Friday thoughts, War, Debt, money.

WILL WAR SOLVE FINANCIAL CRISIS? 

FEAR OF EXCHANGING ASSET PROFITS FOR DEVALUING CURRENCY

The adedge that war is a great stimulus to a struggling economy may no longer apply. France, Uk and Germany all have Debt to GDP ratios over 100%, the U.S. is 125%. In former wars, money was borrowed to finance the war and then stimulated the economy from the increase in deficit spending. Most western countries are already in serious debt problems, they would have to attempt to confiscate assets to fund a war. The head of the EU has suggested using the EXCESS savings of citizens to fund war. I suspect such attempts to fund more war will be resisted very strongly. By the way, Russia has a 19% debt to GDP ratio.

BRICS countries average around a 50% Debt to GDP ratio.

In former wars these countries had extensive manufacturing capacity, no more, it is unlikely they could produce enough for a long war. Leaving only resorting to nuclear weapons as a strategy.

We see all markets at record highs, and without the underlying real value, this would indicate that it would be good time to take profits. Problem is, it feels uncomfortable to take profits, pay taxes and exchange these assets for dollars with an uncertain future. I suspect this is, at least for now, keeping these markets up.

Central banks, on average,  now have the majority of their reserves in gold and not treasury bonds.

It is being reported that the U.S. is withdrawing troops from Iraq, Russia has quietly evacuated its diplomats from Israel. Large amounts of weapons and supplies are being accumulated. Iran is feverishly preparing its defense. Some believe that another Israel/Iran engagement is imminent. Is this why Trump has handed management of the Ukraine conflict over to the EU?

Just a few things to think about over the weekend.

Are new tariffs on India, the last straw?

 INDIA APPEARS UNWILLING TO SUBMIT

WILL IT NOW FOCUS ITS FUTURE ELSEWHERE?

Yesterday the Trump administration at the behest of Lindsey Graham and the U.S. senate put 50% tariffs on India. It is supposedly because India is buying oil from Russia. Oil that mostly ends up being shipped to Europe. India has claimed hypocrisy, as the U.S. is till buying fertilizer, uranium and other products from Russia. It seems both the U.S. and Europe are willing to exempt items that they feel are essential for them, but India cannot. It is reported that Trump called Modi 4 times in recent days, but got no answer or call back. India and others may soon make the decision that trade with the U.S., while important, can be eliminated by nurturing trade with its neighbors and more friendly partners.

We also saw this week a result of trade wars, Intel, once the symbol of the U.S. much touted technology economy, being in effect bailed out by the U.S. government.  Much of this is the result of U.S. government forbidding sales to China of certain silicon chips. China retaliated by going full steam into the chip business and now outselling  U.S. producers by a wide margin. We also see China reduced purchases of U.S. grain and moved their business to Brazil, Argentina and Russia. Then Europe is also being pressured to adopt U.S. policy and with their economies already on life support, it can be expected to cause further loss of market share. The hope of isolating certain countries may end up isolating the 750 million population western countries from the other 6 billion of the world's population. 

India has been in consultation with both Russia and China in the last weeks. India has sought a position of neutrality and non-alignment, while under extreme pressure to take geopolitical sides. Neutrality is no longer allowed, the Bush doctrine of " You are either with us or our enemy " is still in effect. India is already considering cancelling it F-35 orders and buying aircraft somewhere else.

This weekend is the 25th summit meeting of the Shanghai cooperation organization in Tianjin, China. It will be attended by 20 world leaders and 10 international organizations. Xi, Putin, Modi and leaders or representatives of Egypt, Iran, Pakistan, Malaysia, Indonesia, Vietnam, Cambodia, Laos, Myanmar, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Belarus, Afghanistan, Mongolia, Turkey, Sri Lanka, Turkmenistan, Armenia, Azerbaijan, Maldives, Nepal and representatives of the gulf nations. Un.secretary Guterres will also attend. The theme is viewing the multi-polar world.

