GEOPOLITICAL SEA-CHANGE AFOOT / MACLEOD FINANCE

Geopolitical sea-change afoot

Reports suggest that China is helping Iran give the US an extra shove out of the Middle East. A US funding crisis and a collapsing dollar surely follows.

ALASDAIR MACLEOD

First, it was a recommendation by Chinese regulators to banks to lighten up on US treasuries, which combined with a funding crisis in Japan leading to insurers and pension funds under pressure to sell them as well couldn’t come at a worse time for the spendthrift US administration.

Then there are increasing reports of countries switching trade settlements from dollars to yuan, giving the impression at least that the yuan is taking over from the dollar. 

This is very much a minority activity so far, but the yuan’s trend is clear. 

It continues to rise against the dollar, which must be a reflection of international shifts in the yuan’s favour, and against that of the dollar. 

It reflects a currency which shows that China’s leaders are growing more confident of the dollar’s demise.

Furthermore, Reuters reports that China is shipping man-portable air-defence systems (MANPADS) to Iran, which admittedly China strongly denies. 

If Reuters is right, then this is a minor escalation of assistance to Iran, but significant.

The single most important point to understand is that the US is being driven out of the Middle East and its role as the global hegemon effectively ends. 

It is the most important signal to the world outside the Americas that for all intents she can be 

ignored and her currency with it. She can huff and puff as much as she like from the sidelines. 

But starting with the Middle East, nations will increasingly turn to the China-Russia partnership for trade and trade settlement.

Indeed, there have been signs that the US has been looking at a fall-back Monroe doctrine for over a year, where her sphere of influence would be concentrated across all the Americas. 

With the loss of wars against Iran and Ukraine and the Israeli influence increasingly viewed as toxic by US voters, the decline in US hegemony over the rest of the world is potentially rapid. 

But this gives the US treasury a huge headache.

The accumulation of foreign ownership of dollars will almost certainly reverse. 

An AI search reveals foreigners own some $65 trillion. 

But this does not include, so far as can be seen offshore eurodollars, nor dollar balances in the forex market created to transit exchanges between non-dollar currencies which the Bank for International Settlements estimated in 2022 at a further $83 trillion (Graph A below).

The unwinding of dollar hegemony will make these dollars redundant. 

It will do much to collapse the value of the dollar and the currencies that align with it. 

Settlement through China’s CIPS does away with forex dollars entirely. 

It is already leading to the reduction of foreign ownership of US Treasuries at a very difficult time for Secretary Bessant and the issuer, which is the Fed. 

It intensifies the debt trap on a government which finds it impossible to rapidly cut government spending in an attempt to protect the dollar’s value.

China probably understands the consequences of Iran defeating the US and the inevitability of the US losing influence over the region. 

It explains their uncharacteristic move from letting the US make all the mistakes and not intervening to taking actions likely to speed up the US’s and its dollar’s decline. 

It could just be a matter of protecting herself from the collapse of everyone’s trade settlement medium. 

But it is also an important message for western capital markets too myopic to save themselves from an impending fiat dollar-based systemic collapse.

Importantly, the over-valuation of the dollar points to an under-valuation for gold. 

A word to the wise: get out of credit and into real money before the West’s sleepyheads wake up.