wholly risk-free as regional banks in the US have recently discovered), the 10 year US Treasury’s yield is then adjusted upwards by risk premiums, market betas, tax rates and company gearing levels to arrive at the real world manifestation of Caesar’s Thumb for a given company: its weighted average cost of capital.
This price has two components. The obvious dimension is usually given as a percentage: the rate of return that a company needs to beat to achieve a profitable investment. The less obvious dimension is that that return also needs to be made in a currency. Thus for Apple, its weighted average cost of capital is somewhere in the region of 6% measured in US Dollars.
If the currency in which a cost of capital is denominated - and most of the capitalist world keys their calculation of that yield on the 10 year Treasury as measured in US Dollars even if this is translated into another currency thereafter - if that currency were to become compromised, so too (to use a different image) would the gimbel at the centre of the gyroscope of global capitalism: it would be knocked off its axis with serious consequences for all.
Though as noted it is often forgotten in the list of the functions of money, its measurement of the standard of deferred payment that sets the “risk-free rate” may - underneath it all - be its most critical function.
Tik, tok. Cut, cut.
05.03.2023
I was speaking yesterday at an investor conference in Chicago - albeit virtually. My topic was “Africa looking forward”…and the double-meaning of the phrase only struck me half-way through my presentation. What, I asked myself, does Africa have to look forward to?
It was then that one of Keynes’s “fluffy balls of wool” started forming in my mind. (See ‘Quotes I like’ for full reference.)
Much of my presentation dealt with the growing role of China in Africa. This was compared - in a response to a question - to the floundering position of the US, notwithstanding the wishful thinking of Anthony Blinken embodied in his Washington Consensus 2.0 vision.
What I realised was that, when it comes to trade - the current account (see above) - Africa is now firmly in China’s “atmosphere”. In 1980, when measured by leading trade partners, all but Togo were in the Western and mostly US camp. Today all but Chad (uranium) and Lesotho (textiles) have China as their lead trade partner.
And parts of Africa’s capital account are starting to turn Chinese as well: China’s annual FDI into Africa now exceeds that of the IMF and the World Bank combined (Thes Bretton Woods duo front for most of the West’s lending to Africa.) No individual Western nation comes close to matching China’s commitment.
This trend has in recent year’s also been repeated in the realm of concessional loans. Evidence of this is how large China’s exposure features in debt renegotiations with countries like Zambia. That said, when it comes to the pricing of loans to Africa, the continent remains firmly in the all-powerful US “atmosphere” for capital. This explains why more and more African nations have over the past year faced increasing difficulty when it comes to servicing their foreign currency loans, where the interest rate is most often keyed off the Fed Funds Rate (FFR).
The sharp increase over the past year in the FFR has now claimed three banks in the US who ‘lent long and borrowed short’. A number of African nations find themselves in a parallel predicament: their current incomes cannot meet their interest bills on foreign debt.
Herein then lies the awkward truth: even as Africa has been pulled into China’s trade atmosphere, it remains largely trapped in the US’s capital atmosphere.
And unless an African country runs a healthy current account balance - though this is no guarantee either - financing its largely US Dollar denominated loans that are in turn geared to US interest rates has become progressively harder to do.
One of the things Africa has to look forward to then - though this would by no means be a cure-all for its external financing requirements - is to escape the US atmosphere for capital and instead start breathing the Chinese equivalent where financing rates are almost 50% less.
Footnote: there is a deeper force at work here that will have the effect of drawing Africa “away from the Atlantic and Mediterranean towards the Indian Ocean”. Some African nations have already effectively acknowledged it: Ethiopia, Kenya, Lesotho. Others have not: South Africa much of the Rand Zone in Southern Africa (so including the nations of Rand Monetary Area, though not Lesotho.) Botswana and Zambia may also be being caught out here too.
As a natural result of its colonial history, much of Africa has always seen itself - when it comes to comparative wage rates for semi-skilled and unskilled labour - as a “cheaper Europe”. The uncomfortable and dawning reality is that a fair number of countries - led by South Africa - are rather an “expensive Asia”.
This suggests that “looking forward” some of Africa must uncouple itself from its Western competitive wage benchmarking and instead take its cue from an Eastern benchmark. Today I see that benchmark being set not by China but by Bangladesh, Cambodia, Indonesia and - increasingly - India.
05.05.2023
Last night I listened to a fascinating conversation hosted by Foreign Affairs magazine on the subject of “The West versus The Rest”. The three participants represented the three less contentious BRICS - Brasil, India and South Africa and all acquitted themselves with distinction. Kudos to Foreign Affairs for hosting the event and having the grasp of geopolitics to know that the Western narrative - which dominates the airwaves of most international media - is most decidedly not shared by the Rest.
Many items were discussed, most of which underlined the frustration with the way the global community has been ordered… and is being ordered around by the West. Key multilateral institutions were built in the post war era - UN, IMF, World Bank - and still today reflect the priorities of the Great Powers of that era: the makeup of the permanent members of the UN Security Council is grating evidence of that.
