The theme of this blog has been and will continue to be that nothing is as it seems on the surface. In an effort to be as non-partisan as possible, a question arises over the G-7’s immediacy to place sanctions on Putin’s pals as retribution for Russia’s aggression on the Ukraine and Crimea. The use of sanctions under the control of the U.S. Treasury Department and its potential harmful effects on any nation’s economy forces the question: Why would global financial entities desire to do business in dollars or with U.S. domiciled financial institutions? Any time that the U.S. government questions the foreign policy demands of another country, will sanctions be the initial response? If China tomorrow chooses a military response to the issue of the Senkaku Islands, would the U.S. push for sanctions against Chinese financial institutions out of respect for the U.S. alliance with Japan?
The amount of possible situations where the U.S. could move to sanction any country it deems belligerent are endless. The U.S. use of sanctions will result in many nation-states moving away from a dollar-dominated world order. As the French have maintained for 65 years, the U.S. dollar and its dominance of the global financial system is an exorbitant privilege, though with any great privilege comes a heavy responsibility. When will other nations question weather the U.S. desire to inflict financial pain on those with different national interests is a burden worth bearing? If Putin were to awake tomorrow and demand that the Europeans pay for Russian energy with euros, roubles, pounds or, more importantly, GOLD, what would the response of the global financial system be? The U.S. is playing a serious game with the rush to invoke financial pain upon any action that it deems to be a violation of “international law.”
As an aside, the term “international law” carries no weight. The reading of Hugo Grotius, the social contract theorists, moralists and the U.N. charter has always left me dazed and confused when coming to understand what “international law” genuinely means. I know the concept of mutual understanding of Treaties of the Sea, Territorial Maritime Law, Piracy and others that all established nation-states have accepted as usual and custom, but history leaves me empty on issues of international law and belligerency. Can it be said that imposing financial sanctions is in fact a belligerent and possibly warlike action? And if international law were so cut and dry, why hasn’t the United Nations invoked a concerted action in response to the Russian aggression in Crimea? Oh, that’s right, Russia could veto the action. All of the recent geopolitical news has helped to undermine the stability of the global financial system. The global equity markets continue to brush-off every political crisis, talk about the mispricing of risk. But the goal of Notes From Underground is to analyze market action so as to be aware of the investor’s need to comprehend that 2+2=5 and put it into potential profitability.
***In tomorrow’s Financial Times, there is an op-ed article by a strong German monetary voice, Herr Otmar Issing. The article, “Get Your Finances In Order and Stop Blaming Germany,” is a an authoritative voice warning the Eurocrats about placing too much of Europe’s problems on the shoulders of German citizens. He cites George Soros and others for signaling Germany as the main bearer of Europe’s burdens. The “Germany Should Lead” crowd wants the Germans to backdrop a unified banking system and the creation of a Eurobond. Mr. Issing uses the translation of Germany Should Lead (Deutschland Als Fuhrer) as a coded warning for too much reliance on the German budget. As he so succinctly states: “Legacy problems in national banking systems should be solved before banking union goes any further. If they are not, it would be better to stop the whole project.” The recent added pressure on Germany to impose sanctions on Russia is providing Chancellor Merkel with great leverage in lessening the financial demands for German money to secure financial Europe. What will the price be for Germany to up the pressure on Russia? Otmar Issing is voicing his opinion on how to counteract the Deutschland Als Fuhrer crowd. And the markets rallied ….