In the movie The International Clive Owen plays the part of Louis Salinger, an Interpol agent trying to bring down the world’s largest bank.
In this clip a banker explains things to him:
Umberto Calvini: [In explaining the “true” nature of banking in the world]
“The IBBC is a bank. Their objective isn’t to control the conflict, it’s to control the debt that the conflict produces. You see, the real value of a conflict, the true value, is in the debt that it creates. You control the debt, you control everything. You find this upsetting, yes? But this is the very essence of the banking industry, to make us all, whether we be nations or individuals, slaves to debt.”
Debt is much like a baseball bat: neither good nor bad. You can use it to hit the ball out of the park or you can get beaten into a bloody pulp by it. How we use (or abuse it) is the determiner. Read my article on the easy and uncomplicated way to get rich to ensure you go about it the smart way.
Certainly debt can – and has been used – to control people, assets, and entire societies ever since we crawled out of the cave and began covering our bits with fur. Just ask your neighbour Billy, who’s always complaining about his sh*tty job, why he won’t shut up and just quit? The answer typically is because his mortgage and car payments won’t let him.
I’ve been thinking a lot about debt lately. Not the consumer driven silliness highlighted by Billy but specifically how debt is used as a tool on an international and political level and how it affects currencies and geopolitics.
I then looked at the unfolding trends present today. Trying to see how they all fit together is, I believe, a valuable exercise, even though there’s more moving parts to this than a silo full of Swiss watches.
To begin with, let’s revisit some recent history of debt, currency, and deficits and how they’ve interacted. George Soros articulates it very well in his book The Alchemy of Finance when describing what he called “Reagan’s Imperial Circle”:
“Foreign capital was attracted [to the US], partly by the high return on financial assets and partly by the confidence inspired by President Reagan. The dollar strengthened and a strengthening currency combined with a positive interest rate differential made the move into the dollar irresistible. The strong dollar attracted imports, which helped to satisfy excess demand and to keep down the price level. A self-reinforcing process was set into motion in which a strong economy, a strong currency, a large deficit budget, and a large trade deficit mutually reinforced each other to produce noninflationary growth. I have called this circular relationship Reagan’s Imperial Circle.”
Keep this concept in mind as we’ll revisit it in a minute.
Fast forward to today, and there are some dramatic shifts taking place in the world:
- Bureaucrats in Brussels, who specialise in overpriced corporate lunches and finding new ways of spending their unjustifiable annual bonuses, continue to berate the “PIGS” for not doing more about austerity. Ironic but the truth is Brussels controls the PIGS much in the same way the bankers in the movie The International controlled the world
- Across the Atlantic we have the sexiest first lady in forever elected, and now we enjoy her orange husband bring a whole new level of ridiculous to Twitter, a space previously owned by the Kardashians’ posteriors. I’m still undecided which is worse
- On the shores of the murky isles, Brits marched boldly towards independence only to realise in shock that they had a completely inept leadership and not a single able-minded option available to them. And so they did what any pissed-off aggravated person would do: they began voting for Jeremy Corbyn. Not because anyone wanted him in power. Hell no! Purely in protest
- And so, while much of the West increasingly looks dysfunctional, lost, and confused, China are embarking on the most ambitious project ever since I tried to convince my now wife that a hot girl should marry me. The project? One Belt One Road (OBOR), which impacts many industries and countries such as Greece.
In many ways China has many elements in their favour whereby they can use their increasing economic prowess, large trade surplus, and existing overcapacity to control the debt of trading partners, and in so doing slowly but surely influence politics and economics in a self-reinforcing cycle.
Incidentally, if they’re successful in their OBOR endeavours, they can hope to mitigate some of the fallout from an impending and overdue domestic non-performing loan cycle.
Commentators on OBOR seem to fall into those who are bullish… and those who poke fun at it and either don’t like it or question China’s ability to pull it all off. On the face of it the idea seems simple enough. OBOR promises to open up markets for Chinese exports. This is, I think, somewhat simplistic and naive.
The more I’ve researched the topic the more I think there is much much more to OBOR than meets the eye. The Chinese are many things but stupid is not one of them.
Let’s take a look at some of their problems, their ambitions, and how and why OBOR really is front and centre for Xi.
We know that too much of anything is bad for us. Just ask Chris Christie’s arteries.
China suffer from too much capacity as well as too much domestic debt in their banking system. OBOR may provide a means for China to deflate this debt while exporting overcapacity.
