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The New Cold War Will Increase Military Spending and Debt, Causing a U.S. Dollar Collapse

To understand the renewed “cold war” between the United States and its allies with Russia, look no further than the possibility–or the probability–of a U.S. dollar collapse.

The U.S. dollar remains the world’s dominant currency. Countries–even those that don’t enjoy a particularly stellar relationships with the U.S., like China–with the U.S. use the dollar to buy oil and precious metals. The end of the gold standard and the shelving of the Bretton-Woods accords were designed to advance the U.S. dollar.

It allowed the U.S. to print as much of its currency as it liked, sustaining a huge military and a similarly large public debt. That’s the essence of the “petrodollar.” The quantitative easing that allowed Wall Street to pull its way out, or at least sweep the damage under the carpet, from the ruins of the 2008 financial crisis would not have been possible without the petrodollar system.

Emerging economic powers like China and Russia, however, are disrupting the petrodollar system. The euro, while trading at some 1.2 times the value of the dollar, remains a rival currency, but only in the financial and economic spheres.

The West has isolated China and Russia, among others, geopolitically in the past few years. These powers are paying the price for their obstinacy to resist the influence of the Euro-Atlantic pact (NATO, for example). However, the West, Washington and London especially, have pushed too far. This is what’s going to lead to a U.S. dollar collapse.

Washington, and the Obama administration (but any other president would have done the same) in particular, took many of the decisions concerning the U.S. economy with a specific aim of prolonging American domination of the global economy. The result was an artificial supporting of a financial system, which the U.S. dollar can no longer sustain.

The most recent efforts of certain emerging military and economic powers to reduce their reliance on the dollar go back to 2012. That’s when Iran and Venezuela, as well as Russia and North Korea, were forced to seek alternative ways to function in the global economic system. (Source: “Economic Collapse and Dollar Hegemony – How Did This Start?,” The Strategic Culture Foundation, January 26, 2018.)

In 2012, the Obama administration decided to expel Iranian banks from the Belgium-based (but heavily U.S. influenced) Society for Worldwide Interbank Financial Telecommunications (SWIFT), a global payment transaction system. Iranian banks were disconnected from SWIFT as the U.S. encouraged a tightening of international sanctions against Tehran over its nuclear research program. In 2016, Iran was readmitted into the system as part of the Iran nuclear deal and the easing of sanctions. Still, the damage was done.

That damage consisted in the fear that the United States could apply SWIFT pressure on any country it targeted for whatever reason. SWIFT became yet another battleground through which Washington could enforce its hegemony. This created the need.

China Has the Solution

And China came up with the solution to prevent Washington, or anyone else for that matter, from interfering with its financial system. The solution was a direct alternative to SWIFT. It was developed in 2015 and is called the Cross-Border Interbank Payments System (CIPS). This is not a system to undermine the dollar. Nevertheless, it could help promote the Chinese yuan, because the CIPS system is based on the Chinese currency. (Source: “China Breakthroughs: New international payments system goes into action,” CCTV, October 19, 2017.)

CIPS is an example of how China–and countries it considers allies, including Russia and Iran–can bypass aspects of the Washington-imposed world order, the so-called “Washington consensus.” This is the space where the undermining of the dollar itself could occur.

The West’s Embarrassment

The Skripal case and the fact that London and Washington appear to be hammers in search of Russian nails at every turn are hiding the West’s embarrassment. The leaders of Russia, Iran, and Turkey met in Istanbul on April 4. 2018 to discuss the future of Syria. Where’s the United States, which played such a crucial role in stirring and encouraging the rebels? It was Hillary Clinton as Secretary of State, after all, who sent the ambassador to Syria, Robert Ford, to meet the rebels in Hama, walking among them, during the summer of 2011.

Washington has been left out of the negotiations. Russia and Iran have succeeded in supporting their horse in the Syrian conflict, which was never a civil war; it was a war by proxy between regional powers, superpowers, and factions over which they had influence. The Russians and Iranians have won, determining the fate of Syria, which will form an uninterrupted Shiite axis from Lebanon to Iran via Iraq.

The U.S. will soon lose any influence it had over Iraq. Washington has overplayed its hand in the Middle East, losing anything it had gained, however tenuously, during the Iraq War. If President Donald Trump wants any of that influence back, he will have to start a new war targeting Iran, which will offer serious resistance.

Pushed away from the Middle East, the United States will have little choice but to encourage the rivalries with Russia, China, and Iran. This will help the money flow into defense programs and the military industrial complex.

Defense spending will increase, even as Trump has lowered taxes for the rich and corporations. The public debt will rise, as the U.S. will have to print more money–selling more of its treasuries to China and Japan–to fund the next generations of jet fighters, tanks, and battleships. The U.S. dollar will suffer in turn. Higher interest rates won’t save the dollar. They will, however, turn the possibility of a major stock market crash into a probability.

The Dollar Collapse Hangs in the Balance of the New Cold War

President Trump (if the proposed new National Security Advisor John Bolton allows it) could meet Russian President Vladimir Putin in the coming months. Trump made the invitation and Russian officials confirmed. Putin has not replied, but chances are he will make the date. There’s still time for Trump’s hawkish foreign policy gurus to change Trump’s mind. And in this instance, timing is key.

Certainly now, while Trump’s invitation is “hot,” would not be a good time for Putin to agree to visit the White House. He must wait until international tensions ease. Therefore, the meeting won’t happen next week, and not even next month. However, it could happen before the end of 2018.

Meanwhile, the Cold War between the West and Russia is only getting warmer. Syria, Iran, the Skripal poisoning episode in the U.K., and North Korea remain geopolitical problems, which Washington and its allies, London first and foremost, are only too happy to exploit to justify more defense/military spending.

All the major NATO players have expelled Russian diplomats, even as nobody has proven allegations of a Russian chemical agent attack against former KGB spy Sergey Skripal in London. More than any other in recent months, the Skripal case has brought the world closer to a major military confrontation between nuclear superpowers.

The geopolitical tensions could also have economic and financial consequences. For starters, the Russian ruble, which had been one of the top-performing currencies in the world in 2016, has lost some 1.2% against the dollar. In the past, a free-falling ruble and other Russian financial problems were used to encourage Russian millionaires and billionaires to export their wealth abroad.

London was (and remains) an especially attractive location where rich Russians can park their assets. Indeed, London is sometimes called “Londongrad” because of its high number of wealthy Russian residents who invest in real estate and in the city’s banks.

The possibility that London has an interest in stirring the Russian cauldron to encourage capital flight toward its shores cannot be discounted. London risks losing its role as Europe’s financial capital as the Brexit proceeds. Brexit will push many billions and their owners toward other havens of finance. The U.K. had to do something to ensure the wealth spigot remains open. Without Russian money, the London real estate market risks nothing less than a crash.

Would Such a Plan Produce Any Results?

No. Those who had money to invest abroad have already done so. The Ukraine crisis and the related sanctions certainly stimulated some outflow, bit not as much as occurred when Putin threatened prison terms for several oligarchs who may, or may not have acquired huge sums of money illicitly.

Moreover, any Russians who still have the resources to invest abroad might prefer havens outside of NATO countries and the West. They would, naturally, fear repercussions, such as a freezing of assets, from the rising East-West tensions. If anything, wealthy Russians might be scrambling to move their funds away from London. The unintended consequence is that the Russian markets could remain stable as investment flows back into the country.