Coronavirus: The Finance and Banking Guide

Before the coronavirus crisis, there were few underlying financial instabilities in the American economic system. There certainly were nothing like the massive bubbles in real estate markets in 2007. Nor was there the sort of broad industrial dislocations that triggered the 1979 and 1983 oil shocks.

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At the Edge of Disorder

Last week, U.S. President-elect Donald Trump shook the global diplomatic community to its bedrock by throwing the One China policy into doubt, specifically noting, “I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.” He expressly linked One China to possible negotiations over the South China Sea and the North Korean nuclear program.

The One China concept is that meaningful, positive relations with the Chinese are predicated on public proclamations that mainland China and island Taiwan are one and the same country, and that Beijing oversees the whole thing. American acceptance of One China is not something that was agreed to lightly, but is instead part of a deeper strategy.

In the aftermath of the Normandy invasion of Nazi-occupied Europe, the Americans drew their Western allies and their major colonies together at Bretton Woods to prepare for the post-World War II (WWII) world. Pre-WWII global commerce was fiercely competitive with all countries using all levers of power to maximize their overall strategic position. Trade, finance, culture, employment, and war were all simultaneously tools and vulnerabilities. Successful states/empires would use all of them to maximize their gains in others. One result was the all-against-all nature of pre-1945 international affairs, ultimately leading to WWII.

Mount Washington Hotel in Bretton Woods, New Hampshire

At Bretton Woods the Americans changed the nature of the game. From now on the U.S. Navy would guard oceanic commerce for all participants, while the American economy would be opened to all participants. There was, of course, a catch — you had to join the Americans in their Cold War.

As the Cold War took shape new countries were admitted into the Bretton Woods system. Former Axis. Former neutrals. Developing countries. And finally, China. Unsurprisingly, Beijing insisted the Americans adhere to One China. Under Henry Kissinger’s guidance, the United States willingly and knowingly swallowed One China hook, line, and sinker. Bolstered by China, the Bretton Woods system now presented the Soviets with hostility in all directions. It was quite the strategic coup, and contributed heavily to Soviet overextension and eventually, collapse.

Yet the key factor to remember is that Bretton Woods firmly limited how the Americans could pursue trade. American market access was extended to allies for strategic reasons. Anyone could dump products on the American market, so long as they maintained their position in the anti-Soviet wall.

But the Cold War is over. Bretton Woods has outlived America’s strategic needs, and American trade policy is now evolving to serve America’s economic needs. Trump’s statement on One China is (probably) not an off-the-cuff comment, but instead a true pivot away from Bretton Woods and towards a fundamentally new strategic posture. If the American government no longer views trade as a means to an end, but instead an end in its own right, it can and will begin using issues such as trade access, maritime security, and political positions on issues such as One China to cut different deals. That changes the global strategic picture radically.

China is wildly unprepared for such a shift. Everything about the modern Chinese system was designed expressly for the Bretton Woods system. The economy is export-led. Efforts to drive domestic consumption have largely ended in ignoble failure. The economy is driven by an Enronesque flooding of the industrial sector with subsidized capital. Such growth comes at the cost of sustainability and a functional banking system. China’s strategic position is completely dependent upon the United States offering market access and guaranteeing freedom of the seas for China’s merchandise exports and raw material and energy imports. Remove the economic and strategic cover of Bretton Woods, and it all comes crashing down.

Hong Kong Special Administrative Region of the People’s Republic of China

Even mentally the Chinese are not prepared for change. Since the election, the only American that Beijing has reached out to is none other than Henry Kissinger himself, the only statesman the Chinese respect and trust. But while Kissinger remains strategically brilliant, his connections and advice are firmly rooted — critics might say mired in — the Bretton Woods age. Beijing is so in love with its China Rising mantra — again, made possible by Bretton Woods — that it just cannot come to grips with the fact that the Americans might now have other plans.

Or that the Americans hold most of the cards. No surprise that Chinese state media’s response to Trump’s offhand statement could best be described as a seizure.

The Chinese are not alone:

  • Like China, modern Germany was expressly designed to maximize exports to the Bretton Woods system to the point that nearly half of German GDP is export-driven. In fact, the entire EU project relies upon the United States market as well as U.S. military protection for commodity import supply lines. Other countries heavily dependent upon global trade include — but are far from limited to — South, Korea, Taiwan, Singapore, Thailand, Japan, the oil producers of the Persian Gulf, Egypt, Australia, New Zealand, Brazil, Uruguay, Paraguay, Algeria, South Africa, and Israel. If these countries — or any others dependent upon trade — are going to retain market access and maritime trade opportunities, they will need to offer the Americans something in return.
  • A whole host of countries are utterly dependent upon implicit or explicit U.S. security guarantees. A partial list includes Estonia, Latvia, Kuwait, Lithuania, Poland, Saudi Arabia, Georgia, Azerbaijan, Finland, South Korea, Germany, Romania, Qatar, the United Arab Emirates, Taiwan, Japan, Sweden, Singapore, Croatia, Denmark, the Netherlands, Turkey, and Israel. If these countries are going to retain that strategic cover, they must give the Americans something the Americans find useful.
  • Part and parcel of the Bretton Woods system is the guarding of energy flows, in particular those out of the Persian Gulf. Remove American guarantees and the countries of the Gulf have to resolve their security issues themselves. That endangers energy flows at the point of production, within the Gulf, at the Strait of Hormuz, and even globally as importers must take supply protection into their own hands.