This makes up the vast majority of the Asian nations and one must wonder how this is viewed by South Korea and Japan, who are also under severe pressure to take sides by supporting Ukraine and sanctions on China. It may become a very hard decision, since they do much business with these countries.

Japan who was pressured by the U.S. to stop selling certain machine tools to China resulted in China cancelling billions in orders and sourcing them from Russia.

We will see how all this works out, can the west pressure the rest of the world to submit or will it end in the isolation of the west from a majority of the worlds commerce.

The EU coalition may be willing, but not able.

 INFIGHTING AND ECONOMIC CRISIS WILL END UKRAINE SUPPORT 

INTERNAL THREATS MORE REAL THAN RUSSIA

We hear all kinds of proposals for the European "coalition of the willing" claiming they are ready to give support to Ukraine. So far Hungary and Slovakia have made it clear they are out, as far as more support for Ukraine. Ukraine has now retaliated by cutting off their oil that transits through Ukraine, even though they are dependent on electric energy from those countries. There is real threat of escalation of this situation between Ukraine and Hungary and Slovakia. 

Poland announced this week that it is cutting off much of the aid to Ukrainian refugees as they can no longer sustain this drain on their resources. Poland also is very doubtful to place their troops at the disposal of this coalition.

Germany, now under Merz is still saber rattling at the same time he has announced an increase taxes, maybe a wealth tax, cutting of pensions, and other social benefits. At the same time he has pledged another 9 billion to Ukraine and a massive plan of rearmament. One must wonder if there is something wrong in those calculations. The German economy is floundering,  mostly due to massive increases in energy costs, due to there embargo on purchasing Russian energy. As the war drags on, they will be getting weaker, not stronger.

Then there is the Uk, where many are predicting actual economic collapse and a need to be bailed out by others. Their debt is exploding, social services suffering and there bond market is suffering. It is amazing that they are still talking massive military spending and recruitment, It appears to be all wishful thinking.

France's economy and military may be in better shape, but they are having serious social problems that can only be magnified by any move to send troops to Ukraine. Much of their country is powered with nuclear energy and has proved to place them in a better place than its neighbors.

Indications are that Italy is not going to war in Ukraine.

Talk of being willing is very costless, anything more will become more unlikely as the days go by.

How the debt and dollar crisis is unavoidable. Part 2.

 INTEREST PAYMENTS TO EXPLODE

EXPORTED INFLATED DOLLARS TO RETURN HOME

The 1970's saw an average inflation rate of 6.8% and a peak in 1979 of 13%. In 1980 it was 12.5 %. Some of this was due to the policy of OPEC, the "Organization of oil exporting countries", seeking to control the price of oil by production regulation. Before OPEC, the price was set by the New York and London commodity markets and was manipulated to never account for the inflation of the currency. The 1970's saw an increase in the price of imported oil and a embargo in 1974, in reaction to U.S. policy in Israel and an effort to offset inflation of dollars that was the currency that oil was traded in.

Also in the 1970's we saw the introduction of the "Clean Air Act" and OSHA, the "Occupational health and safety act" The increase in energy price and stability,  coupled with these new laws, which were often implemented without any consideration for the ability of many foundries, steel mills and other manufactures to absorb these costs quickly began the deindustrialization of the backbone of a manufacturing economy. Small operators were first to go, but in 2 decades these industries were importing products from Japan and soon China, after the Nixon's softening relations in 1972. 

Manufacturers soon realized they could import products for less costs and avoid the risks of government regulation, labor disputes and unstable material prices. The economy transitioned to a consumer market and manufacturing was replaced by services, entertainment and paper financial transactions. I argue that wealth is created by the combination of materials and labor to produce a product of more value than the imputed materials and labor. China is a perfect example of that reality, as it was for the United States in late 19th and 20th centuries.

At the same time government realized that the combination of lower priced imports and the exporting of inflated U.S. dollars to pay for those goods, kept domestic inflation under control. This was also coupled with taking out of the price index items like energy and other costs that reveal actual inflation.

