The New Cold War
For those of us who lived through any of the 1948-1991 period of the Cold War between The United States and the Soviet Union, we remember a bi-polar world. A world where most countries aligned economically and militarily with either the United States or the Soviet Union. The Soviets thought of themselves as a great superpower equal to the United States. While they might have been militarily, they couldn’t hold a candle to the United States economically and a country cannot be considered a superpower if doesn’t possess both types of control. Ultimately, the command-and-control economy of the communists couldn’t compete with the United States free market capitalism and their economy collapsed, triggering the dissolution of the Soviet Union in 1991. What remained was the core Russian Federation which morphed into a corrupt kleptocracy headed by Vladimir Putin since 1999.
As former Ukrainian diplomat David Hunter described in my previous podcast, post-Soviet Russia started off as a corrupt deal between Putin and disgraced Prime Minister Boris Yeltsin who served as the first President of the Russian Federation. Putin, the former KGB agent, had the goods on Yeltsin and threatened to expose his family’s corruption. They made a deal where Yeltsin would support Putin’s bid for power in exchange for immunity from prosecution. And so began the sordid Vladimir Putin era. A real “democratic process.”
Putin has made no secret of his belief that the fall of the Soviet Union was the worst geo-political catastrophe of the 20th century nor of his desire to return many of the old Soviet states into his orbit. Putin is a skilled liar, but I think we must take him at his word on these two items. The world is watching his brazen invasion of Ukraine that is eerily reminiscent of Hitler’s invasion of the Sudetenland (Czechoslovakia) in 1938. We should all hope the parallels end there because this is the first mass invasion of a large country in the nuclear era. Given that Putin has already made not-so-veiled nuclear threats if the West entered the war to aide Ukraine, we should all hope that this is Putin the liar speaking. But can we really afford to not take his threats seriously?
As I discussed in my March 4, 2022 blog, Wake Up. Things Just Got Real, the strategy that allowed the U.S. to win the last Cold War, was rooted on the idea of mutually assured destruction (MAD) where neither side can win an all-out nuclear war that would decimate the planet. Once that was understood, it became a war of competing economic models and we know who won that. Winning the New Cold War will prove to be more difficult due to some important factors that didn’t exist in the prior Cold War.
1. China, a third world country then, now rivals United States economically and militarily.
2. China and Russia were adversarial during the Cold War, yet now have a deep economic and military partnership.
3. There was no globalism as we know it now.
4. The US dollar’s status as the preeminent world reserve currency is now under serious threat.
China, Russia, and Globalism
While the clear and present danger seems to be Vladimir Putin’s Russia, China is at the center of the biggest challenges facing the United States. Historically, China and Russia had deep seated animosities and centuries of distrust. Communism did nothing to offset this as nationalism proved to be a far more potent force than ideology ever could. Fast forward to February 2022 where China and Russia jointly declared a partnership that has “no limits.” The organizing principle for this partnership is a shared hostility towards the United States and its allies and replacing it as the global hegemon. Let that sink in.
Globalism, as we know it today, began in 2001 with China’s entry into the World Trade Organization (WTO) and the opening of its economy to the rest of the world. At the time, Chinese commentators warned that the country was "dancing with wolves," exposing itself to attack by ravenous competitors in a potentially fatal misstep. Instead, China has become the workshop of the world, as whole industries have disappeared from America and Europe. Membership in the WTO, which sets global rules for trade and investment, has proved to be an unmitigated success for China, with unprecedented economic growth since 2001.
While there have been undeniable benefits to China being at the center of the global supply chain, it has come with significant costs, some of which we are only now able to see. China has become an expert getting around the rules as its state-capitalist system is incompatible with much of the WTO structure. One of their most egregious violations is the industrial-scale intellectual property theft which has benefited their major industries and their military. Former Microsoft CEO Steve Ballmer famously said in 2011 that though as many computers are sold in China as in the US, China represented only 5 percent of its Microsoft’s US revenues because of software piracy. The fact is that the rules-based free trading world that the United States has guaranteed for nearly 80 years, has been exploited by an authoritarian imperialist adversary whose goal is to replace it as the center the new world order.