Compounding these structural issues is the increasing weariness of much of the Rest on being lectured by the West about adherence to the ‘Rules-Based Order’. The Rest had little to do with creating those rules. Furthermore, there is clear evidence that the West - and particularly the US - has not been adhering to those ‘rules’ when it suits them to break them. For example, when the US demands that someone stands trial for crimes against humanity, they may well have a valid point…except not being a signed up member of the International Criminal Court rather undermines their standing as does calling out China for violations of the UN’s Law of the Sea when the US is not a signatory of that convention either. Most nations, even in the Rest, think it was wrong for Russia to invade Ukraine. But then the United Nations General Assembly did not approve of the US-led invasions of Iraq and Afghanistan either.
The Rest are growing tired of what, deep down, are Western justifications for their actions based upon the concept of ‘might is right’.
That the US is now seemingly de-emphasising the Rules-Based Order mantra in favour of a “Washington Consensus 2.0” may in part be an admission by them that their international modus operandi must move on.
The Rest is unlikely to be that impressed though they may not be surprised as to what this change means. The Washington Consensus 2.0 is not only a repudiation of the neo-liberalism that the US practiced at home and tried to get nations abroad to adopt as well, it clearly amounts to a naked proclamation of America First.
05.08.2023
An interesting headline in India’s The Statesman this morning: “Dollar’s rule facing many mutinies, a likely credible one from BRICS”. (Unsurprisingly, the Indian Press is an excellent source of ‘views from the Indian Ocean’!)
An Indian writer would not use the history-laden term ‘mutiny’ lightly. But it is a useful term to add to the forecast that the Dollar’s slow demise will likely suffer a ‘death by a thousand cuts’. Perhaps rather it will be a case of usurpation by a thousand mutinies!
The article conjoins the evidence of growing mutinies with the possible expansion of the BRICS, a process that is likely to begin at the group’s summit in Durban, South Africa, in August. The Times of India, quoting Anil Sooklal, South Africa’s ambassador to the group, cited the fact that many countries have expressed an interest in joining the group. These include: Saudi Arabia, Argentina, Uruguay, Iran, the United Arab Emirates, Algeria, Egypt, Bahrain, Mexico, Turkey, Indonesia, Bangladesh, Afghanistan, Belarus, Kazakhstan, Nicaragua, Pakistan, Senegal, Sudan, Syria, Thailand, Venezuela, and Zimbabwe.
Kenya has accepted an invitation to join the Durban summit.
What strikes me about this list - besides the inclusion of countries under economic sanction from the United States like Syria, Iran, Belarus and Venezuela - is that it also includes a number of countries running large current account surpluses: Saudi Arabia, the United Arab Emirates, Algeria and Kazakhstan: Indonesia, Thailand and Belarus are also in surplus, albeit on a smaller scale. Of course, of the original five BRICS, China and Russia are also surplus runners.
This is important in the grand puzzle of economic interconnectedness as the recycling of these surpluses helps balance the scales between deficit and surplus running countries. The more countries running surpluses moving into the BRICS camp, the greater the precariousness of the US Dollar’s position.
Tik, tok! Mutiny, mutiny! Cut, cut!
11.05.2023
A first stab at outlining the geoeconomics of the IOsphere
The Indian Ocean Basin is the poorest of the three great Ocean Basins in terms of GDP: it contains only one of the twelve largest economies: India. Yet it is the ‘richest’ in terms of population: 3250 million people or 40% of the world’s population. And partly by virtue of the latter, this means it has the youngest and so ‘best’ demographics.
It is also noticeable in that none of the homelands of Great Powers border the Indian Ocean, so none of the five permanent members of the UN Security Council are truly part of the IOsphere. That said, it is not a vacuum in the world of Great Power Rivalry: all of the five - the US, the UK, China, Russia and France - have military bases there. And France - via a smattering of islands notably Reunion and Mayotte - the the UK - via the British Indian Ocean Territory (notably Diego Garcia) - have sovereign territories in the region. But compared to the Atlantic and the Pacific, it is by far the most ‘open’ of the Great Oceans.
The Overseas Territories of Europe and especially the UK and France
The US’s Overseas Territories are mostly in the Pacific plus Puerto Rico and the Virgin Islands in the Caribbean.
Since the Cold War, East West rivalry has manifested itself in the region via a proliferation of Great Power bases : the US in Diego Garcia (1973; leased from the British) and Djibouti (2002), the Chinese in Djibouti (2016) and the Russians in Port Sudan (2020); the French have bases in Reunion and Mayotte as well as Djibouti; the British have permanent access to Diego Garcia. Since the Invasion of Kuwait in 1990, the US, the UK and France also have had multiple military facilities throughout the Arabian Gulf.
Furthermore the American and British militaries are present in both Kenya and Singapore. Finally, under the aegis of the AUKUS military pact, the US and UK likely have military personnel based in Australia.
All of the above does not detract from the statement that, of the three great Ocean basins, the Indian is (for now) the least militarised.
This blog recognises the power of geopolitics in understanding the place of the IOsphere in today’s world. But it seeks to let international economics share the stage…and it is in considering the latter that the Great Prize of the future becomes most apparent. As already noted above as ranked in Harvard’s Atlas of Economic Complexity, 8 out of 11 of the world’s fastest growing economies till 2030 - ranked by average annual GDP growth - will be found in the IOsphere (China, Cambodia and Vietnam are the other three.).