Exporting countries soon found they had lots of dollars and often placed them to earn some interest on U.S. debt. Government debt was advertised as the safest investment in the world, even though, due to inflation, its buying power was steadily decreasing.

The dissolving of the Soviet Union in 1991, was an opportunity to change direction and address the unsustainable path of debt. It was labeled, " The peace dividend" and the government came close to balancing the budget in 1993, but it was short lived, as there are incentives for more spending and debt. More spending often translates to more political power and more debt is a major industry of Investment Banks who earn steady commissions on all those transactions.

Soon after the collapse of the Soviet Union, many in government saw the opportunity of being the only remaining Superpower to use that power to fashion the world as they saw fit. Again the ability to finance, now war and and rapidly increasing debt was aided by exporting inflated dollars around the world. 

As the 21st century arrived it was becoming apparent to many that the country was on an unsustainable financial path. This coupled with the increase in policy of the U.S. to intervene in the financial and political affairs of other countries to force social, and cultural changes and assume control of the resources of other countries. It began a period of endless war and support for war, all financed with more debt.

The U.S. dollar which was the world reserve currency due to its being, "as good as gold" was now often used as a weapon to force submission to U.S. will and soon there was in increase in resistance to that policy.  This resistance was coming from allies and competitors. 

Japan, China and other holders of U.S. debt began to feel U.S. debt may not be a good investment and started lower their holdings of that debt. At one time transactions in world trade were conducted in over 80%  with dollars, it is now near 50%. Settlements are increasingly being made in other currencies and in platforms not controlled by the U.S. and EU. 

The interest on the debt is now exploding and is the biggest item in the budget and it is about to get much bigger when debt that matures that was 1%, is now going to be over 4%.  $9.3 trillion matures in the next 12 months and 70% of U.S. debt mature in the next 5 years, all at much higher rates than before. This can only result in more deficit spending and more debt, an unsustainable reality.

The other shoe that will drop is that as the world moves away from the dollar transactions and liquidates U.S. debt, where are all those exported dollars going to go? They are going to attempt to be repatriated back to the U.S., one way or another.

We have seen gold buying by central banks around the world with Gold now trading at over $3350. an oz., silver is now beginning to also increase as is other stores of value.  Much of this is caused by the liquidation of dollar reserves into precious metals and other assets.

It took 50 years for the U.S. to export inflated dollars around the world, but it will not take 50 years for holders to attempt cash out. While they can spend those dollars on many things around the world, it may be a declining demand for dollars and then there will be attempts to use them in the U.S.  The U.S. stock market may explode and real estate prices increase, at least until the desire to unload those dollars in realized. 

It is possible that real estate will become unaffordable for Americans and Stocks will be in the stratosphere, but when those dollars are finally repatriated, demand will inevitably disappear and those exported dollars will evaporate, like the dew exposed to the morning sun. 

How the debt and dollar crisis is unavoidable. Part 1.

 50 YEAR ROAD TO FINANCIAL CRISIS

NO LONGER ABLE TO POSTPONE OR MANAGE

The United States now has a national debt of $37 trillion and is growing by the day.  While many now believe this has been talked about forever and the system is still functioning, they assume it can be maintained forever. This crisis has been in the works for over 50 years and all the opportunities to seriously address it have been postponed or managed by covering up with financial gimmicks.

The debate between Keynesian economics and the Austrian school of economics was conducted in the early part of the 20th. century, with the Keynesians winning out in most of the western countries. The Austrians were firm believers that money was an asset and the best store of of wealth was gold and silver. That if the money was secure, market forces would be able to minimize distortions and excesses in the economy. 

The Keynesians believed that the economy could be controlled and stabilized by raising and lower interest rates. Raising rates in periods of overstimulation or speculation and lowering them when the economy stagnated. They also believed that debt accumulated by the government in stimulating the government through deficit spending would be paid off in times of prosperity. 

While all this occured before my time, I did witness the debate in the 1960's and 70's about the idea of engaging in a practice of perpetual deficit spending, targeting a 2% annual inflation rate. The sound money advocates vehemently opposed this idea and the advocates sold the idea that gold and silver backed currency was an antiquated idea and could not allow growth in a modern economy.  While there never was a vote by anybody or a definitive moment of this change in monetary policy, it did happen. 

