AN MOU IS NOT AN AGREEMENT / MACLEOD FINANCE

An MOU is NOT an agreement

Trump is telling the world that an agreement will be signed immediately ending the Hormuz crisis. He’s wrong on both. It will only be a Memorandum of Understanding — an MOU.

ALASDAIR MACLEOD

“It is against this background that we must consider the dollar’s future. 

It is over-owned by foreigners who have a diminishing need for them and are moving their monetary reserves into gold. 

It is a process likely to accelerate as a result of America’s defeat against Iran, a factor of which markets are not yet sufficiently aware. 

As a further disincentive to hold dollars, China’s yuan is in the ascendent.”

Introduction

It appears that the Pakistanis have managed to get Iran and America to agree to talk. 

The start of the process is a Memorandum of Understanding, which only lists the topics to be resolved. 

Sixty days are to be put aside to resolve these issues. 

The last of these is the nuclear issue, because that will require American presence or representation on Iranian soil to oversee the de-enrichment of Iran’s uranium. 

In any event, Iran insists on its right to maintain her domestic enrichment capability under the Nuclear Non-Proliferation Treaty.

Iran’s other principal red lines are as follows:

· Israel to withdraw completely from Lebanon and cease its attacks on Hezbollah.

· Iran’s support for regional allies like Hezbollah, Hamas, Houthis and others.

· No interference in her ballistic missile program.

· The return of Iranian funds and assets confiscated by the US and her allies.

· The removal of all sanctions on Iran’s energy and other exports.

· Iran to retain control over the Strait of Hormuz and the right to charge fees to shipping.

Clearly, it is America which wants to end the conflict. 

Iran will almost certainly insist that Hormuz will remain closed until America agrees to accept these red lines in a binding agreement because it is in her power to do so and maintains maximum pressure on the Americans. 

Therefore, if an MOU is signed, we should expect at the least a period of up to sixty days before traffic is allowed to flow freely through Hormuz which takes us into August. 

And if the US prevaricates, or Israel continues attacking Lebanon, refuses to withdraw and continues to attack Iran’s regional allies, Hormuz will almost certainly remain closed to general shipping until Iran’s terms are accepted, or the US withdraws its military from the region.

The one thing that western capital markets don’t appear to understand is that America and Israel have lost this war against Iran and is not in a position to challenge Iran’s red lines. 

Instead, this ill-conceived war has put America on the back foot because of the mounting threat to her economy and those of the other G7 nations. 

Iran knows this and it is her strongest negotiating position. 

The defeat of the US is de facto if not de jure.

Geopolitical implications

First Afghanistan, and now Iran. 

This defeat for the US leads to the loss of her hegemony in West Asia, creating a power vacuum which the China/Russia/Iran partnership will fill. 

Israel’s fair-weather friends in the Arab world will turn against her. 

The American-installed Lebanese government will probably fall and a Hezbollah government return. 

Zionism will be under the greatest threat in its existence, because America’s failure is Israel’s as well. 

Netanyahu’s successors — he will be gone — will need to seek protection from the new hegemons, particularly Russia given that 20% of Israelis are of Russian origin.

Partly to concentrate on supporting the Zionists in their Greater Israel project, the US has already reduced her commitment to NATO. 

The Europeans are struggling to adapt to this new reality with a feeling of defencelessness against Russia. 

And in East Asia, the dominoes appear to be falling in China’s favour with ethnicity and commercial interests being guiding factors.

America’s importance outside the Americas has diminished significantly, and its failure in the Middle East is part of a trend. 

The Empire is in decline and retreating into the Monroe doctrine.

It is against this background that we must consider the dollar’s future. 

It is over-owned by foreigners who have a diminishing need for them and are moving their monetary reserves into gold. 

It is a process likely to accelerate as a result of America’s defeat against Iran, a factor of which markets are not yet sufficiently aware. 

As a further disincentive to hold dollars, China’s yuan is in the ascendent, as the chart below illustrates:

These are big-picture issues, which leaves a world awash with dollars to sell them, if not immediately over the next few years as the implications of the US being booted out of the Eurasian continent sink in and the dollar as a store of value loses credibility.

This time scale for the dollar’s demise is being compressed by the consequences of her Middle East debacle. 

By some measures, this needless oil crisis is worse than that of October 1973 when OPEC announced price hikes of nearly 300% to $11.65 per barrel. 

The likely outturn for oil prices in the coming months is yet to hit US capital markets. 

And in the last 53 years the Persian Gulf has become a major global supplier of vital downstream products. 

The consequences for commodity prices are just beginning to be reflected in supply disruption, which will spread through wholesale prices and into consumer products and services.

So far, official and semi-official forecasts of worst-case inflationary consequences are ridiculously complacent, compared with what happened in the wake of the 1973 OPEC shock. 

The table below is a vivid illustration of what happened to G7 inflation rates then, compared with the current situation:

For less than one month the gold/dollar exchange rate paused while the implications sank in. 

Then gold doubled in just three months from $90 to $180:

As the cliché goes, history doesn’t necessarily repeat but it does tend to rhyme. 

It’s a rhyme that strongly suggests that while sentiment against gold and silver is deeply negative, they are set up for a spectacular move higher in very short order. 

The sensible strategy for traders is to arbitrage against current sentiment, which assumes that the prospect of higher interest rates is a headwind for gold, and buy into the consequences of far higher bond yields as the outcome of a combination of far higher inflation and a government debt to GDP of 125%.

To summarise

· America’s global empire is ending, calling into question the dollar’s future as a fiat currency.

· The economic consequences of the war against Iran are bound to lead to a rapid expansion of dollar money supply, and of the entire G7 for that matter as they attempt to rescue their economies from a global slump.

· High government debt levels will exacerbate the situation for the dollar and other G7 currencies, triggering debt traps which essentially make soaring government deficits unfundable.

· Along with the US’s global hegemony, her dollar’s undisputed reign as the leader of the fiat currency pack is coming to an end, while China’s yuan star is in the ascendent.