Asymmetric Financial War and Radical US Leverage – What Will It Bring?

It seems that the Chinese leadership has concluded that the Trump Administration is determined to use its full spectrum radical leverage to hobble China as a rival, and to resurrect its own global domination – Xi seems to foresee a long struggle for position in the global future: one that will be played out geo-politically (in the jostling in the South China Sea, over North Korea, Taiwan and the BRI), as much as in the economic domain. If this is so, there is real risk of the ‘jostling’ spontaneously escalating into a military clash, whether limited and contained, or not.

Xi is essentially correct. Until recently, Washington subscribed to the western cultural conviction of the linear itinerary of historical ‘progress’ – that is to say, that the introduction of the western-style economic liberal market, under Deng Xiaoping, constituted part of an inevitable Chinese journey towards ever greater economic and political liberty (i.e. they would become like ‘us’). 

But Washington DC had its ‘tipping point’. It slid across, into a very different understanding. This was that China’s liberal economic reforms were all about restoring China’s former global economic primacy and power – and never about ‘empowering the individual’ in the western mode of thinking. In that context, China remaining compliant and well-behaved within the global order made sense for China – so long as it remained on course to become the global Number One, by 2049 (the CCP Centenary Year).

But, like all ‘Road to Damascus’ late converts, US foreign policy élites now have become fervent proselytisers for the Chinese ‘threat’ meme. So, the question arises: does it make sense any more for China to pursue its instinctive policy of not confronting the US, especially if Trump is known for keeping up the pressure, never backing off, and always doubling down? How can China too, stick with its ‘quietist’ posture if Trump ups the pressure in the South China Sea, or in North Korea, or decides to adopt Taiwan as a ‘democracy cause’? Xi can’t.

Russia, on the other hand, is witnessing an extremely defensive US President – a longstanding believer in good relations with Russia, but whose persistent vulnerability to the ‘Russiagate’ hysteria is pushing him to polish his anti-Russian credentials to the extent that he is now becoming holier than the Pope (more ‘hard-on-Russia’ than the Russophobes); more neocon, than the neocons. With rafts of crushing sanctions against Russia already in the Congressional pipeline (over which the US President has minimal ability to limit their implementation), Russia too must prepare for a long period of economic attrition. The depth of the American crisis is such that President Putin (like everyone) cannot guess how it may all turn out.

For Europe, Iran, Turkey, Pakistan and Venezuela, the outlook is similar: It will be a period in which the US weaponises all the leverage it has at its command to restore the US global primacy – and to bring all into line with the wider US agenda. Trump is escalating – intent, it would seem, on having the first capitulation, or political fissure to burst apart, by November. But what if that doesn't happen?

The ‘market’ (with a few exceptions) take the view of America's victory in the trade war as certain: the US is easily the predominant consumer market and concomitantly, it hurts US trade partners the more to be shut out from it – which is also to say, that retaliatory tariffs imposed by others will hurt US exporters the less (because US outwards exports are the lesser, in most cases).

With states such as China, its exports to the US are at least double the value of US exports to the US, therefore the US owns the leverage (in the White House view) – because there are twice as many possibilities for US to impose import tariffs as China has to impose export tariffs. Additionally, the US uses the US dollar hegemony (i.e. currency war) to create an artificially strong dollar – which weakens emerging markets, and concomitantly weakens their leverage (as their US dollar-denominated debt and interest payments, become toxically elevated, in relation to their domestic currencies).

This ‘market’ view of trade war somehow is a mirror of America’s military zeitgeist. The US has the biggest military by far; it can outgun everyone (except Russia), so anyone challenging the US is bound to be ‘a loser’ (it is assumed). Indeed, the US can, and does, begin its wars with a slick show of destructive capability that pummels the adversary. But what then? Then, the US military doesn’t seem to have answers to the subsequent phases: It bogs down, and then finds itself losing to asymmetric retaliation. Its only answer is the ‘forever’ wars.