The results of this debate was already going on in that in the early 60's, the price of silver began to exceed the face value of the currency or coins. Some, my brother was one, who had a lower middleclass income, began picking up bags of silver at the bank and either hoarding them or as more wealthy often did, had then melted and refined, with a profit in paper currency. This led to the elimination of silver by the treasury in 1964. While silver was no longer minted by the treasury, it was still legal to be owned.

This was reminiscent of the executive order by President Roosevelt in 1933 for citizens to turn over their gold coins, under penalty of law, in exchange for a paper $20 currency. One year later, in 1934, He revalued gold at $35.00 an oz., thereby devaluing those paper $20 notes by 60%. The poor and uninformed turned in their gold and were instantly made poorer, while the more sophisticated hid their gold. It was illegal for citizens to own or trade gold until 1974 when it was again allowed by law, under Gerald Ford.

The last balanced budget of the U.S. government was in 1969, much of this had to do with new social programs passed in the late 60's and the Vietnam war. The U.S. has not had a balanced budget for 56 years. 

While citizens were not allowed to own gold, the government still respected their promise that paper dollars could be exchanged for gold at $35 an oz. by foreign governments. Foreign governments soon saw what was happening and began to exchange paper for real gold. This was stopped by Nixon in 1971 when he temporarily closed the gold window, it has never reopened.  He then revalued gold to $42. an oz, another default,  and it remains officially price at $42. an oz. when the market price is now over $3300 an oz.. Question, did gold up in value, or did the currency become less valuable? These developments ended any real connection of paper money having any real backing. In effect, money became a debt instrument of government, rather than asset in your control.

At the end of WW2 the U.S. was the only unscathed developed economy in the world. Many nations had changes of governments, devalued currencies and many were destitute. The U.S. dollar, backed by gold, was considered, " as good as gold" It became the preeminent store of value all around the world. Again, all that began to change in 1969. 

At the end of WW2, the U.S. was the manufacturing giant in the world, It had a world were materials and machinery were needed to rebuild the world and the U.S. was in a position to satisfy that demand. Little competition and growing demand at home and around the world. The best situation possibly in U.S. history.

At the same time as the U.S. began the policy of permanent deficit spending, the world was recovering from WW2. Japan and Germany were growing and soon began offering manufactured goods that were very competitive around the world, including the U.S.  Imports of quality cars, motorcycles, electronics and appliances began to compete with U.S. products, both at home and around the world.

Part 2 tomorrow.

Is Trump moving the U.S. from a co-belligerent to a mediator?

 MOVING THE RESPONSIBILITY FOR UKRAINE TO THE EU

IF U.S. IS OUT, THE UKRAINE PROJECT IS OVER

It is becoming increasingly clear that Trump is in the process of exiting direct involvement in the Ukraine conflict. While he has pledged to continue making weapons available, they are to be sold to the EU countries and then given to Ukraine.  We will have to wait to see if they can come up with the Euro's or if the U.S. can provide the weapons due to a severe shortage of some weapons for the U.S. defense stockpile. 

While we keep hearing that the EU countries are in dread fear of Russia, we see little material evidence that they have increased troop strength, instituted a mobilization or actually increased spending. They have made pledges, but pledges are meaningless without action.

Then, without U.S. overseeing the EU, it can be expected that squabbling will increase to see who is going to exert leadership, the usual, French, who have a bigger army and the English who still think they are the British empire and worst of all, are they really ready to encourage German rearmament. That will be another story in itself.

It is unlikely that any of the current EU leadership is capable of engaging in negotiations with the Russians. They may have all burned their bridges. It may require new leadership, but the reality is that a fire is under their behinds as Russia is continuing to move west every day. Someone has to step up and open up communications with Russia. I expect that Trump's strategy is for them to start talking to Russia.