Understanding the economics of the IOsphere - and thereby the geoeconomics - is best done by starting with the basics. What is the economic endowment of the region?
My approach is to consider its factors of production:
Land: by area, the largest country in the region is Australia (world’s 6th largest nation) then India (7th), Saudi Arabia (13th) and Indonesia 15th.
Resources: the region is an important source of with natural resources: oil and gas from the Middle East (Saudi Arabia, Kuwait, the UAE, Iraq, Iran, Oman, Qatar, Bahrain) and Australia (gas); coal from Australia, Indonesia and South Africa; copper from South Africa and Zambia; lithium from Australia and Zimbabwe; nickel from Indonesia and Australia; gold, PGMs and diamonds from Southern Africa. The region is also a significant exporter of agricultural produce: wheat (Australia), rice (Thailand), tea (Kenya), coffee( Ethiopia), palm oil (Indonesia and Malaysia); forestry products (South Africa and Indonesia);
Labour. The region contains the country with the largest population, India as well as Indonesia (4th), Pakistan (5th), Bangladesh (8th), Ethiopia (14th) and Egypt (15th).
Capital; as noted above, the region only has one of the world’s 12 largest economies: India at 6th. But it has growing wealth as evidenced by its rising financial clout: Singapore is ranked the 3rd most important financial centre; Dubai, the 12th.
Maps detailing the geostrategic position of the IOsphere
Map illustrating the IOsphere’s demographic advantage
2. Prediction from Standard Chartered that, tracking the Kaskazi wind, low cost manufacturing will ‘blow from Asia to Africa’….
3. Heat map from the Atlas of Economic Complexity highlighting the world’s fastest growing region in terms of GDP per annum until 203): the IOsphere.
4. China’s geostrategic vision for the IOsphere: the Southern, maritime, route of the Belt and Road Initiative, also called the Maritime Silk Road of the 21st Century
18.05.2023
The Great Game in the 21st Century
Sir Halford John Mackinder (1861 – 1947) was an enigmatic figure. By profession, he was an English geographer, academic and politician. He was one of the founders of the London School of Economics as well as being seen by many to be one of the founding fathers of both geopolitics and geostrategy.
A fascinating man who merits deeper comment than will be given here, he wrote an essay in 1904 called “The Geographical Pivot of History”. His views were somewhat overlooked in the 20th Century - the American Century - as his world vision put the Americas on the periphery. That said, as one American reviewer said of his essay: “ This classic, difficult to find in most libraries, has been validated time and time again over the past 100 years. A masterpiece of geopolitical thought.”
Mackinder was writing during the final years of the Anglo-Russian Great Game - of which more below. That era ran from 1830 to 1907 when it was concluded via the Anglo-Russian Convention. In 1919, with WW1 now history, he pithily summarised his world view as follows:
Who rules East Europe commands the Heartland;
Who rules the Heartland commands the World-Island;
Who rules the World-Island commands the world.
The term “Eastern Europe” as used here by Mackinder is today more accurately called Eurasia. Elsewhere Mackinder referred to rsther “the vast area of Euro-Asia” which he defined as running from the Volga to the Yangtze. His world looked thus:
One can see why most American commentators shunned Mackinder’ss vision: The United States inhabits the Lands of Outer or Insular Crescent as do the UK and Japan.
As I write the G7 are meeting in the Outer Crescent: Hiroshima, Japan. And as the G7 meets, President Xi is in the Pivot Area - in Xian, China’s historic capital city - hosting the Central Asian Summit with the leaders of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan . The contrast - especially when viewed through Mackinder’s geo-strategic prism - could not be more stark.
The Great Game is reconvening in the 21st Century, only this time the players on the Asian Chessboard are different. In the mid-19th Century, the arm wrestle was between Tsarist Russia and Victorian Britain. The former sought to gain access to an Indian Ocean port. They were thwarted by the jewel in the crown of the British Empire, Greater India, in the South. Britain’s South Asian colonies embraced Myanmar in the East via today’s Bangladesh, through India, Sri Lanka, the Maldives, Bhutan and Nepal to Pakistan and - intermittently and largely unsuccessfully - Afghanistan in the West. Persia was mostly seen as a British sphere of influence as was, after the Ottoman Empire’s defeat in WW1, Greater Arabia including Iraq, Transjordan and Palestine. (This battle royal between Russ and Brit was made famous in Rudyard Kipling’s novel Kim, published in 1901.)
Today the players in the Game are China to the East and - although they hardly realise it - Europe in the West. The Asian Chessboard was aligned North-South in the 19th Century; in the 21st Century, it is aligned East-West. Russia would normally have been a player but they have distracted themselves in Ukraine leaving a vacuum in the Stans which China is very gently but deliberately filling, Europe too is distracted by Ukraine. The only other player with 'a horse in this race’ is Turkey who are very much reflecting on matters internal for now.