Alastair Macleod of the Mises Institute suggests that such market sanguinity is wrong:

“Comments that China is in trouble from trade tariffs and being undermined by a strong dollar, are wide of the mark. Geopolitics dominates here. America’s occasional successes in attacking the rouble and yuan are no more that transient pyrrhic victories. She is not winning the currency war against China and Russia. China is not being deflected from her strategic goals to become, in partnership with Russia, the Eurasian super-power, beyond the reach of American hegemony.”

Russia and China are intent on playing – and winning – the long game. Both states, presently are sounding out Washington (prior to November) as to whether, in the words of Putin’s spokesman, there is any “common ground, trying to understand if it is possible at all – and if the other party is willing at all.” Beijing too is exploring whether Trump is ready to compromise on some sort of a face-saving, PR trade deal – ahead of the November midterms – or, not. This ‘scenting the wind’ should not be misinterpreted for weakness, or a readiness to capitulate. These states are simply doing ‘due diligence’ before events take them to the next stage of the conflict – in which the risks will be graver.

What is less noticed – because there has been no ‘shout out’ occurrence – is how much the preparations for the next phase have been incrementally unfolding (since some time). Small steps, perhaps, but of great significance nonetheless. Because the platforms for countering US financial bullying are being put into place at an accelerating pace – particularly since Trump started to sanction ‘the world’.

And this old axiom is the first point to grasp: ‘Every crisis is also an opportunity’. And Trump’s lambasting and sanctioning of ‘the world’ is catalyzing a powerful push-back. When America sanctions ‘the world’ it is an easy ‘sell’ for China and Russia to push others towards de-dollarisation, and to trading in local (non-dollar) currencies. And this is happening. It is almost ‘done’ in respect to oil. The advent of Shanghai Futures Exchange symbolically marked the beginning of the upending of the Bretton Woods world (with Gulf States likely to succumb to the inevitable, in due course).

The ‘market’ sees the selling of US government debt (US Treasuries) by the PBOC as China’s Damocles Sword hanging over the US; but at the same time, ‘the market’ believes that China will never do such a thing – as it would lower the value of its holdings. It would be counter to China’s own interest. (It is never asked however, why China should want these holdings – at all – if China is debarred, by the US, from purchasing dollar-denominated assets with its US dollars).

China has always been wary of disrupting markets – that is true. But, it maybe that the ‘market’ is misreading China’s ‘war-plan’. The expectation might be that China’s only resort is to sell US Treasuries (as Russia has just done). But, as usual, that would be the ‘market’ looking to the short-term view of China’s possibilities. China however, clearly is playing the long game. Recall what Maj. Gen. Qiau Liang said in 2016: “The US needs a large ‘capital return’ to support the daily life of the Americans, and the US economy. Under such circumstances, [any nation that] blocks the return of capital to the US is the enemy of the US. We must understand this matter clearly … To effectively contain the United States, other countries shall think more about how to cut off the capital flow to the United States while formulating their strategies”. 

And what China can – and is – doing with those US dollar assets, is to deploy them in another important way. It is not selling them, but rather is using them – without fanfare – to support its key allies, whose currencies are under periodic, concerted, Wall Street ‘short’ selling raids on their currencies: that is to say, China is supporting quietly Turkey and Iran (more through the purchase of its crude, in the latter case). So China is quietly subverting, and undermining Trump’s strong dollar card that is intended to force Turkey and Iran to capitulate. This is asymmetric financial war for the long game.

Both these states (together with Pakistan) are key hubs of the ‘Belt and Road’ initiative; but more than that, they are directly strategically significant components to the national security of China. China is very concerned by the Muslim, Turkic, Uighurs of Xinjiang province, thousands of whom already fight as jihadists in Syria. China does not want the latter returned, nor does it want Muslims to be radicalised in China, or in the states to the West of China. 