Then the question is, is the U.S. going to pull their advisers out of Ukraine? These are people that operate sophisticated Hi-Mars and Patriot systems. Then there is a large number of CIA and other operatives in the country. One of the reasons for a call for a ceasefire is Russia is now more effectively targeting NATO personnel. When you see apartment buildings and hotels hit, you can assume they are housing foreign advisers.

Of course, this will all be severely objected to by those who are willing to fight to the last Ukrainian.

As for Ukraine, the proposed meeting between Putin and Zelinsky is not yet scheduled, We can expect that Trump wants Zelenitsky to open a dialogue with Putin and then he will act as mediator. It would be a very difficult meeting.

A leaked document from the Ukrainian defense department revealed that Ukraine has suffered 1.7 million deaths and missing. It was 188.500 in 2022, 405,400 in 2023, 595,000 in 2024 and so far 621,000 in 2025. It can be expected these numbers will find their way into the Ukrainian public.

It seems Russia has not altered their strategy of just exerting continuous pressure everywhere. Ukraine has launched several counter offensives and Russia has moved back, as has been their policy. Inevitably Russia will retake those areas in the future. Russia seems to believe that time is on their side as Ukraine and its supporters are being weakened by this attritional strategy.

Are security guarantees NATO expansion by another name.

 EUROPEAN SECURITY ARCHITECTURE SHOULD INCLUDE RUSSIA 

STILL STUCK IN US VS THEM

We now hear that Russia proposes that negotiations on security guarantees need to include Russian input.  This is considered by the European countries as outrageous and impossible. Any peace deal that does not address the long standing and divisive political situation will only insure more war in the future. And more war can inevitably lead to a catastrophic result for Europe and the world. 

In every discussion with the EU its always about maintaining and strengthening a military alliance in opposition to Russia. With the end of the Soviet Union in 1991 there was a opportunity for another arrangement to replace the cold war and the NATO/Soviet Union situation. There is much evidence thats what Russia wanted, but it seems there were many in the west who desired the cold war to continue. That fear of a permanent villain enabled continued military expenditures and covert intrigue for power to actually never end. There now may be second chance to pursue a new agreement that leesens this mentality and is the only real opportunity for lasting peace.

A peace deal to end the hostilities in Ukraine without a serious reevaluation of the political situation will only be temporary respite. It seems the EU wants a ceasefire or temporary pause to rearm and continue this confrontation with Russia. Sadly, many here in the U.S.  have the same desires. 

This Ukraine project, which was born in the U.S. intelligence and state department, has moved to divide the world. While they want to blame Russia, the result has been a Russian/China alliance and the escalation is now pushing India into a military alliance with Russia. It has encouraged a growing economic alliance that further divides the world. The western world has been weakened politically, economically and militarily, yet refuses to acknowledge that only decline and disaster will be the result.

While Russia proposed a new architecture before the breakout of the Ukraine conflict, even discussion was rejected, there is now another opportunity and it may be the last.

It would need to address covert political interference that seeks to deny any country to seeking a neutral status, The Bush policy of you are either with us or our enemy is a juvenile, divisive and destructive policy. The expansion of NATO to include the former Soviet countries is just one example. The same mentality is at work in southeast Asia, South America and Africa. Switzerland and Sweden were neutral countries for decades with great success and a stabilizing influence. 

We as Americans have witnessed the covert policies of the U.S. intelligence agencies, perfected around the world,  being employed right here at home for political advantage. Not only the world, but this country will not survive if a change of direction is not made, now.  Limiting the CIA to the collection of  accurate intelligence information would be good first step.

We have witnessed the demonization of many counties and political leaders by our media in cooperation with their intelligence community handlers and it is till going on. An independent media should have no connection to covert intelligence operators. 

While many will reject and deny any reevaluation, particularly if it is proposed by Russia, it is now an opportunity for a new era of cooperation and mutual prosperity. Why are they so afraid to engage in discussion and negotiation? What good can come of a policy that refuses to listen and hear and only demands submission and compliance? Are they afraid that possibly others may make valid points that they cannot refute?