Is it impossible to imagine that for China, Russia’s invasion of Ukraine is a distraction that is allowing China to achieve their geopolitical ambitions in the Main Game, the Pivot Area? Whilst the US is harrumphing about Chinese naval activities in the South China Sea, are the strategists in the Pentagon missing out o China’s true land-based agenda, extending its influence into the heart of the World Island?
And is there other evidence that this thinking lies at the heart of China’s World Island vision?
Yes; two far-sighted initiatives that have been in place since 2001 - the Shanghai Cooperation Organization - and since 2013 - the Belt and Road Initiative, Both have successfully enlisted nations across the region into a grand vision that was Made in China.
The current membership of the Shanghai Cooperation Organization is as follows:
Countries agreeing to be part of the Belt and Road Initiative are as follows:
China’s vision began as a plan to recreate the two Silk Roads of antiquity from China to Europe, the land-based route to the north and the maritime on via the Indian Ocean to the South. The vision has now expanded to embrace all of Africa as well as looking South East across the Pacific to New Zealand, most South Pacific Island groups and Latin America.
A Caravanserai, a place where, in history, the peoples of Central Asia gathered. (See Peter Frankopan’s ‘Silk Road’ on my book list.)
As a final footnote, China’s Special envoy to Ukraine is in Kiev as I write. If any nation can bring Russia to the negotiating table - a big ask! - it is China. And if that happens, China will be at the negotiating table to. And if that happens China will have inserted itself into the centre of Eurasian geopolitics…and even the future of Europe’s security. Queen takes pawn, check?
08.06.2023
Article published in the Daily Maverick:
Has that moment finally arrived: a New World Order…or Disorder?
Almost everyone with a grasp of modern history knows that ‘9.11’ refers to the day in September 2001 when al-Qaeda terrorists attacked the United States. But few probably remember that, on 9.12, the first foreign leader to call President George W. Bush with his condolences and pledges of support was Russia’s President, Vladimir Putin. And on the evening of 9.12, China’s President, Jiang Zemin, did likewise. Like the planets of our solar system being momentarily aligned, the Great Powers of the world were, albeit briefly, ad idem.
In an address to a Joint Session of the US Congress a week later, George Bush remarked: “Every nation, in every region, now has a decision to make. Either you are with us, or you are with the terrorists.”
Though hairline cracks have started to appear in this blunt bi-polarism, over 20 years later the US still reflexively returns to this “us versus them” doctrine wherever its foreign policy is concerned. After the February 2022 invasion of Ukraine by Russia, that principle was updated to say “Every nation, in every region, now has a decision to make. Either you are with the Ukraine, or you are with the Russians.” A majority of the UN General Assembly – 141 out of 181 votes cast – decided they were ‘with Ukraine’. This included fellow African nations Nigeria, Egypt, Kenya and Cote d’Ivoire. But some demurred: 35 nations abstained, South Africa included, as did fellow BRICS club members India and China. Only 6 nations sided with Russia. Bolsinaro’s Brazil was the only BRICS nation that voted to condemn the Russian invasion: after President Lula’s recent remarks in Beijing, might today’s Brazil also have abstained?
In passing, it is worth noting that the most widely praised speech of that UN session was made by a non-Westerner: Kenya’s Ambassador, Martin Kimani. Voting ‘with Ukraine’, he likened Russia’s actions to stoking the “embers of dead empires.”
Arguably however, it is in those 35 abstentions that the revival began of a movement whose roots go back 75 years: in 1955, what became the non-aligned movement met in Bandung, Indonesia. By definition, non-alignment has no place in an ‘either us/US or them’ world.
The world has moved on since that dark day in September 2001. Large scale wars have happened. Afghanistan was invaded by the US and its allies in 2001, Iraq invaded by broadly the same US-led Western coalition in 2003. Neither action was sanctioned by the United Nations and neither action found what the invaders were looking for: no Osama bin Laden and no Weapons of Mass Destruction respectively. Noting again that the 2022 invasion of Ukraine was also opposed by the UN General Assembly, it appears the latter tends not to approve of invasions whichever ‘side’ might initiate them.
The above votes by the General Assembly underline the growing dissatisfaction of the world order by much of what is now called the Global South: one of their central charges is hypocrisy. The US and its Western allies preach the upholding a ‘Rules Based Order’. Critics say the RBO has morphed into a mish-mash of contradictory ambiguities. They note that the winners of WW2 made those rules, those rules were based upon their own principles, and, with this double lock, the West now feels it has license to order the Rest around as they see fit. Worst of all, when they see fit, key nations in the West go on to violate these very same rules.
Critics of the British Empire quipped over a century ago: “Britain may rule the waves, but when it suits its purposes, it waives the rules.” The same charge is being levelled today at the leading advocates of a Rules Based Order.
As summarized by China’s Minister of Defense, Li Shangfu, at the end of last week’s Shangri-La Dialogue in Singapore: “The so-called rules-based international order never tells you what the rules are and who made these rules. It practices exceptionalism and double standards and only serves the interests of a small number of countries.”
