Ein Platzen der US-Schuldenblase wird die Welt böse treffen – Russland jedoch nicht

13 Oct. 2021 21:32

A comment from Glenn These

The long-awaited US financial crisis seems to be on its way. Inflation is rising, energy prices are rising beyond control and already the levels of private and public debt are unsustainably high. Washington now has few tools to avert or mitigate the crisis – and it has a lot to lose in the process.

Wave of price increases in the USA: inflation is already at 5.4 percent

Another US financial and currency crisis seems to be looming, which threatens to affect the whole world and lead to dramatic shifts in the international distribution of power. The whole world? No! A Russia led by indomitable real politicians shows that it is prepared for the coming turbulence. Their strategy is: simply leave the injection area of ​​a bubble that is about to burst at an early stage. In addition to ensuring strict budget discipline, the strategic partnership between Russia and China should be emphasized as one of the focal points associated with decoupling from the international financial system under the leadership of the USA.

The Virtue of the United States: Passing Problems Before You With Dignity

The blessing of being able to print the world reserve currency is also a curse. For years the US has been able to run massive deficits and thus maintain a standard of living and an empire far beyond its means, while politicians could claim that the imbalances are a sign of a healthy economy and that the willingness of the whole world is proof of this to lend such large amounts of money to the US. The curse of the license to print the world’s trade and reserve currency is diluting the need to maintain budget discipline as any problems can easily be postponed into the future.

Painful awakening: the stock market and economic crash is imminentPainful awakening: the stock market and economic crash is imminent

When the technology bubble burst in the 1990s, the US should have accepted the need for painful economic corrections, in the course of which it should have switched from an economy of stock market bubbles to a real economy. Instead, interest rates were cut to inflate the asset bubbles further. So you could switch from a technology bubble to a real estate bubble that could finance a consumption-driven upswing for a short time.

When this bubble also burst in 2008, interest rates were cut much more sharply to almost zero. Today, 13 years later, they are still at this level. The US has been in a bind ever since. On the one hand, low interest rates lead to bad investments and increase economic inequality, as the rich can usurp real assets for cheap money. On the other hand, an increase in interest rates and the restoration of budget discipline would completely burst the entire bubble economy in the USA and weaken the country’s role internationally. And so, once again, the way out of the crisis caused by excessive borrowing and spending was to borrow even more and spend that money to inflate the bubble economy further. The global financial crisis was not resolved, only made worse by such postponement of reckoning.

The emperor's new economy: The current forecasts of the Deutsche BundesbankThe emperor's new economy: The current forecasts of the Deutsche Bundesbank

The pandemic is bursting the bubble

As a rule, it is difficult to estimate what will burst a bubble, since something comparatively minor (such as the failure of subprime mortgages) can collapse the big house of cards with its increasingly ailing foundation. This time, however, it was about nothing less than a global pandemic that led to a puppet-up of the world economy and beyond that to an economic war against China.

The USA now not only has to recover from the pandemic, but also from the collapse of a bubble economy that has continued to erode over the past few decades. The US national debt has soared from $ 5 trillion in 2001 to $ 10 trillion in 2008, and now, 13 years later, will surpass the $ 29 trillion mark.

With interest rates that can no longer be lowered because they are already close to zero and with no further instruments in the toolbox, the next financial crisis is predictably also a crisis of the US dollar. Washington’s response to the global financial crisis in 2008 was a few hundred billion US dollar bailout packages that ruined the US middle class and boosted both left and right populist movements.

The US is currently moving towards the so-called Reconciliation Bill, a budget balancing act worth $ 3.5 trillion. The government under US President Joe Biden even goes so far as to pledge Washington’s political legitimacy: They want to assure the people of the USA that the proposed law will “pay for itself”.

Price increases reach record levels - retail fears bottlenecksPrice increases reach record levels - retail fears bottlenecks

On the way to hyperinflation?

Hyperinflation usually follows major wars, when manufacturing capacity has been destroyed and money is printed to revive the economy.

When productivity and value creation decline while the money supply increases, the predictable outcome is that inflation will spiral out of control to an extent that can destroy a currency. The pandemic has a similar dynamic to the war: production power is reduced and the economy has to be stimulated again with fiscal incentives.

more on the subject – ICS warns: global supply chains are facing total “system breakdown”

The US stimulus measures are not only excessive and unnecessary. The forced breathing of the consumer economy with plenty of freshly printed money is intended to stimulate it, but it also leads to an increase in production – in China. The traffic of cargo ships from China to the USA has increased many times over. The US ports on the west coast can hardly keep up with the unloading of the large amount of cargo. For the US public, these policies lead to devastating inflation. But when borrowing and spending lead to rising GDP, the destruction of wealth can even be portrayed as … wealth creation.

So the coming crisis is likely to be a US dollar crisis. At some point the US will be forced to restore budget discipline, lost long ago, to increase production and reduce spending. The exact opposite of current politics.

This painful readjustment will lower the standard of living of the Americans and diminish the role of the USA in the system of international relations. It seems that the USA’s chance to make the necessary adjustments voluntarily and in a somewhat orderly manner has already been wasted and that market forces will now force the USA to make disorderly corrections.

Central Bank of Russia: Global status of dollar declines as countries bet on other currenciesCentral Bank of Russia: Global status of dollar declines as countries bet on other currencies

Russia’s preparations for the US financial crisis

Russia and China began preparing when it became clear in 2008 and 2009 that the US would go down the drain instead of returning to budget discipline. Putin denounced the US as a “parasite” in the international financial system. China began to demand a post-western world and gradually decoupled from the US-led financial system.

The often very unpleasant anti-Russian economic sanctions also had a positive aspect that was more than comforting: they forced Russia to make painful adjustments. In recent years, Russia has been able to repay its debts and has exercised the strictest budget discipline. The Russo-Chinese initiative to de-dollarize the two countries has become the largest gold producers, increasingly nominating their transactions in local currencies and further reducing the dollar’s share of their currency reserves. In addition, the two countries have developed financial instruments that range from new investment banks and regional alternatives to the SWIFT transaction system to local credit rating systems and credit card agreements.

Preparing for the financial crisis also includes preparing for the political consequences. As financial crises undermine socio-economic and, above all, political stability, the US government is likely to turn the public on to outside actors to restore solidarity and loyalty to the authorities in the population. Put simply, Washington is likely to blame Russia and China for the financial and economic crisis.

Sustainability instead of debt bubble: China's move away from growth through over-indebtednessSustainability instead of debt bubble: China's move away from growth through over-indebtedness

This can have unpredictable consequences. A “healthy nationalism” already prevails among US citizens to a large extent – at least in the sense of the belief that the best of times are still ahead of them. In contrast, nationalism of the more dangerous kind looks wistfully back on past glorious times, from which one believes oneself to be robbed – robbed by foreign powers. Donald Trump was likely the first US president to claim the size of the US was stolen from China, while Russia is expected to be blamed for rising energy costs.

In short, Russian politicians will have good reason to hope that their country will weather the storm simply by severing ties with the sinking ship.

RT DE strives for a wide range of opinions. Guest contributions and opinion articles do not have to reflect the editorial team’s point of view.

Translated from English.

Glenn this one, Professor at the University of Southeast Norway and editor of Russia in Global Affairs magazine. Follow him on Twitter @glenndiesen

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