United States Dollar Reserve Currency Status is at Risk
To review, countries hold currency reserves to pay for imports, service debts, and moderate the value of its own currency and weather economic shocks. Since most international trade is done in US dollars, many countries can’t borrow or pay for foreign goods in their own currencies, and therefore need to hold reserves to ensure a steady supply of imports during a crisis assuring creditors that debt payments denominated in foreign currency can be made. The US dollar has long been the most held foreign currency at over $15 trillion, with China representing about 23% of the total. As of 2020, the dollar represented over 62% of the foreign exchange reserves held by other countries. Due to the profligate money printing by the Unites States and other western countries, central banks have begun to buy more gold as a reserve asset. However, gold still only represents 13% of global reserve assets, with foreign currencies representing 78% and 9% by Special Drawing Rights (SDR) at the IMF.
The recent US freezing of $630 billion in Russian central bank assets and the 2021 suspension of Taliban-controlled Afghanistan’s dollar assets and SDRs, raises serious questions about the value of fiat currency as a “hard” reserve asset. If sovereign reserves can be easily frozen, this could cause central banks to shift more towards gold as a reserve asset again, while also focusing on keeping larger industrial/agricultural commodity inventories. Scarce commodities, physically held within the country’s borders, can’t be sanctioned or frozen. A few weeks ago, Credit Suisse published an article by former Federal Reserve analyst Zoltan Pozsar, called “Bretton Woods III” which highlights the problem at hand.
“We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and contribute to inflationary forces in the West. A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves…”
Last week, the Wall Street Journal reported that Saudi Arabia is considering accepting yuan for some of China’s oil purchases. Since 1974, Saudi Arabia agreed to sell its oil only for US dollars, in exchange for a strong military partnership with the United States. However, as US oil purchases from Saudi Arabia have diminished and China’s oil purchases have grown over the years, China has far surpassed the United States as the largest buyer of Saudi oil. Despite the heartburn this will create in Washington DC, it is a perfectly rational move for China, an adversary, and Saudi Arabia, who has drifted apart from the United States since Joe Biden became President. When it is cheap, oil represents about 2.5% of global GDP historically. However, when oil consumption exceeds 4.5% of global GDP, the world economy typically faces either recession or stagnation, as with the 1970s stagflation monster. Together with inflation, the Ukraine war and other geo-political factors, we could see oil consumption hit 13% in 2022. Wow!
With oil remaining at current levels, there would be almost no way to avoid a serious global recession and indeed many leading economic indicators are beginning to flash red. And in recessions, the central bank historical playbook has always been to print more money, which fuels the ugly stagflation outcome, and pops real estate and stock market asset bubbles, and further diminishes the value of the US dollar as a reserve asset. Add this to the already huge federal debt ($30 trillion) and deficit ($1 trillion), and you are beginning to see the box Washington DC and its central bank has put its citizens into. These kinds of imbalances often lead to social unrest and signal weakness that adversaries exploit.
What Can You Do?
Well let’s first quickly discuss what individuals can do. The short answer is not much. When asset bubbles pop, there are not many places to hide. Stocks, real estate, collectibles all decrease in value as the economy plunges into recession. But if the Feds continue to print money to monetize the federal debt, the classic response for individuals over history is to own hard assets like gold, commodities, agricultural land and potentially some residential real estate in desirable places. You should probably also own some guns and ammo which is an insurance policy if things really get bad. I also recommend owning high quality crypto like Bitcoin and Ethereum because of their portability and inability to be frozen by insolvent governments. If you’d like to learn more about crypto, check out my podcast Episode 33 and Episode 36 with the folks who manage my crypto investments. If you are interested in getting connected with them, email me at jim@jimfini.com and I will connect you. I would also recommend listening to the Episode 30 podcast with my guest Lyn Alden, a savvy investment analyst who understands and shares my concern on the big macroeconomic and geopolitical pictures.
What Can America Do?
Now let’s talk about what America can do collectively to mitigate the worst of the inevitable hard times that are in our future. First, it is important to fully embrace that our country is under threat both internally and externally. Believing America will always be great because we have always been great reveals ignorance of history. The United States is showing the classic signs of an empire in decline: large income inequality gaps, deep political dissension, government that cannot afford promises made to its citizens, money going bad and external military threats from rising challengers. Every empire in history, from the Romans, Chinese, Dutch, Spanish and British have gone through some version of this. The collapse typically includes some kind of war and/or internal revolution where a new world order emerges on the other side. For more information on the cycles of history, check out my Episode 40 podcast or my September 2021 blog, Rome, China, the United States and the Cycles of History. Lest you think that I am a lone wolf in this view of America in decline, check out billionaire hedge fund smart dude Ray Dalio’s series on the changing world order. It seems like he borrows heavily from a 20 year old book, The Fourth Turning, that I highly recommend. I’ve read it three times and its predictions are spot on.