The double standards of the US especially grate. By all means, accuse President Putin of being a war criminal but can you do this if you are not a member of the International Criminal Court and so have no locus standi to make that charge? Assuredly, criticize China for violating the precepts of the International Law of the Sea in its behaviour in the South China Sea but should you not be a signatory of that Charter if you want to make those claims? Defend human rights worldwide, of course, but then do not suspend them when torturing prisoners in Guantanamo Bay in Cuba or Abu Ghraib in Iraq. At the time, it did not help when, in a flagrant contradiction of the rules of Geneva Convention, a US Vice President insisted “Waterboarding isn’t torture”.
And it is not only the US that waives the rules: Britain’s continued illegal occupation of the Chagos Islands in the Indian Ocean – and, by extension, the US airbase on Diego Garcia – is but another example of Western double standards. This inconsistency has not stopped the UK and the US from criticizing China for building an airbase on the uninhabited Mischief Reef in the Spratly Islands in the South China Sea.
These are but a few of the aggravations that illustrate why a growing number of countries outside the West are opting for non-alignment. The examples cited above are mostly political in nature. But to them are now being added a list of economic differences of opinion as well. This has been prompted in particular by the decision of many countries to opt for non-alignment in the wake of the growing tensions between the US and China. Quite simply, many countries do not want to pick sides as doing so would likely harm their economic interests. As the Prime Minister of Singapore, Lee Hsien Loong, recently noted: “Right now we are friends with both — it’s not that we don’t have issues with either, but we are generally friends with both, and the relationships are in good working order.”
Political differences have existed between the West and the Rest for decades; what has recently come to the fore are the stark economic differences. The most striking visualization of how the Global South increasingly resents the way in which the global economy is ordered and operates occurred on 14 December 2022. In a General Assembly vote in the United Nations under the motion entitled “Towards a New International Order”, 123 nations voted for it; 1 – NATO-member Turkey – abstained; 50 voted against it. The pattern was self-evident: it really was the West versus the Rest.
Here in South Africa, not everyone seems aware of this turning tide. Many of us – with sound historic justification – continue to hold the US economic model in high esteem. But that model is not as robust as it once was; increasingly, it is broken. And not just economically broken but politically and socially as well.
For many non-aligned observers, it is the underlying economic reality of America that rankles the most. In 2022, the US’s share of all current account deficits run worldwide was over 60% whilst its share of all government budget deficits run worldwide was over 40%. These two deficits – one external, the other internal – were generated by a mere 4.3% of the world’s population. These excesses – a current account deficit of 3.5% of GDP, a budget deficit of 5.5% of GDP – hardly embody the principle of prudent economic management that is the hallmark of the original Washington Consensus.
One ever-growing fallout? US national debt has quadrupled from $8 trillion to $32 trillion in the last 15 years. The latest budget deal in Washington D.C. will do little to curb this trajectory: the Congressional Budget Office forecast federal debt to exceed $54 trillion within a decade, an average annual growth of $2 trillion.
To sustain the US’s now $1 trillion current account deficit, it must run a broadly equivalent capital account surplus. And broadly it has, attracting foreign capital into America. But do not believe foreign flows of capital into the US have, on a net basis, gone into the seemingly vibrant US Inc and the capital markets that represent it. Since 2014 and on a net basis as the US Treasury’s TICS data confirms, the overwhelming majority of those inflows have gone into US Government debt instruments, thereby underwriting that massive increase in federal debt that has taken place rather than backing the US private sector. No wonder there are those in the Global South who now ask whether – beneath that brash surface and despite the US’s repeated championing of the title – “Deep down, is America still a capitalist heaven?” After all, it is not domestic but foreign capital inflows that are required to finance the US’s now annual $1 trillion current account deficit and so balance the US’s external imbalance. Those same foreign inflows are then applied mostly towards financing the majority of the US’s ever-growing internal imbalance, its budget deficit. Ostensibly ‘capitalist’ America increasingly relies on the kindness of foreign strangers – the subsidization of US over-spending by savings from overseas – to make ends meet.
For the past 40 years, many in the Global South have been subjected to the ministrations of the World Bank and the IMF, the shock troops for US global capitalism, complete with their ‘structural adjustment programmes’ and ‘conditionalities’ aimed at promoting sound macroeconomic management. Physician heal thyself? The US might get the DC multilaterals to enforce their disciplines: Ghana and Zambia are in their care as of 2023... but reality smacks of being an economic version of ‘do as I say, not as I do’. Exercising the ‘exorbitant privilege’ that comes from owning the world’s reserve currency, the US Dollar, the US covers its own excesses by printing money that is securitized into in bonds and sold partly to foreigners. Try printing Cedi and Kwacha in Accra and Lusaka and see how the enforcers from Washington DC respond!
The above discussion is important for us in South Africa to grasp ahead of the BRICS Summit in (now) Johannesburg on 22-24 August…if indeed that is where the summit will take place. If it is in Johannesburg, expect fireworks…and not just those surrounding President Putin’s possible attendance.
