Behind Korea, Iran & Russia Tensions: The Lurking Financial War

Monday, January 1, 2018
By Paul Martin


What have the tensions between the US and North Korea, Iran and Russia in common? Answer: It is that they are components to a wider financial war. Russia and Iran (together with China) happen to be the three key players shaping a huge (almost half the global population) alternative currency zone. The North Korean issue is important as it potentially may precipitate the US – depending on events – towards a more aggressive policy toward China (whether out of anger at Chinese hesitations over Korea, or as part and parcel of the US Administration’s desire to clip China’s trading wings).

The US has embarked on a project to restore America’s economic primacy through suppressing its main trade competitors (through quasi-protectionism), and in the military context to ensure America’s continued political dominance. The US ‘America First’ National Security Strategy made it plain: China and Russia are America’s ‘revisionist’ adversaries, and the US must and intends to win in this competition. The sub-text is that potential main rivals must be reminded of their ‘place’ in the global order. This part is clear and quite explicit, but what is left unsaid is that America is staking all on the dollar’s global, reserve currency status being maintained, for without it, President Trump’s aims are unlikely to be delivered. The dollar status is crucial – precisely because of what has occurred in the wake of the Great Financial crisis – the explosion of further debt.

But here is a paradox: how is it that a Presidential Candidate who promised less military belligerence, less foreign intervention, and no western cultural-identity imposition, has, in the space of one year, become, as President, a hawk in respect to Korea and Iran. What changed in his thinking? The course being pursued by both states was well-known, and has offered no sudden surprise (though North Korea’s progress may have proved quantitatively more rapid than, perhaps, US Intelligence was expecting: i.e. instead of 2020 – 2021, North Korea may have achieved its weapons objective in 2018 – some two years or so earlier that estimated)? But essentially Korea’s desire to be accepted as a nuclear weapon state is nothing new.

It is ‘the Federal debt’, and a pending ‘debt ceiling’ that is crucial. There is little doubt that the US military is not what it used to be, and the Republican Party possesses a wing that is quite fundamentalist about limiting debt (Freedom Caucus). A serious military crisis is possibly the only way Trump is likely to get a huge ramp-up of military expenditure past Congress’ fiscal hawks. President Trump – the Tax Bill saga tells us — is going to be a big spender as part of MAGA (Make America Great Again). The increase in proposed US defence spending alone, more or less equates to the whole annual Russian defence spending. US Federal debt is already above $20 Trillion, and accelerating fast: the borrowing requirement is ballooning and interest payments to service this additional borrowing, normally would be expected to rise.

But Trump is also explicitly a low interest rate, expanding balance-sheet, sort of guy. So, how does one finance a truly ballooning budget deficit, whilst keeping interest rates low, or at zero? Well a fear-driven rush by foreigners into ‘risk free’ US Treasuries (i.e. military crisis again), historically serves to keep rates low – and dollars plentiful — as ‘overseas dollars’ return ‘home’ to Wall Street. This could be a solution, of course, but it would be entirely contingent on maintaining the present dollar status, and the large pool of dollars held externally for the principal purpose of having to transact trade in dollars.

And why is it that in place of détente with Russia, we have Herman Gref, the CEO of Russia’s largest commercial bank, telling the Financial Times that any further tightening of anti-Russia sanctions, including the potential exclusion of Russian banks and corporations from the SWIFT payment system (the global network of secure financial messaging services) would have such a devastating effect that it would “make the Cold War look like child’s play”? (The US Treasury is expected to present its report on further sanctions to Congress as early as February 2018, the Financial Times reports). What is the point? Why should the US and Europe proceed down this particular rabbit hole — it would be particularly damaging for Europe? Well, the answer, probably, is similar: the imperative to maintain the dollar’s global status for a programme to reclaim America’s pre-eminence, which – given the overhang of additional debt in the wake of 2008 – has to be contingent on the dollar’s global status.

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