So, here’s a short list of things that I feel should be top priorities for the United States in order meet these challenges.
Strengthen our Defense
The budget deal recently signed by President Biden includes $728.5 billion in discretionary funding for the Department of Defense for fiscal 2022. That’s an increase of nearly 5% over fiscal 2021 defense spending levels. However, this increase in defense spending cannot be a one and done exercise. We must brace for several years of higher defense spending to build more ships and subs, modernize our nuclear arsenal, develop and deploy hypersonic missiles, and build our cyber and space capabilities. Of course, we need to deploy some of these capabilities with NATO so that there is a credible deterrent to Putin again. We need to double down on the GI Bill so that we attract the best and brightest of our young people. I’ll gladly pay higher taxes to subsidize college for brave young citizens who step up. Historically, our armed services have been the most egalitarian institution in our society. The Air Force I served in was blind to race, wealth, gender, and sexual orientation. The only thing that mattered was doing your job.
We also need to better oversight on how the military spends its money. There has been too cushy of a relationship with the big defense contractors for far too long. The United States Department of Defense continues to be the only unauditable federal department, with trillions still unaccounted for. A 2016 US Inspector General report states that “Army and Defense Finance and Accounting Service Indianapolis personnel did not adequately support $2.8 trillion in third quarter adjustments and $6.5 trillion in yearend adjustments made to Army General Fund data during FY 2015 financial statement compilation.” More recently, Bloomberg’s Anthony Carpaccio reported in 2020, that the Department of Defense made $35 trillion in “accounting adjustments” in 2019.
Apparently, these accounting adjustments represent a lot of double, triple, and quadruple counting of the same money as it got moved between accounts within the Pentagon. According to government data, there were 562,568 adjustments made in the Pentagon’s books in 2018. These adjustments have been going on for decades and are just carried forward into future years from prior unacceptable reports but still fail to explain where the money has gone. This is insane. Why isn’t this a huge news story?
In my experience auditing the books of companies I was interested in acquiring, these kinds of adjustments are made to hide something. Sure, there is some graft and lining of pockets but I’m guessing the vast majority of these accounted trillions are being funneled into so-called Special Access Programs (i.e., “black projects”) that a small cabal of insiders absolutely do not want political leaders or the public knowing about. Lockheed Skunk Works is likely one of the beneficiaries of this money and they advertise on their website that “85% of the work we do is classified and executed in secrecy to protect our national security and ensure our armed forces maintain an edge over any threat.” Last year, a video was leaked of a mystery aircraft at a top secret Air Force base in California. The voice on the video can be heard saying: "What the f**k is that?" Jeff Babione, general manager of Lockheed's Skunk Works arm said he "can't comment” on the object in the video at the Lockheed facility. Maybe they found a way to reverse engineer tech from that crashed alien spacecraft they recovered in Roswell, New Mexico in 1947. 😊
The Constitution bequeaths very limited powers to the federal government but protecting its citizens in “the common defense” is one of the most important enumerated powers. It protects everything we hold dear. If America possesses weapons or technology that substantially change the observable balance of power with our adversaries, it’s time to reveal some it as a deterrent to buy us time to re-establish strategic advantage. We need to get this right.
Energy Self-Sufficiency
This one should be a no-brainer. Do we need any more evidence that America needs to be self-sufficient for its energy consumption? Not in 20 years. NOW! This is one of our most powerful and effective non-military weapons in The New Cold War. And it’s not like it’s some unattainable utopia. America was self-sufficient under the prior administration. We are no-longer self-sufficient because the Biden administration policy favors the green energy objectives of the powerful climate lobby wing of his party and punishes oil and gas producers.
If the goal is to lower our carbon footprint, we should be running to drastically expand our nuclear power. It is simply a fact that nuclear is the ONLY scalable zero-carbon footprint solution that can meet our energy needs. France meets 75% of its electricity needs with nuclear. They have developed smaller and safer power plants. The old argument of what do we do with the waste is just a canard used by nuclear opponents to scare people. According to NEI.org, all of the used nuclear fuel ever produced since the late 1950s would cover a football field to a height of 10 yards. To put that into perspective, coal plants generate that same amount of waste every hour. Surely, the most technological nation on the planet can find a safe way to dispose of nuclear waste. Maybe we could pay Elon Musk and SpaceX to launch it deep into space.