But wherever the event happens, also expect the BRICS club to admit new members. Twenty nations – Kazakhstan appears to be the latest – have applied to join. And whilst this list might include Venezuela and Iran, it is not primarily made up of economic minnows: Mexico, Turkey, Saudi Arabia, the UAE, Pakistan, Bangladesh, Thailand, Indonesia…it is a roll of consequence. Here in Africa, Algeria, Egypt, Nigeria, Senegal and maybe even Kenya (a surprise invitee to the Summit) may join. Individually, an extra nation joining the club will not tip the balance on the global geo-economic scales: collectively, the group cited just might.
So let us not be overly distracted by the hoopla surrounding President Putin’s possible attendance of the event, as important as the principles involved might be. Rather we must reserve some of our focus for the much bigger issue that is in the balance: the future of the global economic order in the wake of the incipient demise of the West’s Rules Based Order.
It is little wonder that Jake Sullivan, the US National Security Adviser, has recently jettisoned the free market vision of the original Washington Consensus and replaced it with a new state-sponsored economic model, one he himself dubbed the Washington Consensus II. The net effect of this will be to put America unequivocally first with the rest of the world being treated as little more than an afterthought. In a post-Afghanistan world where the US clearly no longer ‘rules the waves’, is it now circling the wagons and withdrawing into a quasi-protectionist kraal?
A New World Order is indeed arising. The ultimate evidence of this is that the Old World Order is abandoning its long-held economic modus operandi.
07.06.2023
Letter submitted to the Financial Times in response to Janan Ganesh’s opinion: Don’t blame the west if the global south goes its own way:
https://www.ft.com/content/ac0acfbf-4fd7-4657-aa17-c8310ae3af16
Dear Editor,
Janan Ganesh misses the facts but more importantly the point in his opinion: Don’t blame the west if the global south goes its own way.
First the facts: in the key Ukraine vote in the UN on 22.02.22, the Rest far outnumbered the West (91 to 50) in their condemnation of the Russian invasion. The best speech came from a non-Westerner, Ambassador Martin Kimani of Kenya. Likening Russia’s actions to stoking the “embers of dead empires”, he spoke for many in that group of 91 who had been on the receiving end of imperialism.
As tragic as the Ukraine issue is, it is not the only issue wracking today’s world. As Indian External Affairs Minister, S. Jaishankar, has noted “Somewhere Europe has to grow out of the mindset that Europe's problems are the world's problems but the world's problems are not Europe's problems.”
To understand the wider economic issues that tax the Rest rather look at the voting patterns that emerged from the 14.12.2022 UN Vote on “Towards a New International Economic Order”. Here the Western Bloc was outnumbered 123 to 50. There was only one abstention, that nation where the West meets the Rest: Turkey.
The economic challenges besetting the Rest – and the Global South grouping emerging within it – are not all of their own making. For the West to be blind or high-minded towards this risks making the emerging divisions deeper.
26.06.2023
Published article in the Daily Maverick
Foundation of global world of finance is precarious while a tentative migration away from Dollarworld begins
Some say it was Bertrand Russell who gave a public lecture on astronomy describing how the Earth orbits the Sun and how the Sun, in turn, orbits around the centre of a vast collection of stars called our galaxy.
At the end of the lecture, a little old lady got up and said, “… what you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise.” The mathematician gave a superior smile before replying, “What is the tortoise standing on?” Said the old lady, “You’re very clever, young man, very clever. But it’s turtles all the way down!”
Had Russell been talking about the global economy, I would have been on the side of the little old lady… only the tortoise would have been the US dollar and all those turtles underneath it, US Federal Debt.
The recently fudged deal between the Biden administration and the Republican-controlled House of Representatives to raise the US Federal Debt limit resulted in an enormous sigh of relief across nearly all capital markets worldwide: the full faith and credit of the United States would continue to be honoured. Dollarworld would not – at least not this time – be knocked off its axis.
Few commentators were churlish enough to note that the net result was yet again to raise the water temperature in that jacuzzi that is today’s US economy. And the froggie wallowing in it will live to bask another day. Yes, over time he will likely become ever more soporific. But most of the financial commentariat dare not let the poor amphibian know that he is a degree or two closer to his day of reckoning. For now, the perverse logic of boiling frog economics remains intact.
Quadrupled debt
In the 15 years since just before the Global Financial Crisis in 2008, US Federal Debt has quadrupled from $8-trillion to $32-trillion today. This Federal Debt increase is the result of the detritus from wars abroad (Afghanistan), “wars” at home (on Covid-19), unfunded Trump tax cuts and much more overspending besides… yes, even President Biden’s ballyhooed Inflation Reduction Act.
In the next decade, the bipartisan Congressional Budget Office expects that Federal Debt total to rise by another $20-trillion to $52-trillion. Though the increase will not be “straight line” – this year’s deficit is forecast to be “only” $1.4-trillion, over half of which will again be financed by foreigners – the coming increase translates into an average of $2-trillion growth in Federal Debt for each year during the next decade.
And most of that increase will be funded via those “turtles”: US dollar bond market debt (BMD) issued by way of Treasury Bonds, Bills and their like.
At the risk of getting financially geeky, it is important to understand the truly axiomatic role played by Treasury Bonds in the Dollarworld of capital. Quite simply, they determine the price of risk and so – theoretically – the value of pretty much every financial instrument that can be traded internationally. (Not cryptos, of course: but then is that one further reason why the SEC is now going after digital currencies?)
