Economic Warfare: U.S. Allies Go AWOL

Posted On Dec 18, 2019 By Dave Gonigam

  • If Washington isn’t “weaponizing the U.S. dollar”…
  • … Then why are two long-time allies going their own way?
  • Don’t look now but biotech is breaking out
  • Greece’s madcap push toward a cashless society
  • Another obstacle for state pensions… climate change and strategic thermometer placement… the Fed and Boeing… and more!

“Let me be clear: We are not weaponizing the U.S. dollar,” said Treasury Secretary Steve Mnuchin last weekend at a conference in Qatar.

He was asked about the Trump administration’s pursuit of sanctions and other forms of economic warfare. According to Treasury’s own figures, sanctions currently target more than 20 countries and 6,300 individuals and companies labeled “Specially Designated Nationals.”

“I take great responsibility that people use the dollar as the reserve currency of the world,” Mnuchin added.

“The reason why we’re using sanctions is because they are an important alternative for world military conflicts. And I believe it’s worked. So whether it’s North Korea, whether it’s Iran or other places in the world, we take the responsibility very seriously.”

There’s a lot to unpack here. Especially when it comes to the “collateral damage” from this sort of warfare. Both overseas and here at home.

To begin with… for the people on the receiving end, sanctions are just as deadly as bullets and bombs.

We cited one example this fall. The sweeping U.S. sanctions against Iran hypothetically make an exception for food and medicine. But the reality is that banks are scared to death of processing any payments for Iran lest they get shut out of the SWIFT network and other dollar-payment systems.

Thus, hospital patients in Tehran don’t get the medicines they need. Children with cancer miss out on chemo drugs and even basic painkillers. Meanwhile, the mullahs who rule Iran — the presumed target of the sanctions — are getting along just fine, thank you.

But that’s how sanctions work. It’s not just a Trump thing. Bill Clinton’s U.N. ambassador Madeleine Albright was asked in 1996 about the deaths of a half million Iraqi children under sanctions targeting Saddam Hussein. “We think the price is worth it,” was her reply.

If Albright had been a government official almost anywhere else, she’d have been put on trial for war crimes in The Hague. Instead, she collects speaking fees these days of $50,000 a pop. American exceptionalism, baby!

When Albright was still in “public service,” Washington experienced little blowback from its sanctions. No more. This morning’s nonimpeachment headlines are living proof.

While Mnuchin was spouting off in Qatar last weekend, Turkey’s president Recep Tayyip Erdoğan was threatening to shut down the giant Incirlik air base — home to U.S. nuclear weapons.

“Erdoğan’s warning,” reports the Reuters newswire, “came in response to threats of U.S. sanctions and a U.S. Senate resolution that recognized mass killings of Armenians a century ago as ‘genocide.’”

Defense Secretary Mark Esper’s initial reply was measured and diplomatic. He said he wants to talk with Turkey’s defense minister “to understand what they really mean and how serious they are.”

Now he’s more direct — questioning Turkey’s loyalty to NATO, of which it’s been a member since 1952: “The issue here is — is, once again — what is Turkey’s direction with regard to the NATO alliance.”

The “direction” is already clear given Turkey’s purchase of S-400 air defense missiles from Russia… despite the threat of U.S. sanctions.

Nor is Turkey the only major U.S. ally defying the threat of sanctions. There’s also Germany.

Buried in a gargantuan defense-spending bill approved by Congress yesterday are sanctions on companies and governments working on the Nord Stream 2 gas pipeline connecting Russia and Germany.

We’ve been following the Nord Stream 2 saga for more than two years. This ambitious project would transport natural gas under the Baltic Sea from Russia to Germany, mostly paralleling an existing pipeline.

sanctions Target

The new line could double Germany’s imports of Russian gas — the better to stay warm in the winter and to wean its electric grid off coal and nuclear.

Given the obvious benefits to Russia, there are bipartisan howls of protest from Washington — including from Donald Trump, the supposed Russian sock-puppet.

But Berlin is defiant. “European energy policy is decided in Europe, not the U.S.” says German foreign minister Heiko Maas. “We are opposed in principle to interventions from abroad, and to extraterritorial sanctions.”

After two years of back-and-forth over Nord Stream 2, everyday Germans are likewise fed up with Washington. A majority wants to kick out at least some of the 30,000-plus U.S. troops stationed in Germany.

At least Mnuchin sees the writing on the wall, even if he can’t bring it into sharp focus yet.

“Over a long period of time, if we’re not careful, people will look at using other currencies.”

This is the “de-dollarization” process we’ve been describing since mid-2014.

Short term, more and more countries are trading in each other’s currencies, bypassing the dollar.

Long term, China and Russia — along with Iran and Turkey — are aligning into what our Jim Rickards calls the “axis of gold.” Together they’re pursuing a payments system, possibly gold-based, that’s “free of hacking, tracking or interdiction by the U.S. and free of U.S. dollars.”

It’s a long-term process. Jim says it took 30 years for the British pound to lose its status as the globe’s reserve currency — from the outbreak of World War I in 1914 to the Bretton Woods agreement of 1944 that made the dollar king of the hill. Britain was soon broke and had to abandon its empire.