I am all about having the cleanest, reliable, sustainable energy matrix as possible. We need an “all of the above” energy policy that addresses the existential threats we face FIRST. While it’s an important challenge we face, climate change is not an existential threat like nuclear war. Those that don’t agree with this are not in the mainstream and probably stopped reading this article a while ago.
Reconfiguring Supply Chains
The New Cold War demands that America and the west disengage as much as possible economically from both Russia and China because not doing so will enrich and embolden our already aggressive adversaries. Remember we are playing a long-game and a cold war is better than a hot one. Being realistic means understanding that, until there is durable regime change in Russia and China, western economies and markets will have to painfully recalibrate to the new world order. Russia is the world leader for exporting wheat and ranks among the top for global sales of crude oil, natural gas, coal, agricultural fertilizer, iron, aluminum, copper, palladium, and lumber. If you think we have supply chain and inflation problems now, wait until these products go off-line.
In response, we must reinforce and expand existing trading blocs with our trusted allies: Canada, most of Europe, Japan, Australia, South Korea, Mexico, and others. Together this “Allied trading” bloc dwarfs the “Axis trading bloc” of China, Russia, and its few friends. It is gratifying to see the bipartisan support in hearings on the strategic importance of bringing back the semiconductor manufacturing to our shores. Short of military confrontation, depriving the Axis of our trade and technology, is the most powerful non-military weapon we have. This means that everything about our interconnected world – from how we manufacture products, to how we grow food, to how we keep the lights on, to how we shuttle stuff about, to how we pay for it all – is about to change. This will means enduring some collective pain in a war we must win!
Upgrading Infrastructure
When we talk about infrastructure, we mean real infrastructure like bridges, roads, ports, the electric grid, energy transport and cybersecurity. Infrastructure does not mean health care, and universal pre-K, childcare, and climate initiatives as does the Biden Build Back Better (BBB) that passed the House last year. The nonpartisan Congressional Budget Office (CBO) estimated that 90% of BBB $1.7 trillion would be offset by higher taxes, predictably using accounting gimmicks to mask the true cost of the bill which is about double. Thankfully, Democrat Joe Manchin resisted his party’s coercion, and voted against the bill which tanked in the Senate. He did the country a major solid as this bill would have done much to disincentive work and expand an already dangerously unsustainable federal government. Upgrading actual real infrastructure is strategically critical and bipartisan so what are we waiting for?
Homeland Security
Surely, nobody can argue that protecting the homeland is not a fundamental role of the federal government. We pay taxes to government for services like police, prisons, intelligence services to protect us. Border security is part of Homeland Security, especially in a time of war.
The U.S. has gone far too long with a porous southern border. Along with energy, there is no more stark policy difference between the current and previous administration than with border policy. Between March 1 and October 31, 2021, over 192,000 illegal immigrants were allowed to stay in this country as the Biden administration used an expansive view of limited parole that makes them eligible for work permits. While the Border Patrol is busy detaining people, thousands of human and drug traffickers traverse our border as regular as a daily work commute.
How can this be in the best interest of U.S. citizens? A February 2022 Gallup poll suggests Americans see what is happening and they are not happy, with 58% being dissatisfied with the Biden border policies. It cannot be emphasized enough how big of a national security risk this represents. Border Patrol has detained people from over 130 countries including some hostile to the U.S. Who can honestly believe that in the New Cold War, U.S. adversaries will not try to exploit our porous borders, and the most generous immigration laws on the planet? This is another bipartisan issue. How about this for a bipartisan deal? All the DACA kids serve 4 years in our military in exchange for citizenship? I’d do that deal in a heartbeat.
We need to explore preventing Chinese nationals from attending any of our American schools; public, private, college. Nothing. We should probably expand this to Chinese nationals with work visas. According to the FBI, five Chinese national spies were indicted last week who engaged in sabotage, bribing, harassment, intimidation and entrapment operations. The indictment says they operated at the behest of the Chinese government, conducting operations on US soil, with an “unlimited budget”. The FBI alleges that the five men were tasked with destroying the personal lives and careers of Chinese dissidents living in the United States. Chinese nationals studying at our prestigious universities and working at our tech companies are integral to the massive multi-trillion-dollar intellectual property theft operation that has benefited China’s industries and military. Chinese oligarchs regularly make huge donations to get their kids into American universities and this must stop.
I have nothing against the Chinese or Russian people because they are ancient and proud cultures, but they have no history of democracy. Only thousands of years of coercion and repression from authoritarian regimes from dynastic empires to the communist party. When the people can rise and topple these dictators and join the community of democratic nations, we should welcome them with open arms.