As any student of the first level of the CFA programme focusing on the cornerstones of modern corporate finance will tell you, in the end – and indeed from the very beginning – it is the yield on the 10-year US Treasury Bond (USTB) that theoretically determines the price of every other security in the US dollar atmosphere, be they an equity or debt instrument. Those assets outside that atmosphere are few, but yes, their number is growing and yes, their benchmarks are different… but I will come to that below.
Back in Dollarworld, that USTB 10-year yield is the gimbal at the heart of the gyroscope of capital: the sun at the centre of the solar system of finance.
And if something were to knock that gimbal off its spin axis, the financial consequences would be “catastrophic”… which is the precise term used by Janet Yellen ahead of that recent US Federal Debt limit deal: for nearly all in the US and many beyond, it just had to be done.
Why then is this seemingly esoteric measure so important? Because it is assumed to be the “risk-free rate”… only it is patently no longer “risk-free” and, in all truth, it never was. Still valuation methodologies had to start somewhere, and this linchpin was that somewhere. What it defines – theoretically – is the risk-free opportunity cost of capital. If you dare to invest anywhere else, you had better be duly rewarded for taking that extra risk above and beyond this “guaranteed” return.
(That today’s US 10-year Treasury yield [3.75%] remains below US CPI [4.0%] and has done so for much of the past five years only makes matters worse for capital. But I will not open that Pandora’s Box here.)
The net result of this is that much of the world of finance has come to be built upon Treasuries, this bale of turtles that is the pool of issued US Federal BMD. (Yes, I had to look it up: it is a “bale” of turtles!) The borrowing instruments underpinning Federal Debt anchor the wider universe of BMD issued within the United States.
39% of global BMD
And according to the Bank of International Settlements, in 2022, the US share of total BMD outstanding worldwide was $51.3-trillion out of the global total of $133-trillion, some 39%. (Note that this 39% share is carried on the shoulders of 4.3% of the world’s population. At the lesser $32-trillion, each US citizen is now weighed down by nearly $95,000 of today’s Federal Debt, each taxpayer by $245,000.)
Though not umbilically linked, this 39% share comes close to matching the global share of government deficits the US ran in 2021: 42% or $2.7-trillion out of a global government deficit total of $6.4-trillion. It is also worth noting that all the 2021 budget surpluses run by the few like Norway and the UAE totalled a mere $244-billion, meaning over $6-trillion of all those 2021 government deficits most of the world created were unfunded; to repeat: not covered by income but by BMD.
Granted, this means the US is not alone in its overspending, merely the Granddaddy of them all when it comes to the gargantuan scale of its fiscal profligacy.
The influence of that Treasury Bond yield does not stop with that American share of 39%: the amount of BMD globally keyed off that USTB 10-year yield is larger than just that $51.3-trillion rooted inside the US. Again, according to the BIS, the rest of the West (Japan and Korea included) accounted for a further $43.4-trillion worth of government BMD securities; note that this aggregate is less than that of the US alone.
To a greater (UK) or lesser (Germany) degree, valuation metrics of these Western turtles are mathematically and mechanically linked to that US BMD bale. Beyond the West’s total of $94.7-trillion, the rest – broadly what is sometimes called the Global South – accounted for the balance of $38.3-trillion, with China alone accounting for $20.8-trillion of that residual.
And, as all South African market operators know, even some of the Global South’s $38.3-trillion dances in time to the T-Bond tango.
Nor does the influence of the Treasury Bond yield on fixed income securities stop at bonds: the even larger-in-size tradable credit market is also keyed off this linchpin. As a London colleague noted, it really is “one rate to rule them all”.
I realise that I may have overwhelmed the reader with big numbers… but that was deliberate. In going into the specifics of the US BMD bale, I sought to shock as to how utterly ginormous it has become, and as such, just how precarious is the foundation upon which the world of finance now stands. And it is not just the US BMD pile – that turtle bale – that is precarious: by definition, it is the status of that bale’s currency of denomination, the tortoise that is the US dollar.
Different atmospheres for trade and capital flows
No wonder much of the Global South – led by the BRICS Club – are now looking to breathe another, non-US dollar atmosphere for their trade and capital flows!
One consequence of global decoupling between the US and China – or de-risking if you use the less provocative term – will be that it will move to create two (and maybe more) different atmospheres for trade and capital flows. One remains all too familiar: it is centred on that of the US dollar tortoise and its supporting Federal Debt turtles.
The only other atmosphere of consequence (at least for now) is far less familiar and much harder to define as it has only recently started to take shape. As yet, there is no dominant currency within it, though the growing assumption is that the Chinese renminbi will at least be “primus inter pares”, though I expect the Indian rupee also to feature heavily.
Were this to happen, the yields on the Chinese and Indian 10-year Government Bonds might yet become valuation linchpins in those alternative atmospheres.
There is evidence of this growing bifurcation of trade and capital atmospheres everywhere. Take, for example, the total funding raised by China-focused venture capital and private equity funds outside of China. In 2021, it reached $48.6-billion. In 2022, it fell to $16.5-billion. Thus far for 2023, it has totalled only $1.15-billion.