No telling where we stand in the process, or how long it will take. But we’d venture to guess if you’re older than 50, de-dollarization will be one of the defining stories of the rest of your life. We’ll stay on top of it…

Like yesterday, the major U.S. stock indexes are creeping higher into record territory. At last check, the Dow industrials are up 11 points at 28,278.

The Dow transports, on the other hand, are slumping more than 1% — dragged down by FedEx. FDX is once again “guiding lower” on its quarterly earnings as Amazon increasingly does more of its own deliveries. As we write, shares are down nearly 10% on the day.

Impeachment, you ask? Yawn.

For one thing, as we’ve pointed out a couple of times in recent days, the stock market’s action this autumn almost perfectly tracks the action in late 1998 leading up to Bill Clinton’s impeachment — upward and approaching records.

Then there’s the exhaustion factor. After the House Judiciary Committee approved articles of impeachment last week, freelance political reporter Michael Tracey remarked, “It doesn’t even feel like an especially ‘momentous’ occasion, just a continuation of the same nonstop political tedium that has characterized the entire Trump era.”

Word…

While the broad stock market has touched new highs several times this year, the biotech sector is playing catch-up.

Only in recent days has biotech approached its levels of September 2018.

“It’s been great for small biotech stocks as investors come back in,” says our Ray Blanco. “A spate of buyouts has boosted the sector, and small biotechs are jumping 100% as positive news seems to be happening daily more often than not.

“We’re at a key level right now,” he says — meaning last year’s highs in the Nasdaq Biotechnology Index. And the record going back to mid-2015 isn’t that far away…

New Highs Approaching

“Will the biopharmas keep on running to new all-time highs?” Ray asks. “Positive news and deal flow will be key.

“The NBI has moved more than 23% since early October, and a 10% move between now and the end of the year could put the index at new highs.”

Well, this is one way to corral people into a cashless society.

From the U.K. Telegraph: “Greeks will be hit with a hefty fine if they don’t spend almost a third of their income electronically in an ­unprecedented bid by the new government to stamp out rampant tax evasion.”

As you might know, Greece has an enormous “shadow” economy thriving on cash transactions that aren’t easily tracked.

So here’s how the system is supposed to work. If Greek citizens fail to spend 30% of their income using debit cards, credit cards, bank transfers or online transactions… they’ll be fined 22% of the shortfall.

The mind boggles: What sort of record-keeping will this require of Greek taxpayers?

No word about that from Alex Patelis, chief economic adviser to the prime minister in the new conservative government. He’s too enamored at the thought of reeling in another 500 million euros a year in revenue. Of course…

“Regarding your take on state pensions,” begins today’s mailbag, “there are other factors adding to the lack of funding.

“In Illinois, many of the public funds are restricted in their investment options. Municipal funds with over $10 million may invest up to 65% of the fund into individual equities. Funds over $5 million but under $10 million may invest up to 65% in equity mutual funds.

“The greatest hurdle, though, is for those funds under $5 million. They may only invest 10% into equity mutual funds through insurance separate contracts. The bulk of the funds must be invested into either U.S. government bonds or other direct-obligation instruments. One can imagine the return numbers on these kinds of investments. Odd logic that requires smaller funds to restrict investments so as to prevent growth.

“Thanks for a great article and outstanding information!”

On the subject of climate change, a reader adds to Jim Rickards’ remarks about where surface-level temperatures are measured…

“Not sure where you live, but in Detroit, they’re measured at the airport. Been measured since 1950 or earlier. What’s happened at the airport? We went from planes that could maybe carry 10 to planes that can carry hundreds. I’d love to find the real number, but they’ve added hundreds of cubic feet of concrete and asphalt to handle the bigger planes.

“Around the airport? The airport was put in its location because nobody wanted it and it was surrounded by farmland. While the cows would be bothered by the planes, it isn’t like they’d be bothering humans. I’d also love statistics on traffic, but I’d expect maybe a couple of hundred cars. Now, thousands of cars a day. Those farms? Long gone. Now suburban/urban, with thousands of self-heating houses, let alone the heat picked up by the roads and houses.

“The temperature went up? Wow! Shocking! NOT!”

“I suspect that the Fed is keeping Boeing in business with all the repo funds injected lately,” a reader speculates. “Probably several insurance companies have also required the largesse of the Fed.

“This 737 Max thing is costing someone a bundle. I’m no expert, so you should check out my numbers. I imagine a 737 Max costs about $100 million to buy.  Boeing currently has 374 of them sitting around undelivered and I assume not paid for yet.

“I’m not good at decimal points that get into these big amounts, so I’ll leave you to compute how many trillions might be involved. Don’t forget to add in the liability award potential too.

“We hear about banks being too big to fail. I suspect that also applies to Boeing, just as it did for GM.

“What say ye? Thanks for all the good reading you have supplied me with over the years.”

The 5: Boeing is already too big to jail, in the estimation of the Justice Department.

Last month we took note of a Wall Street Journal story that said upfront the feds were leery about a criminal case against Boeing because: “A corporate indictment and potentially huge sanctions must be balanced against the economic and national-security risks of incapacitating the country’s second-biggest defense contractor behind Lockheed Martin Corp.”

So Bill Barr lets Boeing off the hook for the same reasons Eric Holder let the banks off the hook.

Gee, it’s as if nothing really changes no matter who’s in charge, while boobus Americanus is distracted with debates over trivia.

Which reminds us of a meme we ran across just this morning…

Impeachment Meme

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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