President Erdogan has been significantly instrumental in their radicalisation. They want Erdogan to stop his game with the ethnic Turkic populations, in and near to China, in return for which, China is helping with the Lira. Equally, China’s economy is vulnerable to America closing the Malacca Strait. To offset that vulnerability, China needs Pakistan, and its ‘corridor’, down to the port at Gwadar. And Iran is absolutely central to both China’s and Russia’s national security.

What we see therefore is China and Russia quietly sewing together the fabric of a de-dollarised, currency-swap equipped, and credit-supplied, belt across Central Asia – in opposition to America’s attempt to break it up. Russia, which largely already has de-dollarised its economy, has the particular role of ensuring that Europe is not lost as a market for the Belt and Road to Trump’s leveraged bullying, and that his aim to reacquire energy dominance remains no more than ‘an aspiration’.

Taken in aggregate, all these quantitatively, mini-steps, represent a qualitatively significant diminution of the use of the dollar, outside of the US domestic sphere. Its depth, beyond the US homeland, is being salami-sliced away. The import of this should not be underestimated — the US enjoys the high standard of living that it has because it can buy cheap goods, paid for, in paper (fiat) US debt, that others are obliged to hold, for purposes of trading in the global reserve currency. Americans’ standard of living is, in effect, subsidised by the rest of the world.

It can only afford the military it has because it can – unlike any other state – run budget deficits to pay for its outsized military, whimsically, and without concern, since foreigners (until now), simply go on filling the budget gap.

America has radical financial leverage at this moment precisely because of the ‘strong dollar’. Make no mistake. This is not just the result of Fed hiking rates: Trump well understands that: “Money is pouring into our cherished DOLLAR like rarely before.” Donald Trump tweeted, on 16 August. It is, of course, all about leverage.

With a strong dollar, trading partners’ currencies devalue, their interest and capital payments soar – and, traditionally, they are pushed to the IMF for a dose of austerity and the sale of their national assets. This is the ‘play’ which Russia and China intend to end. They have set up alternatives to the Word Bank and to the IMF to which Turkey may have recourse – instead of being forced into an IMF programme.

Alasdair Macleod notes the dichotomy between Trump’s ‘short game’ and China and Russia’s ‘long game’:

“For now, and probably for only a few months ahead of the US mid-term elections in November, President Trump is forcing currency difficulties on his enemies by aggressive trade policies, including sanctions, and by weaponising the dollar. It is a trick that has been used by successive American administrations for a considerable time…

President Trump’s actions over trade… are driving countries away from her sphere of influence. Ultimately this will prove counterproductive. Speculators buying into Trump’s short-termism and the Fed’s normalization policies are, for the moment, driving the dollar higher … This seems certain to lead to the dollar’s downfall [in the longer term].

The dollar is rising only on short-term considerations, driven by nothing more substantial than speculative flows. Once these abate, the longer-term prospects for the dollar will reassert themselves, including the escalating budget and trade deficits… and rising prices fueled by a combination of earlier monetary expansion, and the extra taxes of trade tariffs.”

This may well be Russia and China’s ‘long game’. For now, the strong dollar (and geo-political fear), is causing a safe-haven flight into easily marketable, US assets. The recent US Tax Bill has deepened this flow of dollars ‘returning home’ (through its amnesty for returning, corporate, off-shore, cash holdings). The financial leverage presently lies with the US. All looks well: the stock market is up; traders think the trade war will be an easy ‘win’; and economic indicators, the Federal Reserve says, are ‘strong’.

But Russia and China can be patient. Those overseas dollars “pouring in [to America], as rarely before” – are sucking out the oxygen, (i.e. dollar-liquidity) from everywhere. It will either soon exhaust itself, or will result in a contagious credit crisis (with Europe likely the prime victim), triggered precisely by the liquidity-drought engineered to give Trump more leverage.

At this point, the relative strengths between the US and Russia-China invert, and leverage flips to the latter’s advantage.