At the global level, only those countries with exchange controls – notably on the free flow of capital into and out of their economies – can hope to insulate themselves from the atmospheric pressure of Dollarworld. This is far easier to do if they also run a current account surplus as well as have significant levels of foreign exchange reserves.
In normal times, South Africa has neither, making us very dependent on the rising and falling of the barometer readings of Dollarworld. By contrast, China is largely insulated from these Dollarworld atmospheric fluctuations: it always runs a current account surplus and has the ample foreign exchange reserves needed to maintain an “air-lock” between its own atmosphere and that of Dollarworld.
Though there will be much else besides to discuss at the upcoming BRICS Summit in August – whether it takes place in Johannesburg or another more Putin-friendly location – one priority will be to start mapping out the architecture for alternative atmospheres: my hunch is that, short term, the initial focus will be on de-dollarising trade flows before moving on to de-dollarising capital flows, although the BRICS Bank is already considering the latter.
The new path will not be easy to map out: global finance’s network dependency on the US dollar for trade and capital flows is probably more pervasive than our computers’ dependency on the Windows operating system! But expect a start to be made in August.
Its success will likely depend on which other current account surplus runners join the BRICS Club in the coming years. China will be the anchor tenant of course, while Russia is unavoidably and enthusiastically a member too; both run current account surpluses.
Watch for the positions taken by the leading oil exporters and other surplus runners, led by Saudi Arabia and the UAE. Collectively, the unspent export earnings of these countries could provide an extra degree of cover for the three existing members of the BRICS Club – India, Brazil and South Africa – that traditionally run current account deficits.
South Africa exposed
South Africa is even more exposed than India and Brazil: our foreign exchange reserves only cover 4.6 months of imports. Our bond and equity markets are so integrated with that Dollarworld that any premature move to another atmosphere would be incredibly disruptive. The South African Reserve Bank has already warned as much.
My sense is other nations will need to take the lead in constructing alternative atmospheres before the likes of South Africa would consider diversifying away from Dollarworld.
Furthermore, these alternate atmospheres will need to be more defined and robust than they are today before nations that habitually run external deficits would consider making such a risky migration, even partially and even then, initially concentrating on trade flows before adding capital flows.
But there are signs that this migration is – very tentatively – starting to happen, predictably within the trade transactions of other BRICS nations.
India is buying gas from the UAE and using dirhams to settle their import bill; India obtained those dirhams by accepting them as payment for its exports to the UAE. Brazil is starting to settle trade with China using both reais and renminbi. For now, the amounts involved are not large.
But the mechanical channels are being put in place to grow these volumes and so to bypass the US dollar and in particular to disintermediate the US dollar clearing-house mechanism located in New York’s banking system.
Meanwhile, the turtle population of US BMD upon which today’s Dollarworld of finance rests continues to breed at an almost uncontrolled rate. And, as the Bible did not say, but even Bertrand Russell would have doubtless agreed: “It would be a foolish nation that built its financial house on the back of a tortoise itself riding upon the backs of a fast-growing bale of turtles.”
Awkwardly, unsurprisingly and perhaps even understandably, for now South Africa prefers being trapped in the known realm of the foolish rather than venturing forth into that unknown unknown. This means South Africa is choosing the Devil of Ballooning US Dollar Debt over the Deep Blue Sea. But for how long?
Postscript: two readers required more data:
US debt to GDP is now 135%, the highest ever (the end of WW2 when it was 128%.)
US debt to GDP is up from 53% in 2002.
Unfunded liabilities – items contracted for but not yet delivered (pensions, Medicare, social security) – are 6 times the current Federal Debt of $32 trillion
Renminbi trade settlement grew 26.6% in 2022 after 16.5% in 2021.
For China, more of their trade is now settled in Renminbi than US Dollars.
About 4.5% of global trade finance is now done in RMB, up from 2% a year ago. For the Euro, it is about 6%, down from 6.5% a year ago.
The debt markets of China are valued about $21 trillion. The Eurozone – made up of government debt of individual states – is around $19 trillion.
Yet another BRIC in the non-Western Wall? Ethiopia applies to be a member.
The guessing game is hotting up. Who will be admitted to the BRICS Club at the August Summit in Johannesburg?
This map shows all the 26 countries that are in the running.
But it is highly unlikely that all 26 will be invited to join this time round.
The ‘hot’ shortlist of nine nations includes seven Indian Ocean Rim countries: Saudi Arabia, the UAE , Egypt, Iran, Bangladesh and Indonesia plus landlocked Ethiopia whose maritime access is via the Red Sea inlet . Other likely nominees are Algeria and Argentina. Were these nine countries to join, that would result in 45% of the world’s population being in the Club.
Were the other countries mentioned above admitted - including population heavyweights Pakistan, Nigeria and Mexico - the Club’s combined total would be 4888m people, over 60% of the world’s population. Of the world’s ten most populous nations, only one - the United States - would then NOT be a BRICS Club member.
And in PPP terms, this grouping would account for over 50% of the world’s economy.