The System and Drums of war, QE and QT, fragility, corruption (cont)

The System might be broken, but is it on 'The Eve of Destruction'? Today's links.

Eve of Destruction written by P.F. Sloane, 1965, age 19.

Yeah, my blood’s so mad, feels like coagulatin’

I’m just sittin’ here just contemplatin’

I can’t twist the truth, it knows no regulation

Handful of senators don’t pass legislation

And marches alone can’t bring integration

When human respect is disintegratin’

This whole crazy world is just too frustratin’

And you tell me over and over and over again my friend

Ah, you don’t believe we’re on the eve of destruction

Eve of Destruction sung by Barry Mcguire

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The System and the drums of war

The future has looked even more ominous these last few weeks. Sabre rattling is getting louder, even as Chinese State Councillor Wang Yi travels to Moscow to try and broker a peace plan between Russia and Ukraine. As the Financial Times reported on Tuesday, 21 February:

The Americans have not taken kindly to this initiative. In line with the manufactured phoney ‘panic’ orchestrated around a supposed Chinese spy balloon, and designed to placate extreme right-wing Republicans, so US Secretary of State Anthony Blinken dismissed China’s offer of peace negotiations.

Just another beat sounding the drums of war.

Nor is Putin impressed. Today Russia’s warring dictator announced that Russia will no longer participate in New Start, the last major remaining nuclear arms control treaty with the US.

So the war-mongers have it.

And at this moment of global geopolitical tension the Biden administration seems to be setting the stage for an attack on China. That attack will take the form of financial sanctions, like those imposed on Russia.

In May, 2022, Janet Yellen, US Treasury Secretary made clear that it was not legal for the US to seize official Russian assets…And still the Biden administration went ahead.

david kersten @davidkersten

May 19, 2022. Nobody can trust the US not to seize their assets. The trust is gone. It's not coming back.

reuters.comYellen: Not legal for U.S. to seize Russian official assetsThe United States does not have legal authority to seize Russian central bank assets frozen due to its invasion of Ukraine, Treasury Secretary Janet Yellen said on Wednesday, but talks with U.S. partners over ways to make Russia foot the bill for Ukraine’s post-war reconstruction are starting.

And now the Biden administration has China in its sights.

Peter Zeihan @PeterZeihan

The first formal hit will be financial sanctions. We are now at the point that US investors in China shouldn’t even plan on getting their cash out.

cbsnews.comChina considering providing “lethal support” to aid Russian invasion of Ukraine, Blinken saysSecretary of State Antony Blinken said that Beijing may provide weapons, and confirmed Chinese companies are giving non-lethal support to the Russian effort.

Of course investors will rush for the exits. But being forced to do so will lead to a reckoning with The System - globalised, largely unregulated financial capitalism, that had until now, elevated the interests and protection of mobile capital above all other interests.

The System, it is clear, is now broken.

As Kathleen Tyson noted this month, and as referred to in my post warning of a “Sudden Paralysis of the System” - it is US unilateral sanctions that have broken the current system, defined by some (not me) as ‘Bretton Woods II’.

Kathleen Tyson @Kathleen_Tyson_

@RobinWigg US unilateral sanctions starting China 1949 were always violations of customay international law that accorded official reserves with diplomatic immunity. Venezuela (2019) and Afghanistan (2021) and Russian (2022) expropriations of official reserves have broken Bretton Woods II.

So American and other western investors in China will pay the price of American unilateral sanctions. They may not plan to rush for the exits, but they will fight and are probably fighting now, behind the scenes, to have their investments protected. As Ms Tyson also notes, the return OF your money is even more important than the capital gains that can be made ON your money.

Kathleen Tyson @Kathleen_Tyson_

@MacroAlf If it is foreigners wary of losing their money to US sanctions then interest rates are irrelevant. In the era of sanctions the return OF your money is more important than the return ON your money.

The System and global liquidity

For a while now I have been pointing out that thanks to central bank Quantitative Tightening, liquidity (i.e. buyers) in global markets had been drying up…I was not alone of course. Tuomos Malinen warned in November, 2022 of an outright collapse of market liquidity..

Tuomas Malinen @mtmalinen

Past week I promised a (long) thread on global #liquidity and so, here goes! I have been analyzing the current state global liquidity since early November. Then I warned on possibility of an outright collapse of market liquidity. 🧵1/25 mtmalinen.substack.com/p/global-liqui…

mtmalinen.substack.comGlobal liquidity collapse approachesThe hidden fracture lines of global finance

But liquidity has not collapsed. That does not mean that the system has somehow miraculously stabilised, and is less fragile. It has not, and yes, it is still fragile. The explanation for the latest developments is that China stepped in and stepped up.

Tuomas Malinen @mtmalinen

But there was more. China (i.e. the PBoC) flooded the global financial system with money (liquidity) in November. Currently, China is dominating the landscape of global money supply. 18/

In other words, at this moment of acute geopolitical instability, as central banks tighten monetary policy (with higher rates, and by selling, not buying bonds); and with US politicians drum-beating - US investors active in global capital markets find themselves vulnerable to, and dependent on, Chinese policies and actions.

Ironic, or not?

The System and Corruption

Every week brings fresh news of vice, fraud, and corruption germinated and sustained by the parasitic global financial system.

Two examples of fraud and corruption with societal and political consequences are currently lighting up financial media. The first is the bankruptcy scandal of Sam Bankman-Fried’s crypto empire that was FTX and Alameda Research. The company collapsed in just a week into what the FT called “a steaming pile of financial toxic waste”. Sam Bankman-Fried (known as SBF) founder of FTX woke up one Monday morning in November and watched (from his luxurious Bahamas pad) as the crypto companies he founded, valued at about $40 billion disintegrated.  Soon after, in December, 2022, Bankman-Fried was arrested in the Bahamas, and charged by US authorities with orchestrating “one of the biggest financial frauds in American history.”

Even more dramatic – and politically consequential – is the alleged “brazen stock manipulation and accounting fraud scheme” which through offshore shell entities based in Mauritius, manipulated and inflated the valuations of the Indian Adani Group’s listed companies. Those allegations were made on the 24^thJanuary this year, when Hindenberg Research, described by Reuters as a “forensic financial research firm” published a stunning blog, titled Adani Group: How the World’s 3^rd Richest Man Is Pulling The Largest Con in Corporate History.

Arundhati Roy had a brilliant piece in the Guardian (18 February) explaining the links between Adani and India’s Prime Minister:

She describes the Modi-Adani close relationship as India’s “twin towers” - now under attack by the BBC on the one hand (see the BBC programme examining the relationship between Narendra Modi and the Muslim minority) and Hindenberg Research on the other. The Modi-Adani relationship has been tremendously profitable for one of the world’s richest men.

In the nine years of Modi’s tenure, Adani’s wealth grew from $8bn to $137bn. In 2022 alone, he made $72bn, which is more than the combined earnings of the world’s next nine billionaires put together.

The Adani Group now controls a dozen shipping ports that account for the movement of 30% of India’s freight, seven airports that handle 23% of India’s airline passengers, and warehouses that collectively hold 30% of India’s grain. It owns and operates power plants that are the biggest generators of the country’s private electricity. The Gujarat model of development has been replicated at scale.