The Geopolitics of Inflation

How It Benefits U.S. [The Daily Reckoning] August 06, 2022 [WEBSITE]( | [UNSUBSCRIBE]( The Geopolitics of Inflation - The four levels of power… - “Is the looming global recession merely ‘bad luck’ or could an unavoidable global recession be ‘nudged’ to serve geopolitical aims?”… - What really matters… [[Trade Alert] This Explosive Sector Is Primed To Deliver Huge Gains… Fast!]( [Click here for more...]( Have a few hundred dollars and the desire to make huge gains? If so, [this explosive stock market sector]( needs your attention right away. I’m talking about biotech. And as one headline from late July reads, “investors back [biotech]… as sector booms.” Point being, there’s a lot of money up for grabs right now. Best of all, we’ve identified what could be the No. 1 biotech stock pick in the world. It could deliver substantial gains over the coming weeks to those who act fast. And you can still buy shares for less than $5. [Click Here To Learn More]( San Francisco, California August 6, 2022 Editor’s note: You know all too well about today’s inflation. But the U.S. is also exporting that inflation to the rest of the world. Today, Charles Hugh Smith shows you the geopolitical effects of the inflation, and who benefits from it. [Charles Hugh Smith] CHARLES HUGH SMITH Dear Reader , Though it's difficult to be confident of anything in the current flux we’re experiencing, I am pretty confident of three things: 1) Price is set on the margins. 2) Currencies are the foundation of every economy. 3) The financial forecasts issued to calm the public do not reflect operative geopolitical goals. Let’s break this down. Every national government has "global interests." Governments naturally do whatever they can to boost dynamics favorable to the state and nation, and obstruct or hinder dynamics injurious to the state or nation. As a general rule, nations have relatively few levers they can pull to influence global finance, trade, growth, currencies or the geopolitical balance of power. One such lever is the interest the state pays on its sovereign bonds. Leverage If a central bank/state increases the interest it pays on its bonds, that attracts capital seeking higher return (presuming the bond is perceived as safe from default). This inflow of capital strengthens demand for its currency, because the bonds are denominated in the state's currency. As the currency strengthens vis-à-vis other currencies, it buys more goods and services. Imports become cheaper and the nation's exports become more costly to those using other currencies. Another lever is to reduce the exports of commodities, especially essential commodities like energy and grains. If this reduction reduces the global supply, the price leaps. If allies get the exports and enemies don't, this punishes enemies and rewards allies. A third lever is to limit imports. A consumer nation can limit imports from specific exporters, or make do with domestic supplies or only buy from allies. A fourth lever is to meet with allies and reach an agreement about finance and commodities to stave off imbalances that threaten the stability of the alliance. An example of this is the 1985 Plaza Accord that weakened the U.S. dollar at the expense of the Japanese yen and European currencies. The strong dollar was crushing U.S. exports and generating destabilizing trade deficits in the U.S. Each of these levers has geopolitical consequences. [Hey, It’s Jim Rickards Here]( I need your attention immediately. My big announcement comes down on Tuesday at midnight. If you haven’t already, you need to see it. Trust me, you do not want to miss out on what’s coming. [Click Here ASAP]( It’s All Connected Financial actions such as raising interest rates are presented as purely financial, but their geopolitical consequences are not lost on the nation's political/military leadership. Boosting or trimming exports of commodities can be presented as financial as well, even when the real purpose is geopolitical. In other words, events which are presented as solely financial can also serve geopolitical aims beneath the domestic-centric rah-rah. Consider how the price of oil contributed to the collapse of the Soviet Union. In the mid-to-late 1980s, the price of oil fell and stayed relatively low for years. In 1986, oil fell under $10/barrel. Adjusted for inflation, this was lower than prices paid in the late 1950s. Although this ample oil supply was fundamentally a result of super-major oil fields discovered in the 1960s and 1970s coming online, it had a geopolitical consequence few fully appreciate: It pushed the Soviet Union over the fiscal cliff into collapse. No Coincidence, Comrade Oil and natural gas exports were the primary source of the Soviets' hard cash it needed to buy goods and commodities from other nations. Once the oil revenues dried up, the Soviet Union was no longer financially viable. Was this lengthy "glut" of oil just good luck for the U.S., or was a policy agreement with Saudi Arabia and other oil exporters that "nudged" the price lower also a factor? What do you reckon — pure luck or luck "nudged" to achieve a geopolitical goal? Given the high stakes and the vulnerability of the USSR to low oil prices, is it plausible that it was entirely happy happenstance? In the 37 years since the Plaza Accord, the U.S. has endeavored to keep the dollar relatively weak for a number of reasons: to limit trade deficits and avoid putting undue pressure on emerging countries with debts denominated in USD and nations that imported commodities priced in USD, which is virtually all commodities. This weak-dollar policy has changed, with profound implications. The soaring USD is adding a currency "surcharge" on top of rising prices for commodities such as oil and grain. A Double-Whammy of Inflation Take Japan as an example: The yen has weakened 20% against the USD. This means every commodity priced in USD is 20% higher in price for those using yen. Add the increase in cost due to global scarcities and that's a double-whammy hit of inflation. These sharp increases in inflation/price of essentials are recessionary as demand craters. People simply don't have enough earnings to pay higher costs for essentials and maintain their discretionary spending on goods and services. [Biden to Replace US Dollar?]( [Click here for more...]( Thanks to Biden’s Executive Order 14067, every dollar you own could be in serious jeopardy. They could be made worthless, or even confiscated – practically overnight. [Click Here To Read More]( Recall that price is set on the margins. If supply of oil falls 5 million barrels per day (BPD), price rises. But if demand falls 10 million BPD, the price of oil plummets. As the price of oil falls, oil exporters receive much less money, and so they compensate by pumping more oil. This serves to further depress prices. Who would benefit from a rising U.S. dollar and a global recession, and who would be hurt? The U.S. would benefit from a higher USD because that lowers the cost of all imports. Everyone else using weaker currencies would pay more for imported commodities. As demand for oil falls, the price plummets. That helps consumer nations and hurts oil exporters. Is China the Target? As the USD rises, it drags every currency pegged to the USD higher with it, making their exports more expensive. That would pressure China's exports, forcing China to adjust its currency peg, reducing the purchasing power of everyone using yuan/RMB. Is the looming global recession merely "bad luck" or could an unavoidable global recession be "nudged" to serve geopolitical aims? The forces that have been unleashed (higher interest rates, scarcities, strong dollar) will take time to work through the global economy. The USD may drop and oil may rise over the next few months, but where will global demand and oil be in a year? What Really Matters Many people expect the dollar to weaken and the Federal Reserve to lower interest rates back to zero once the recession becomes undeniable. I am not so sure. A case can be made that interest rates have completed a 40-year cycle of decline and are now in a secular cycle higher. A case can also be made that the weak-dollar policy has ended and the dollar will move higher, accelerating the financial and geopolitical consequences described above. A strong currency exports inflation to those nations which do not issue the currency. Luck, coincidence or "nudge"? Maybe it doesn't matter. Maybe what matters is that it's happening. Regards, Charles Hugh Smith for, The Daily Reckoning Editor’s note: What if the biggest threat to your wealth right now is NOT inflation… NOT another Fed rate hike… NOT even a recession? What if [THIS]( is the biggest threat to your wealth right now? It would actually make it 100% legal for the government to spy on you and take [unprecedented control]( over your bank account. [Click here now to discover what could be the biggest threat to your wealth today — and how to protect yourself.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Charles Hugh Smith] [Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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