What’s more is that they can do so while providing credit (at the state level) to countries who are in desperate need of it. Greece, as I mentioned last week, fits this picture particularly well.
Deflating the domestic credit bubble
China has a domestic credit problem, and they’re going to have to deal with that in some way or another. Certainly a harsh non-performing loan cycle can punish GDP growth but consider this…
What if China essentially moved this domestic debt problem onto the balance sheets of OBOR partners?
By the Chinese government lending these partners money for large infrastructure projects (as they’ve already been doing). When those infrastructure projects get built, a decent amount of the project works go to Chinese companies which provides them the ability to both export overcapacity all the while deflating some of the domestic credit bubble.
A pretty damn smart move if you can pull it off!
China has some $3 trillion of paper which they can trade for power and influence.
Think about it, which would you rather have: a pile of greenbacks (with the Fed at the helm who have shown in no uncertain terms that, when push comes to shove, they’ll forego monetary stature for domestic political security) or political and economic leverage globally?
The most powerful weapon brought to bear
China’s answer is pretty clear based on what they’ve begun to do.
They have already been making huge loans to strategically placed and often poor countries. These loans provide jobs and infrastructure, both of which are desperately needed by these countries.
That they’re structured on onerous terms and under conditions whereby Chinese materials and labour are often used is easily overlooked when one is broke and desperate (in the private investment world we call it distressed investing). And in case you’ve not realised it, there are a lot of desperate governments littering the planet right now.
And just like in the movie referenced, China need not have these projects even be successful. In fact, there’s a case to be made to say that they’d prefer them NOT to be successful. Having the debt repaid eliminates political and economic leverage.
Case in point: Sri Lanka’s Mattala Rajapaksa International Airport, which opened in 2013, is still largely idle and empty. What does Sri Lanka now get? An empty airport and a massive debt to China which they can’t repay. Pakistan’s multibillion dollar Gwadar port and Greece’s Piraeus port are two more.
China controls all of this debt, and by controlling this debt they can, and will, begin using this power for… ahem, “concessions”.
The world should not be surprised when military submarines with Chinese symbols start using these ports and Beijing begins having a say in how these partner countries’ “assets” are used and by whom, because, after all, China controls the debt.
Neither should we be surprised when Chinese warships begin providing “security” to these ports, or when “security and surveillance” aircraft belonging to the Chinese military begin providing “services” to the airports, gas pipelines, and so forth.
Realise that it’s in China’s interests for these countries to never ever be able to repay these debts. This provides them with extraordinary leverage at what is really a very cheap cost.
Now, I’m not that cynical that I think China doesn’t want this infrastructure to help trade. I’m sure they do. But there is likely a strong political incentive here which really amounts to a bait-and-switch loan sharking game where countries will be forced to make all sorts of concessions in order to defray debt payments.
My readers are a sharp bunch so don’t need me to point out that this is a far cheaper method than the “normal” alternatives.
Consider that the cruise missiles Trump rained down on Syria just 3 months ago cost an estimated $60 million, and the Iraq war has already cost the US government, I mean US taxpayer, $2.4 trillion.
I began doing the math on the total amount of money spent by the US government on gaining or maintaining geopolitical dominance via military interventions but my calculator started smoking and promptly blew up. But it’s definitely safe to say it’s a lot higher than these two numbers.
As I mentioned before, the economics of war have changed, and OBOR represents a vastly cheaper method of acquiring power and influence than does bombing the sh*t out of sand.
China, as mentioned a few weeks ago, is:
- Asia’s largest trading partner
- US largest trading partner
- Germany’s largest trading partner
- Australia’s largest trading partner
- Russia’s second-largest trading partner (after Germany)
- Africa’s largest trading partner
- South America’s largest trading partner.
OBOR is much, much more than simply establishing trading routes for Chinese goods as the MSM will have you believe. It is THE most ambitious geopolitical play of our lifetimes, and it’s well worth understanding what’s taking place here.
Xi’s Imperial Circle?
So the question that I have for you to ponder today is this: is China able to create a self-reinforcing mechanism whereby they export excess capacity, deflate a domestic credit buildup, build an infrastructure for future export and trade all the while having many of the participants beholden (via debt) to China allowing for unsurpassed geopolitical power… and be able to do so because, in large part, the rest of the world has their own problems to wrestle with?
Does the world wake up a couple decades later when the dollar debt has been converted (another concession) to renminbi and marvel at what an amazing chess manoeuvre was played as we all realise we have Xi’s imperial circle?
What do you think?