Of course, there is still a lot of wiggle room in all of this. And regardless it won’t all change (or fall apart) overnight. Some relations (like U.S.-Japan) have more ballast. Others (like U.S.-Australia) are so rooted in cultural, strategic, economic, financial, and political fundaments that they’ll likely survive on their own merits. But for every relationship that looks solid, there are a half-dozen others that just don’t make much sense outside of the Cold War rubric.

A few specific calls on the countries that are not likely to make the cut:

  • South Korea is too exposed (and expensive to maintain) for the Americans to continue a deep relationship.
  • The United States has been fighting a war of zero strategic relevance in the Philippines for a half century (anyone remember Mindanao?); that’s pointless except as a hedge against China.
  • Egypt’s descent into impoverished, dysfunctional tyranny means that it no longer is a threat to anyone, much less nuclear-armed Israel.
  • Syria’s civil war eliminates Damascus as a concern, eliminating any rational for ongoing alignment with Jordan.
  • Relations with Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates have long been dominated by the concern of oil availability. Because of the shale revolution, the Americans only need that oil to fuel their alliance — an alliance that now is largely strategically irrelevant.
  • Subsidizing German, Polish, Baltic, and Romanian economic and physical security only makes sense if the United States wants to risk a ground war with an increasingly insecure (and yet still nuclear-armed) Russia.
  • Pakistan is nothing more than a giant pain in the ass.

What’s coming can only be described as the opposite of a global order — a Disorder.

Want to know more about what that looks like? Our next book — The Absent Superpower: The Shale Revolution and a World Without America — went to the printer today. It should be available in about two weeks. : )

The U.S. Federal Reserve raise interest rates

The US Federal Reserve raised interest rates on Wednesday for the first time since 2006.

After weeks of anticipation (or are we up to years already?) the U.S. Federal Reserve ended its zero-percent interest rate policy on December 16th. Chairwoman Janet Yellen kept to the script of advertising a gradual increase in interest rates for the foreseeable future, with pundits around the world guesstimating that rates will be in the vicinity of 1.25% by the end of 2016.


The U.S. dollar immediately spiked higher against, well, pretty much every currency in the world. U.S. exporters bemoaned the impact a strengthening currency would have on their businesses.
9Of course, the Fed isn’t the only force at work. There is China, of course, where the “mystery meat” is turning out to be less hot dogs and more rancid horse offal. My favorite bit of new economic terror is from November when the government started to prosecute stock traders who didn’t lose money during the summer market meltdown. Not exactly the sort of activity that engenders confidence in the world’s second-largest economy.

Europe isn’t exactly shaping up either, although the whiffs of financial panic that accompany the Eurozone crisis have at least abated for now. Greece sinks into the morass a bit more with every passing month; even the Greek government has stopped manufacturing the fiction that a recovery will happen anytime soon. Now we have the Schengen agreement – which regulates the ability of Europeans to border-jump without document checks – under varying degrees of suspension in Hungary, Slovenia, France, Germany, Denmark, Austria and the Netherlands (and I probably missed a couple).


A rising dollar combined with a fading Europe and stumbling China is of course the worst possible news for commodity markets. Sure, overproduction in global oil markets (and American natural gas markets) sets the tune, but there are plenty of supporting actors. Brazilian and Australian miners – backed both directly and indirectly by Chinese money seeking any safe haven outside of China – doubled down on production facilities during the 2005-2014 boom. Now with demand stalled a reckoning is due – and that’s the best case scenario. Should the Chinese recovery prove as unlikely as I believe, the entire commodities world is in for a very dark half-decade…which just pours more energy into the dollar.


All told 2015 has shaped up to be a year of record U.S. inflows. When all the data is crunched, we’re looking at over $2 trillion in capital flight flooding into U.S. markets. The kicker is that even should China and Europe stabilize, this is just the beginning. The American Boomers continue their inevitable march into retirement, and alllll of their foreign holdings – the money that financed everything from subprime to the BRIC boom to the commodities swell – will be rolling back during the next few years.




China, Europe, commodities, the Boomers. These are all trillion dollar questions. Or perhaps it is more accurate to say they are all trillion dollar answers that the world just hasn’t quite internalized just yet.


Funny thing is, the Fed has quietly started us on the road to a much bigger split. As of this week the U.S. Federal Reserve is the only central bank in the world that is tightening monetary policy. The current expansion is coming up on seven years old, making it one of our longer periods of economic growth. We are due for a recession before long. The next time the global economy contracts, the United States will be the only country in the world with any monetary tools available.