Fiscal Sustainability
I have spent plenty of time already talking about the strategic importance of getting our fiscal house in order. That means, any partisan political spending priorities that aren’t on the list here are subservient to fiscal sustainability. That doesn’t mean, we get rid of all other government. Two-thirds of our entire federal budget ($5.2 trillion) is comprised of mandatory spending that cannot be changed without Congressional approval. Since most of this money is in the form of social welfare like Social, Security, Medicare, Medicaid, Food Stamps and Welfare which goes directly into the pockets of about 40% of our population. The political difficulties of just curtailing the growth of these programs, much less reducing them, cannot be overstated. In my 2019 book, Locally Grown: The Art of Sustainable Government, I present a detailed plan of how we can accomplish the goal of fiscal sustainability. It recommends a combination of expanding block grants to states, reducing waste and fraud, and tax increases to reduce the funding baselines while preserving most of the net benefits to recipients. Those that would decry any attempt at entitlement reform as “throwing granny off the cliff” are disingenuous at best. Our challenges require shared sacrifice, and every citizen must pitch in.
In Claudendo
The two things that concern me most that make this time different from previous eras when America faced daunting challenges are:
1. We have never faced serious problems like this with $30 trillion of unpayable federal debt that constrains our ability to act and,
2. We have never gone to war against serious military rivals with nuclear weapons.
These two factors make the job much more difficult. Putin has already made the nuclear threat and both Russia and China possess hypersonic ballistic missiles that we cannot defend against. How our military and intelligence wonks allowed this to happen is beyond me. I really hope that we have some incredible military technology they are not telling us about. Also, I cannot emphasize enough how much of a strategic risk the deteriorating value of the US dollar is. We are declining in both these areas and fixing them MUST be THE most important priorities for our elected leaders. Nothing else matters if we don’t get them right.
I am not writing about a comfortable topic here and for that I apologize. But I think it’s more important to be realistic than trying to make people feel good. In my humble opinion, the challenges we face demand American consensus on some version of the issues I’ve raised here. We must eliminate divisive politics whether cultural, ideological, or racial. We are all Americans and that matters more than anything else. Freedom of Speech, Equal Protection Under the Law, Freedom of Worship, Right to Bear Arms, Right to Freely Assemble; these are the rights we are fighting for. Russia and China don’t share these values.
I’ve been listening to the Supreme Court Senate confirmation hearings and candidate Judge Ketanji Jackson Brown comported herself well. I wish President Biden had not announced that he would only appoint a black woman. The Supreme Court needs the most qualified candidates rather than ones that check some racial, ideological, or other demographic box. On its face, it seems in conflict with the Equal Protection clause that Judge Brown is supposed to defend. Any fair look at her more than 500 cases as a federal district judge reveals that she’s a liberal judge and sure there are decision she’s made that I disagree with. However, I was impressed with her passion for defending individual freedom from an overly aggressive government as well as her love the United States. As the daughter of parents who grew up with segregated Florida school, I was riveted with her description of how far we have come since those days. She’s being treated with the respect she deserves by both parties. It would be nice to see Democrats remember this the next time a Republican president nominates a SCOTUS justice because blatant hypocrisy is what erodes trust in public institutions.
Even so, a publicly televised institutional process like confirming the most powerful judges in the land is something completely foreign to our adversaries. In fact, Ketanji Brown would never be allowed to serve as any kind of judge in China, Russia, Iran or North Korea. An openly gay man like Pete Buttigieg would never be permitted in a presidential cabinet. China and Russia are two of the most racist countries on earth. Chinese is ethnically cleansing its 1.5 million Muslim Uighur population through reeducation and forced work camps that pump out products for American companies like Nike. Can you imagine this happening in the United States? We’d get that and worse if China and Russia end up writing the rules of the new world order.
Ultimately, our freedoms and rights power the innovative culture that makes the United States the most successful political experiment in history. Even with its historical warts, America has improved the living standards of its citizens more than any human culture that has ever existed. Democracy, protection of individual freedoms, harnessing the power of diversity while creating a strong collective identity. These are strengths that China and Russia will never have without a revolution. This makes me optimistic that we still have what it takes to win The New Cold War. We just need the right leaders, united in mission, to galvanize the public into believing in the power of a United States of America. It’s been said that politicians only act when there’s fire in the living room. Guess what? There is fire in the living room. We can do this!